Like action and reaction, insurance and mortgage are equal and opposite and this is why, in advanced economies of the world, an active insurance industry is highly needed for the mortgage economy. While mortgage lending is a risk, insurance, by its function, acts as a hedge against risk. It is a cover.
To develop a healthy mortgage industry, therefore, there is need for a mortgage insurance functioning as a policy that protects a mortgage lender or title holder in the event that the borrower defaults on payments, dies, or is otherwise unable to meet the contractual obligations of the mortgage.
This is why the new the Mortgage Guarantee programme, a new initiative by the Central Bank of Nigeria (CBN), is quite instructive. This is a kind of mortgage given to a borrower by a lender, where an identified third party will take responsibility for the loan if the borrower defaults. The programme is structured in such a way that once the borrower defaults, the third party receives a claim from the lender, pays the lender off, and assumes responsibility for the mortgage.
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Besides incentivizing mortgage lenders, a quality mortgage guarantee programme is also used to provide credit loss protection to lenders in case of borrower’s default and, according to CBN officials, a robust primary mortgage market is a synergy of several components, all working together to effect affordability and access for intending buyers.
Investopedia, an encyclopedia of investment initiatives, identifies three aspects of mortgage insurance. These are private mortgage insurance (PMI), mortgage life insurance, or mortgage title insurance. What these have in common is an obligation to make the lender or property holder whole in the event of specific cases of loss. Private mortgage insurance may be called ‘lender’s mortgage insurance’ (LMI) if the premium on a PMI policy is paid by the lender and not the borrower.
For these reasons and more, an active insurance industry is needed for the growth and development of a functional mortgage industry. The mortgage industry in Nigeria is still a fledgling and fingers are frequently pointed to an insurance industry that is not as active participant as it should be.
For some reasons, in this country, in spite of everything the people have learnt, policy is still shaping the industry whereas, in advanced economies, it is the other way round—industry shapes policy because people in the industry are the ones implementing the policy every day.
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The mortgage industry in United States, for instance, has been robust for decades and it is with continued activity. One is not however, saying that Nigeria should replicate what happens in the US here, because Nigeria has its own unique characteristics which must be recognized and respected.
What the mortgage players in Nigeria should do however, is to make the US system a base-line because that system represents the global standard. Adenike Fasanya-Osilaja, a mortgage and finance consultant advises that “we have to start learning that system and adapt it to meet our own unique cultural system and unique needs”.
Nigeria needs to lay a very good foundation for mortgage industry growth to ensure that what happened in America in 2006 with sub-prime mortgage crisis does not repeat itself here. The Nigerian Mortgage Refinance Company (NMRC) is a big possibility that can change and shape the mortgage system in this country and could also be an umbrella for the industry.
One of the high points of NMRC, as a secondary mortgage institution, is its long term, low rate global funds and, because the mortgage industry here is not yet buoyant, NMRC, whether it is succeeding now or not, can be a significant tool for achieving these attributes of a working mortgage industry.
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Fasanya-Osilaja believes that the mortgage industry should be shaping NMRC and not NMRC shaping the industry, advising that the Central Bank of Nigeria (CBN), through the NMRC, should be listening to the voice of the industry. “Experience has proved to me that the CBN is quite ready to listen and learn. The problem here, however, is that the industry has been rather passive”, she noted.
This industry has to be standardized so that global players, from global perspectives, could view the local industry from the perspective of NMRC and mortgage banking association of Nigeria (MBAN) and see something to hold on to in their investment decisions. Despite the current challenges, the Nigerian economy could conveniently support the growth of the mortgage industry as the country is one of the fastest growing economies in the world where talent resource is amazing.
The mortgage consultant advises further that Nigeria needs to understand there is time for competition and also time for association and each is as critical as the other. “The only thing that will stop this industry from growing is over-regulation by people who are not in the industry and therefore will not understand the effect of their policy on the actual market”, she said, emphasizing the urgency of an active insurance industry to drive the needed growth in the mortgage industry.
As a step forward, mortgage insurance could come with a typical ‘pay-as-you-go’ premium payment, or may be capitalized into a lump sum payment at the time the mortgage is originated. For homeowners who are required to have PMI because of the 80 percent loan-to-value ratio rule, they can request that the insurance policy be canceled once 20 percent of the principal balance has been paid off.