Download Final Residential RE Seminar

2009 LAGOS BUSINESS SCHOOL
RESIDENTIAL REAL ESTATE
DEVELOPMENT COURSE
AUGUST 11 – 13, 2009
UNDERSTANDING THE
NIGERIAN MORTGAGE INDUSTRY
DAY 3 – THURSDAY, AUGUST 13
12:45 P.M. – 1:30 P.M.
Facilitator: Wilson Adewole
What a proper Mortgage system means for you:
•Increased home ownership
•Increased business for developers and all other partakers
•Improved living standards for Nigerians
•Reduction in crime
•Increased employment
•New job creation
•Better monitoring of financial systems
•More profit for Developers, Banks, PMIs
•Better standards and reduction in construction costs
•More transparency and efficiency
•Increased skills acquisition
TRADITIONAL NIGERIAN MORTGAGE
DELIVERY SYSTEM
Savings
Households
Loans
COMMERCIAL
&
MORTGAGE
BANKS
2007 COUNTRY COMPARISON
350
300
250
200
Population
%/Pov. Line
150
100
50
0
Malaysia
Mexico
Nigeria
South A f rica
UK
US
Population (‘M) Vs. % Below Poverty Line
Sources: CIA World Fact Book,
IMF, World Bank, US Fed.
Reserve, US Dept. of Commerce
2007 COUNTRY COMPARISON
16000
14000
12000
10000
GDP ($B)
Domestic Credit% GDP
8000
6000
4000
2000
0
Malaysia
Mexico
Nigeria
South Africa
UK
US
GDP ($B) Vs. Public debt as % of GDP
Sources: CIA World Fact Book,
IMF, World Bank, US Fed.
Reserve, US Dept. of Commerce
2007 COUNTRY COMPARISON
16000
14000
12000
10000
8000
GDP ($B)
Mortg. Debt as % GDP
6000
4000
2000
0
Malaysia
Mexico
Nigeria
South Africa
UK
Mortgage Debt As % of GDP
Sources: CIA World Fact Book,
IMF, World Bank, US Fed.
Reserve, US Dept. of Commerce
US
LAYING THE RIGHT FOUNDATION
FOR THE PRIMARY MORTGAGE
Loan tenure. The longer the terms the more
stable the market.
Uniform loan origination application
Interest rate – should be market controlled
but guided by the supervising agencies.
Down payment – should be low enough to be
affordable. Down payment to also determine
interest rate due to risk level.
Income – Mortgage debt must not be more
than 45% to 55% of verified Income
Standardization in building and construction
of homes
Standardization in valuation and appraisal of
houses
Division of primary loans into 2 types;
Government insured and Non government
insured
Credit/ Borrowers history , whereas not
currently available, but can built based on:
- rent records
- utility payments
-other verifiable references, e.t.c.
Mortgage Payments
Monthly Mortgage payments are normally
made up of:
P = Principal
I = Interest
T = Taxes
I = Insurance (levies?)
The Mortgage Finance Process
A prospective purchaser of your housing unit
who decides to seek a mortgage loan would go
through the following process:
•Determine which type of mortgage is right for
them and how much home they can afford
•Submit mortgage application and any
additional documentation to
PMI/COMMERCIAL BANK
•PMI/COMMERCIAL BANK reviews credit
documents
•Receipt of Conditional Mortgage Commitment
from PMI/ BANK
•Appraisal completed on subject property
•PMI/Applicant’s attorney orders Title Insurance
(What is title insurance and why do I need it?)
•Applicant arranges for homeowner’s insurance
•Applicant submits remaining items outlined in
the Conditional Mortgage Commitment to PMI/
BANK
•PMI/BANK verifies the title report
•Once title is acceptable, a closing date is
established
•Closing & beyond
Basic & Complex Terms
•Adjustable-Rate Mortgage (ARM): This loan
type that allows the lender to adjust the interest
rate during the term of the loan. Usually changes
are based on market conditions and determined
by an index. Most have a rate change and lifetime
cap.
•Annual Percentage Rate (APR): A standard
format developed to provide an effective interest
rate of a particular loan. This rate takes into
consideration the nominal interest rate, fees and
other charges the lender and attorney may
charge in order to give a TRUE or effective
interest rate
Actual monthly payments are based on the periodic
interest rate, not the APR.
