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.

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Financing
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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.

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Workaround Solutions For Perfecting Property Titles
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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.

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Housing Stock Is In Short Supply
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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

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partnering with the Lagos State Government to provide housing and
mortgages to civil servants.

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Investment Should Reach Beyond Lagos And Abuja
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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.