2009 lagos business school residential real estate development course august 11 – 13, 2009
TRANSCRIPT
2009 LAGOS BUSINESS SCHOOL 2009 LAGOS BUSINESS SCHOOL RESIDENTIAL REAL ESTATE RESIDENTIAL REAL ESTATE
DEVELOPMENT COURSEDEVELOPMENT COURSE
AUGUST 11 – 13, 2009AUGUST 11 – 13, 2009
UNDERSTANDING THEUNDERSTANDING THE
NIGERIAN MORTGAGE INDUSTRYNIGERIAN MORTGAGE INDUSTRY
Facilitator: Wilson Adewole
DAY 3 – THURSDAY, AUGUST 1312:45 P.M. – 1:30 P.M.
What a proper Mortgage system means for you: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 TRADITIONAL NIGERIAN MORTGAGE
DELIVERY SYSTEM DELIVERY SYSTEM
COMMERCIAL&
MORTGAGEBANKS
Households
Originate
Service
Manage Risk
Fund
Savings
Loans
2007 COUNTRY COMPARISON2007 COUNTRY COMPARISON
Population (‘M) Vs. % Below Poverty LinePopulation (‘M) Vs. % Below Poverty Line
Sources: CIA World Fact Book, IMF, World Bank, US Fed. Reserve, US Dept. of Commerce
Malaysia Mexico Nigeria South Africa UK US
0
50
100
150
200
250
300
350
Population%/Pov. Line
2007 COUNTRY COMPARISON2007 COUNTRY COMPARISON
GDP ($B) Vs. Public debt as % of GDPGDP ($B) Vs. Public debt as % of GDP
Sources: CIA World Fact Book, IMF, World Bank, US Fed. Reserve, US Dept. of Commerce
Malaysia Mexico Nigeria South Africa UK US
0
2000
4000
6000
8000
10000
12000
14000
16000
GDP ($B)
Domestic Credit% GDP
2007 COUNTRY COMPARISON2007 COUNTRY COMPARISON
Mortgage Debt As % of GDPMortgage Debt As % of GDPMalaysia Mexico Nigeria South Africa UK US
0
2000
4000
6000
8000
10000
12000
14000
16000
GDP ($B)
Mortg. Debt as % GDP
Sources: CIA World Fact Book, IMF, World Bank, US Fed. Reserve, US Dept. of Commerce
LAYING THE RIGHT FOUNDATIONLAYING THE RIGHT FOUNDATION
FOR THE PRIMARY MORTGAGE 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 PaymentsMortgage Payments
Monthly Mortgage payments are normally made up of:
P = PrincipalP = PrincipalI = InterestI = InterestT = TaxesT = TaxesI = Insurance (levies?)I = Insurance (levies?)
The Mortgage Finance The Mortgage Finance ProcessProcess
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 TermsBasic & 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 theState 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 Developing a Credit Model for NigeriaNigeriaAccording 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 How Nigerian Developers Can Improve Their Credit RatingImprove Their Credit Rating
DISCUSS.
Critical Functions of a Mortgage Critical Functions of a Mortgage lenderlender
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 Importance of Good ProcessingProcessing
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 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
Commercial Real estate (Owner Occupied)
N5 million up to N25 million
Purchase or refinance
12 to 15 years fully amortizing
Secured by commercial real estate
Single family residential
N4million to N12million
Purchase 15 to 20 years fixed 75% LTV
Secured by residential real estate
Land N2million to N15 million
Purchase <= 10years, 65%max LTV
Secured by Land
The mortgage Payment As an The mortgage Payment As an AnnuityAnnuity
• 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 Understanding the Six Functions of the NairaFunctions of the NairaAlbert 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 Analyzing Investment Projects using the Debt Coverage Ratiousing the Debt Coverage RatioThe 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
