ACCESSING THE NATIONAL HOUSING FUND (NHF) LOAN SCHEME: Paper presented by AKINWALE, J. A. General Manager (Loans and Advances) Federal Mortgage Bank of Nigeria, Abuja.

1.0 INTRODUCTION

I am delighted to be able to participate at this enlightenment programme organised by Delta State Government on [lie operations of the National Housing Fund and how to access the Fund facilities. Pleased because, this is one of the few occasions where a State Government has shown so much interest in letting its citizens know about the workings of the NHF. It goes to show that Delta State is concerned about housing its people and taking bold steps to meet the yearning needs of the good people of Delta State on home ownership.

The National Housing Fund (NHF) is a creation of the National 1 lousing Policy launched in 1991, with the objective of ensuring continuous flow of financial resources into housing development. FMBN is charged with the responsibility of managing and administering the National 1 lousing Fund (NHF), among others. Resources of the Fund are channelled through PMIs for on lending to individual contributors to the Fund who may wish to build, purchase, extend or renovate their own houses.

The statutory backing for the existing arrangement of the housing finance system under the National Housing Policy can be cited as the Mortgage Institutions Decree No. 53 of 1989; National Housing Fund Decree No. 3 of 1992; Federal Mortgage Bank of Nigeria Decree No. 82 of 1993; and the Statutory Instrument of 1996 on Terms and Conditions for Accessing the NHF facility. There are various requirements and/or prescriptions in those statutes governing the operation of the NHF Loan Scheme in particular, and mortgage business in general. The role of the Federal Mortgage Bank of Nigeria as spelt out in the various statutes governing the Nigerian housing finance system vis-a-vis the National Housing Fund will be examined and discussed in this presentation.

Since our major concern at this gathering is the operation of the NHF Loan Scheme, outline of major issues for discussion in this presentation will centre on the following:

• Mortgage Loan/Assets Creation.

• Procedure for accessing NHF facilities--

-- Terms and Conditions for NHF Loan;

-- Documentat on for NHF Loan Application;

--The NHF Loan Appraisa1 Process;

-- Completion of, and Security for, NHF Loans;

-- Monitoring and Portfolio Management.

• Factors for making substantial disbursement from the Fund

. • Facilitation of NHF Loans to Workers.

2.0 MORTGAGE ASSETS CREATION

The underwriting of a home mortgage loan by primary mortgage institutions (PMIs) deserves special mention here. A distinguishing characteristic of a mortgage loan is hat it has a relatively long life, perhaps 25 years (as in NHF Loan Sche-ne), and the loan requires servicing, that is regular repayments have to be made, and matters such as insurance and arrears may have to be dealt w.th.

First and foremost mortgages must be attractive investments for PMIs. The interest rates on "he mortgages must be market determined and provide Investors with a positive, real, risk-adjusted rate of return. Thus, the mortgage rate must b e sufficient to cover the investor's marginal funding cost (both debt aid equity), the risks of mortgage investment (i.e., credit, interest rate and liquidity risk) and the administrative cost of servicing mortgages. The principles outlined here will be applicable on mortgages created from Izmos sourced directly by the PML The NHF Scheme is a lending mechanism which recognises that housing loan facilities may not be accessible to mos^. Nigerians where the market forces are left to determine the level of funding for housing.

The following issues will guide the process of mortgage loan creation by any primary mortgage institution:

• The institution's lending policy;

• Application processing - assessment of information on application and investigation of repayment capacity of the applicant;

• Survey and valuation of the property to be mortgaged;

• Legal search - report on title (security document on the property);

• Final approval/decision; • Offer and acceptance;

• Completion - submission of the title documents, consent to mortgage and execution of mortgage deed;

• Portfolio management, including insurance issues, collection of repayment, arrears administration and redemption.

The underwriting process on mortgages establishes guidelines to ensure that a borrower has the ability and the willingness to repay the debt, and that the property provides sufficient security for the mortgage. Assessment of the ability to pay generally consists of relating borrower's income, assets, liabilities and net-worth to proposed mortgage payments and overall housing expenses.

