Toward A Sustainable Mortgage Market In Ghana

- Issues And Concerns

A characteristic feature of housing investment is its relative size and long investment horizon, requiring large amounts of long-term finance. The main aim of a housing finance system is to provide funds to the producers and purchasers of housing both rental and owner-occupied. This simple description has spawned a broad array of institutional arrangements, ranging from contractual savings scheme, to depository institutions specializing in mortgage finance, to the issuance, sale and trading of mortgage securities. All of these arrangements have been created with the same purpose in mind, to channel funds from savers to borrowers. As economies develop, provision of housing finance often moves away from extensive reliance on special circuits towards integration of housing finance into broader financial markets. As populations continue to grow and urbanization accelerates, the necessity of providing adequate housing also mounts.

One of the major means of raising funds to finance the purchase of houses in many parts of the world is through the use of a mortgage. Apart from using the mortgage instrument to raise funds for acquiring residential properties, it is also widely used as a means of raising capital for business purposes. In the United Kingdom for instance, about 95% of all business, responsible for nearly one third of all employment, rely on the mortgage as a method of raising finance.

In addition, mortgages serve as a source of investment for many investors particularly those with long-term liabilities such as Pension Funds and Insurance Companies. It is indeed a huge area of investment. In the United States for instance the total amount of mortgages outstanding as of the first quarter of 2002 was approximately $7,753.5 billion

It is important to note that there are prerequisites for a successful mortgage market. This includes a stable macroeconomic environment-that is a low inflation and interest rates as well as a stable currency. In addition to a sound macroeconomic environment, liquidity is also a most crucial factor for a vibrant mortgage market. This is particularly important because lending institutions would need to be able to replenish funds to meet the demand for funds from borrowers. It should be obvious that the lack of liquidity would mean that lenders would have to wait for periods ranging from 20-25 years before funds invested can be recouped. It is critical from a risk management point of view these lending institutions also have long-term liabilities in the form long-term deposits. This is crucial as a mismatch between assets and liabilities can be disastrous for such institutions in the face of interest rate fluctuations.

It has been proven in most countries particularly the United States that a secondary mortgage market provides the level of liquidity required for a vibrant mortgage market. The successes chalked in The United States and some parts of Europe in this field attest to this fact.

Ghana in its quest to deal with the important issue of creating a secondary market sought to implement a two-tier housing finance system in 1993. The system was created by the Home Mortgage Finance Law [PNDCL 329] 1993, which enjoined the HFC to provide mortgage finance to individuals and to provide liquidity to participating financial institutions under the law. It initiated the Secondary Mortgage Market (SMM) as a means of creating a sustained housing finance market in the country. SMM relies on capital market investors to provide a long term sustainable funding for housing. There are various types, including purchases by Mortgage Credit Institutions (MCI), loans by MCIs, and mortgage securitization. An example is the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation, in the United States and the Stadshypothek in Sweden.

There are three major pre-requisites for the development of a secondary market: an adequate primary market infrastructure, an adequate legal and regulatory framework and an adequate capital market infrastructure. A strong and favourable legal framework is a prerequisite for both primary and secondary market developments. The primary concern for investors is the enforceability of their claim on the collateral in the event of default. This depends on the efficiency of land title system and the ability to foreclose and repossess within a reasonable time period. Similarly, the mortgages must be attractive investments- interest rates must be market determined and provide investors with a positive, real, risk-adjusted rate of return. The primary market base must be large to justify the costs of setting up the secondary market. It is an adjunct to the primary market, allowing lenders to expand their activities in a safe and sound manner. The mortgage instrument and documentation should be standardized, underwriting must be comprehensive and consistent, and servicing must be efficient. The more developed the government bond market, the greater the likelihood of success in developing a mortgage securities market-a benchmark yield to compare yields on other instruments against, market makers, regulatory body to oversee security issues, and rating agencies. Ghana meets these three pre-requisites- the capital market is rapidly growing, the PNDCL 329 deals with problems of foreclosure, the market base exists and once SMM is properly created it will engender primary market activities. However, the PNDCL 39 needs to be extended to all mortgagees.

Government also has a role to play if SMM are to succeed. The primary role is to explicitly guarantee the bonds issued by the MCI. It is inefficient to use implicit guarantees because the government remains obliged but the MCI does not receive the full benefit. A level playing field for all lenders is necessary; the SMM should offer services to lenders who are able to offer properly underwritten mortgages for sale. In this way, those private sector institutions that are most efficient in making mortgage loans and in using the SMM would be encouraged to do so, without the need for any central agency to pre-select which institution to participate. Thus, efficiency and competition would determine which institutions participate in the SMM, and need not be done by legislation as happened in Ghana. The mortgages purchased, bonds issued, and the required capital ratios for the MCI should be specified and regulated. The legal and financial regimes; real estate property rights, foreclosure and secured lending laws, must be created to encourage mortgage origination.

A properly structured secondary market can lead to an increased funding for housing, lower mortgage credit cost for both participants and lenders-through an efficient allocation of risk and improved competition, reduce transaction costs through standardization, and provide liquidity for the primary market lenders. Liquidity, reduces liquidity risk, facilitates participation in the mortgage market and increases lending activities, by providing lenders access to the capital market and expanded funding opportunities. SMM reduces interest rate risk by matching long-term mortgages with long-term sources of funds. It can provide institutional investors with attractive trade-offs between profitability, liquidity, simplicity and security. A well functioning mortgage market provides enormous external benefit to the economy, including capital market development, increased labour market mobility, construction sector employment, and the efficient allocation of real estate asset. By expanding the pool of funding options available, there is less pressure on governments to provide direct (and often subsidized) credit to home buyers. However, SMM cannot solve basic problems such as inadequate household income and credit risk, which constrain the flow of funds and/or increase the relative cost of mortgages, and a poor legal framework. SMM are not appropriate vehicles for subsidizing mortgage credit. Their primary mission should be to mobilize private capital, broaden the financial markets and improve risk allocation. Expanding access to mortgage credit can be better addressed through mortgage design and direct income or down payment support for target group borrowers.

The decision to operate the two-tier system was an appropriate means of achieving a long-term sustainable housing finance in Ghana. SMM with efficient foreclosure procedures addresses the major risks; interest rate, liquidity, and default risk that lenders face. There are, however, some issues to be addressed if SMM is to succeed in the country. Competition and effectiveness should determine market participants and the beneficiaries of the State guarantee instead of pre-selected institutions. The PNDCL 329, 1993 should be amended to create a level playing field for all lenders. HFC was both a liquidator and originator; it must concentrate on the SMM or a new institution must be set up to operate the SMM. The latter may be appropriate since HFC is well established in the primary market. They cannot be both primary market competitors and liquidators. Government guarantees must also be extended to all originators, once they create conforming loans, obey and abide the market regulations.

It is our belief that if Government implements the proposed measures, it will go a long way to create an enabling environment for a vibrant mortgage market. The result will be a sustainable flow of funds to the housing sector thus making it possible for many Ghanaians to be able to afford their own homes. This will, of course, be a major step in our bid to create a property owning democratic society.