•Appraised Value: This is the property's fair-market
value, based on the valuer’s knowledge and an analysis
of the property, which takes into account home values
in the area.
•Assessed Value: The valuation is determined by the
State government’s tax assessor for tenement rate
purposes.
•Balloon Mortgage: This is a short-term fixed-rate loan
with smaller payments for a certain period of time and
one large payment for the entire balance due at the end
of the loan term
•Conventional Mortgage: A mortgage that is not
insured or guaranteed by a government agency
•Convertible ARM: An adjustable-rate mortgage
(ARM) that allows a borrower to convert their mortgage
to a fixed-rate loan for the remainder of the loan term
if certain conditions are met
•Escrow: Funds paid by one party to another to hold
until a specific date when the funds are released to a
designated individual.
•Fixed-Rate Mortgage: A mortgage in which the
monthly principal and interest payments remain
the same throughout the life of the loan
•Initial Interest Rate: The original, starting interest rate
at the time of closing. This rate can change in the future
in an adjustable-rate Mortgage.
•Lender Fees: Fees that are charged by the lender to cover
some of their expenses and meet their profitability goals.
Typically, fees such as origination fees, underwriting fees,
and Document preparation fees are lender fees.
•P&I: This is the monthly principal and interest payment
required when repaying a mortgage in accordance with
its terms
•PITI: Principal (P), Interest (I), Taxes (T) and Insurance (I)
is a reference to the total monthly payment required to
repay a Mortgage in accordance with its term, as well as
monthly escrow Payments for taxes and insurance.
•Points: Fees that are collected by the lender in exchange
for a lower interest rate. Commonly called discount points,
each point is equal to 1 percent of the loan amount.
Developing a Credit Model for
Nigeria
According to the World Bank, Credit information
bureaus are essential for the well functioning credit
market.
•They allow lenders to better assess and manage
risks
•Help good borrowers to gain access to finance,
•They help reduce over indebtedness.
Sub-Saharan Africa, excluding South Africa, is the
only region without fully functioning credit bureaus
to date. Nigeria, of course has 3 licensed credit
bureaus in their beginning stages.
The Central Bank of Nigeria (CBN) regulates these
bureaus which were primarily established with the
purpose of supporting banking supervision.
•The demand for information by financial
institutions on the one side and the pressure from
the bank supervisors to improve risk management
practices on the other, led to several initiatives in
the Africa region to develop credit bureaus.
•Most banks until 2-3 years ago mostly focused on
forex, trade and treasury operations. With the
stabilization of macro economic environment,
lower inflation and decreasing treasury yields,
banks increasingly turn to lending. But lending in
Nigeria as in other African countries is challenging.
Weak creditor rights and virtual inability to enforce
contracts makes lending a risky business.
Some of the challenges in developing credit includes:
•Lack of adequate infrastructure .
•Very few places have verifiable street addresses
•Limited or No identification documentation is
available.
•Constant power outages
•Very expensive (if available) telecommunications
and internet.
•Difficulty in checking corporate records
•Over collateralization of assets.
•Small size of the credit markets.
As a result, most lending relies on local market
and community knowledge. While perfectly
acceptable practice, it significantly restricts the
ability of banks to scale up lending to support
economic growth. Unclear information about
borrower credit worthiness also does not help to
ensure consistent underwriting practices and
makes banks vulnerable to fraud.
How Nigerian Developers Can
Improve Their Credit Rating
DISCUSS.
Critical Functions of a Mortgage
lender
The lender is the one who provides the money to
the borrower at the closing table. In exchange, the
lender receives a note evidencing the borrower's
debt and obligation to repay, plus a lien on the
subject property.
In addition, the mortgage lender does the following:
• They qualify borrowers for a mortgage loan,
• Determine credit eligibility
• Take the borrower's loan application
• Process the loan. Processing includes compiling
the file of information about the transaction,
including the credit report, appraisal, verification of
employment and assets, and so on.
•Underwrite the loan. The underwriter is
responsible for determining whether the
application package prepared by the processor
meets all the lender's criteria
•Fund and close the loan. The closing will occur
after all conditions are cleared and the lender
issues a full loan approval. At the closing, the
lender "funds" the loan with a cashier's check or
bank draft.
