BANKS' CREATIVE SOLUTIONS ALLOW MORTGAGE EXPANSION

UNCLAS SECTION 01 OF 02 LAGOS 000553 SIPDIS SIPDIS STATE PLEASE PASS TO DOT, EX-IM, OPIC, AND USTDA E.O. 12958: N/A TAGS: ECON EINV EFIN PREL NI SUBJECT: BANKS' CREATIVE SOLUTIONS ALLOW MORTGAGE EXPANSION REF: LAGOS 472 ¶1. On June 19, Debra Erb, Overseas Private Investment Corporation (OPIC) met with representatives of First City Monument Bank (FCMB) to discuss ongoing collaboration on a housing construction and mortgage financing project. FCMB was one of several banks expanding its consumer banking activities into the housing sector. Because of the challenges in this sector, including high interest rates, lack of housing stock, and high titling fees, FCMB had developed a number of solutions allowing it to invest in the sector in the absence of legislative reform. ¶2. On June 19, Debra Erb, Overseas Private Investment Corporation (OPIC) met with Oloyede Obatoyinbo, Vice President, Head Home Loans, First City Monument Bank (FCMB); Anurag Saxena, Chief Operating Officer (CEO) FCMB; and Asan Eric, Home Loans, FCMB. Also present were Benny Ukah, Assistant Vice President, Home Loans, FCMB; Ayoleke Adu, Vice President, Project and Structured Finance; and James Brenner, CEO, Broad Cove Partners, Inc. Participants discussed their ongoing collaboration on a housing construction and mortgage project. ¶3. The Nigerian housing sector faced considerable challenges, including high interest rates; consumers' lack of awareness about mortgages; lack of housing stock; and high costs and delays in perfecting property titles. As a result, Nigerianbanks had developed a number of "workaround solutions" that enabled them to invest in the sector with greater security. The FCMB representatives described plans for overcoming some of these challenges. -------------- Financing -------------- ¶4. FCMB aimed to make mortgages affordable to the middle-income borrower by offering home loans between naira five million and naira 50 million, with a tenor of five to 25 years. The loans, for home purchase and refinancing, would be offered to developer financers. Some financing would also be available for equity release and buy-to-let schemes. Given current market constraints, the target interest rate would be a 15-year naira loan with 16 percent interest. Eventually, FCMB would like to offer dollar loans to capture the diaspora market. The only Nigerian bank currently offering dollar loans is UBA. -------------- -------------- Workaround Solutions For Perfecting Property Titles -------------- -------------- ¶5. Residents rarely perfected titles to property because of the high cost (reftel). In Lagos State, perfection of title cost 16 to 19 percent of the property value. Together with other fees, a borrower spent approximately 20-25 percent of the total value of the property. Securing a mortgage meant the borrower would need 50 percent of the purchase price. As a result, few legal titles existed. (Note: In a July 17 meeting with representatives from the U.S. Department of Treasury, Osaze Osifo, Chief Executive Officer, Travant Capital, said only 8,000 to 10,000 legal titles existed in Nigeria. End Note). Lenders were wary of providing mortgages in cases where titles were not perfected, since property disputes in the case of default often lasted years in the courts. ¶6. To address this problem, FCMB had developed a tripartite legal mortgage agreement that would create a more secure lending environment in the absence of legislative reform, such as the amendment of the Land Use Act. This agreement would consist of the vendor handing the original title documents, with the deed of assignment signed in the borrower's name, to FCMB in exchange for the full purchase price. The space for the assignee's name would be left blank, and the title would be held unregistered by the Bank. ¶7. Debra Erb asked whether an amendment to the Land Use Act would be prejudicial to the mortgages under this arrangement. FCMB assured her the mortgages would not be adversely affected, as they were fully legal. This solution would allow FCMB to exercise the right of sale as a legal mortgage without recourse to litigation. It would also reduce by 17-19 percent the cost of purchase. -------------- Housing Stock Is In Short Supply -------------- ¶8. Housing stock, especially for middle- and lower-income groups, was in short supply. Banks have been unwilling to lend for lower cost housing, but this was slowly changing. FCMB was partnering on housing construction projects, such as a 1700-unit project in the Lekki area of Lagos. Obatoyinbo also expressed interest in LAGOS 00000553 002 OF 002 partnering with the Lagos State Government to provide housing and mortgages to civil servants. -------------- - Investment Should Reach Beyond Lagos And Abuja -------------- - ¶9. Debra Erb observed that, in an earlier meeting with President Umaru Yar'Adua in Abuja, the President underscored his desire to see investment in housing not only in Lagos and Abuja, the two areas currently receiving most investment, but in other areas as well. Providing underserved areas with investment could serve as leverage to push for legislative reform, Erb noted. ¶10. Debra Erb cleared this cable.