CBN’s arbitrariness on mortgage loans

The Central Bank of Nigeria’s (CBN) recent circular, which removed “interest rate and cap in respect of Part 2 Section 2.1.3 (Mortgage Finance)” in the Guide to Charges by Banks and Other Financial Institutions in Nigeria, should be of immense interest and concern to people who have had their hopes deferred about housing for all.
 
Specifically, those who intend to borrow money from financial institutions in the country to build or purchase house(s) and tenants should pay more attention to the new deal. The new policy should also be of interest to any persons currently enjoying a mortgage facility before the above referenced circular.
 
Prior to the latest circular which became effective September 9, 2019, interest rate on mortgage facilities in the country, was negotiable but pegged at or subject to a maximum of Monetary Policy Rate (MPR) plus 5%; meaning that lending by financial institutions in Nigeria for mortgage purposes, at a rate higher than MPR plus 5%, amounted to regulatory disobedience. That policy took effect on May 1, 2017. With its termination on September 8, 2019, it lived for about two years and four months.

Indeed, no single or group of stakeholders that had raised issues of concern was indicated. There was also no evidence that the challenges and concerns (whatever they were), were subjected to industry and other interested parties’ deliberations before CBN reached the decision to effect the change in the prevailing policy.
 
Beyond the fact that there may be concerns from some stakeholders about policies, it is imperative that what should guide policy changes or somersault must not be anything short of protecting national interest. That is, it must be for the good of a greater majority of the citizens.
 
Now, with this new change in policy, providers and users of mortgage finance products and services in the Nigerian finance industry are at liberty to negotiate and agree applicable interest rates for their mortgage transactions. In other words, the parties will determine at what interest rate they can do business.
 
Although the new policy regime has already taken off, it is nevertheless, important to highlight some of its major implications for the awareness and guidance of the authorities and other stakeholders such as (intending) borrowers of funds for mortgages and tenants, among others.
 
An important observation: The Nigerian mortgage sub-sector is still at its rudimentary stage and begging for speedy development. With this new policy, CBN has shot a poisoned arrow into the heart of mortgage finance in the country, with negative consequences. 
 
The first implication is that interest rates at which mortgage finance can be accessed, going forward, will obviously increase and therefore, serve as a major deterrent to the development or purchase of mortgage-backed houses. 

Second, interest rates on existing mortgages are at risk of being unilaterally reviewed upwards by financial institutions. The immediate and long-term implication of such situations is the likelihood that some of the mortgage loans will become non-performing, as many of the borrowers are unlikely to meet their obligations under the new rate regime. If no other thing will make this situation possible, the prevailing inclement and harsh economic and business environment in the country, should. And if the issue of non-performing mortgage facilities become prevalent in the sub sector, the risk of distress or even failure of some of the lending institutions will serve no one any benefit. In fact, it will be at the detriment of the economy in the country.
 
Another key issue is this: the possibility of financial institutions booking new mortgages at higher interest rate at this time that the economy is headed down-wards is quite slim. What is worse, many of our citizens who are within their working ages are unemployed and there is a lot of job instability and uncertainty in the economy. Private commercial property developers will be interested in looking at the bottom line of their businesses before commitments, in this regard.
 
Further, market-determined mortgage facility rates in this country skew the power of any provision for negotiation of the rates in favour of financial institutions. This will leave the borrowers with a ‘take-it or leave-it situation’, a scenario that will essentially be anti-national development, especially the drive to “housing for all,” which has always been a mirage.
 
The other impacts that should be expected include, increments in house rents notwithstanding the poor remuneration of the few that are employed and non-existing jobs for the unemployed; increased inability to meet basic household or family needs (such as feeding and payment of children’ school fees); increase in social problems that will arise from homelessness of, especially the youth whose parents may be relieved of their apartments as a result of default in meeting mortgage or tenancy obligations; increased rate of mental ill-health, including lunacy; and intensified level of corrupt practices in public and private services by individuals whose dreams to own houses via  mortgage arrangements, have become derailed by the new policy.
 
It is therefore apparent that Nigerians will be great losers with full implementation of this CBN’s mortgage finance interest rate policy regime.

The development of the mortgage sub-sector will stall, if not nose-dive; the overbearing housing deficit facing the country will intensify aided by the growing number of internally displaced persons (IDPs); increased homelessness of citizens will aggravate prevailing social insecurity perhaps, beyond what is today associated with Boko Haram and kidnapping for ransom of innocent people. It is foreseeable that some of the financial institutions providing mortgages will sooner than later run into troubled waters when their non-performing mortgage portfolios rise above the regulatory threshold. And when that ensues, the CBN, the initiator of the new mortgage finance interest rate regime without boundaries and borders, will have enough to keep it busy towards ensuring recovery of huge outstanding bad debts and resolution of imminent distress or failure of institutions in the system.
 
All told, as the regulator’s aspiration to free the financial system in Nigeria from non-market determined and driven interest rates intensifies, it is time to give serious thought to questions as to whether a single country-wide mortgage framework will serve this complex federation of 36 states and 774 local governments more efficiently. With different housing needs and problems confronting various regions and geographical areas of the country, will what operates in one successfully be expected to also operate in the same manner in another or other areas? Granting the differing level and quantum of housing stock needed in different geographical areas across the country, are we having the mortgage system that can address the needs of all areas? If answers are in the negative, there will then be the urgent need to seek solutions that will take into account peculiarities of pre-defined areas and zones in the country. Such solutions must, of necessity, aim at the overall successful development of the mortgage sub-sector across the country. This again is another national question in the context of tinkering with the convoluted structure that holds everything down in this country.