Importance of Good Processing
When your prospective home purchaser submits
their Mortgage loan application, it may seem like it
disappears into a black hole. But understanding how
the loan processing system works can help reduce
your anxiety while waiting for approval. Processing
is the live wire of any successful mortgage operation.
Processing involves :
• Gathering basic information, such as income and
existing debts
• Reviewing credit reports, the amount of available
collateral, and income
• Determining if any additional documentation is
required, such as personal financial statements, title
reports and property appraisals
•Submitting the completed loan package to the decision
makers — either a loan committee or underwriter .
•Presenting customers with a letter of intent or term
sheet. This is a formal document intended to ensure that
all parties involved (the lender and your company) are on
the same page.
Good loan processing saves the company both short term
and long term. Company profitability is heavily
dependent on the efficiency of the internal systems
among which processing plays a major role.
Understanding various loan Products
Debt financing is the most common means of obtaining capital.
Financial institutions, banks and other funding sources provide a
variety of loan products. Each funding source has its own credit
parameters and requirements. Loan products are designed to suit
different scenarios and seasons.
Examples are shown below:
Loan
Product
Loan
Amount
Purpose
Repayment Collateral
Requirement
Commerci N5 million
al Real
up to N25
estate
million
(Owner
Occupied)
Purchase
or
refinance
12 to 15
years fully
amortizing
Secured by
commercial
real estate
Single
N4million to
family
N12million
residential
Purchase
15 to 20
years fixed
75% LTV
Secured by
residential real
estate
Land
Purchase
<= 10years, Secured by
65%max
Land
LTV
N2million to
N15 million
The mortgage Payment As an Annuity
• A Mortgage is a temporary, conditional pledge of
property to a creditor as security for performance of an
obligation or repayment of a debt. Originally written
exclusively as fixed-rate fully amortizing loans,
mortgages have evolved into more flexible contracts
•An annuity is a contract or agreement by which one
receives fixed payments on an investment for a lifetime
or for a specified number of years.
A mortgage as annuity is an instrument that allows a
person to live off the equity in a fully paid-for house.
Such a homeowner would enter into a reverse annuity
mortgage agreement with a financial institution such as
a bank, which would guarantee a lifelong fixed monthly
income in return for gradually giving up ownership of
the house. The longer the payments continue, the less
equity the elderly owner would retain. At the owner's
death the bank gains title to the real estate, which it can
sell to offset outstanding claims. This is also called
reverse mortgage.
Understanding the Six Functions of
the Naira
Albert Einstein said that the strongest horse in the
universe is compound interest. Understanding the six
functions of the Naira involves studying of the
following questions which deals with interest rate and
the period :
1. What will the value of a Naira grow to in n periods at i
interest?
(Future value of a Naira)
2. What will a Naira set aside at the beginning of each
year accumulate to after n periods at i interest?
( Accumulation of a Naira per period)
3. How much must be set aside in each of n periods
at i interest in order to reach a specific sum in the
future?
( Sinking fund factor)
4. What is the value today of a Naira received n
periods in the future if one's opportunity cost is i?
(Present value of a Naira)
5. What is the value of the right to receive a Naira
each of the next n periods if opportunity cost is i?
(Present value of an ordinary annuity)
6. What installment payment is required to amortize
a debt of one Naira over n periods at i interest?
( Installment to amortize a Naira)
Analyzing Investment Projects using
the Debt Coverage Ratio
The debt Coverage ratio is The relationship between
Net Operating Income (NOI) and Annual Debt Service
(ADS). Often used as an Underwriting criterion for
Income Property mortgage loans (NOI/ADS).
Annual debt service is the cash required to pay out
interest as well as principal on a debt .
Example: Annual debt service for a mortgage loan on
a certain office building is N1,000,000. The property
generates N2,500,000 in annual gross rent, and
requires N700,000 for expenses of operation, leaving
N1,800,000 net operating income. The debt coverage
ratio is 1.80, calculated by the following formula:
NOI/ADS = N1,800,000/ N1,000,000= 1.8
Thank you!!!!
Bonview Consulting Group
Wilson Adewole
wadewole@bonviewconsulting.
com
+234 805 7411119