Another issue worthy of mention under the creation of mortgage assets by PMIs is insurance of the mortgaged property. It should be a condition of every mortgage loan granted that each property offered as security to a PMI is insured against such risks as the PMI decides as soon as a mortgage is completed. The amount of the insurance is usually for full reinstatement value and all PMIs must insist that the insurance cover shall include fire, storm and tempest, in addition to flood, subsidence and landslide. In order that the PMI may easily be certain that each property mortgaged to it is properly insured, it is usual for the insurance to be effected through the PMls agency so that, having itself paid the premium, it may then collect this from the individual borrower either in cash or by debiting his/her mortgage account.

3.0 PROCEDURE FOR ACCESSING NHF LOAN SCHEME

3.1 Terms and Conditions for NHF Loan

The terms and conditions for accessing the NHF facility are outlined in Decree No. 3 of 1992 and reinforced in the Statutory Instrument of 1996 which was signed by the Honourable Minister for Works and Housing. The basic prescriptions are that the Fund shall be managed and administered by the Federal Mortgage Bank of Nigeria; and also that financial resources of the Fund shall be loaned by FMBN to primary mortgage institutions (PMIs) for on lending to individuals who must be contributors to the Scheme. Other requirements are the following:

a) For PMIs:

i. A PMI must have been duly licensed and accredited for NHF.

ii. Applications must be submitted along with applications received for loans from individuals, who must be contributors to the Scheme.

iii. No PMI shall, in any one year, be granted a loan amount in excess of 50 per cent (50%) of its shareholders' fund.

iv. PMIs are required to secure the NHF loan required with appropriate block of existing mortgages or any other security acceptable to the Bank.

b) For Individuals/NHF Contributors:

i. A borrower must be a contributor to the Fund and must have contributed for a period of not less than six months.

ii. A borrower must have evidence of regular flow of income.

iii. Not more than one-third (1/3) of the income of the borrower shall be considered for a loan repayment -- affordability level. Appendixes A and B provide guides on calculation of monthly

repayment amounts, using annuity table; and affordabtlity level on NHF Loans.

iv. Maximum loan to an individual applicant shall not be more than N5,000,000.00 (five million naira only).

v. Possession of valid title to land and the property to be mortgaged shall conform to the existing planning laws and regulations. A loan granted to an individual under the Fund shall be secured by a first legal mortgage of the subject residential property.

The Statutory Instrument also makes a general prescription that the loan to be granted to an individual shall not exceed 90 per cent (90%) of the cost or value of the property to be mortgaged, whichever is lower; and of that loan amount, 80 per cent (80%) shall be provided by the Fund while the PMI, through which the application is made, shall provide 20 per cent (20%).

The Honourable Minister for Works and Housing may, from time to time, give directives for the amendment of the existing terms and conditions on NHF Loans. The role of the Federal Mortgage Bank of Nigeria is to ensure effectiveness and efficiency of the NHF Loan Scheme operation as well as assure that the prescribed conditions are complied with.

3.2 Documentation for NHF Loan

• Application Forms - FMBN standard Application Form for NHF Loan required by the PMI, and PMls Application Form for NHF Loan by individual applicants;

• PMl's financial reports (annual audited accounts and returns for three [3] months prececing application), current tax clearance certificate and Board Resolution supporting loan application.

• Fidelity Bond, Errors and Omission Insurance Policy.

• Block of existing mortgages or other acceptable security - title documents, search reports, consent to mortgage, executed deed of legal mortgage, current property valuation report, current loan status report

• 'NHF proposed mortgages - current valuation report (dated, signed and sealed by registered Valuer), loan appraisal report, loan commitment report/approval, offer letter, acceptance letter, copy of title document (C of O), legal search report and copy of'Consent to Mortgage'.

3.3 NHF Loan Appraisal Process

The loan processes undertaken at this stage in the Federal Mortgage Bank of Nigeria include:

• Verification of documents submitted by the PMl;

• Confirmation of technical reports and opinions through investigation and inspection, where necessary;

• Collation, synthesis and analysis of technical reports;

• Loan Appraisal Memorandum.

3.4 Completion and Security for NHF Loan

This stage of NHF loan processing includes:

• Approval by the Bank (FMBN);

• Offer Letter issues to the PMI by FMBN;

• Acceptance of Offer by the PMI;

• Execution of the Sales and Administration Agreement as well as Deed of Assignment of the Security presented for the NHF Loan; and

• Disbursement of the Loan to the PMI as may be agreed between FMBN and the PMI.

3.5 Monitoring and Portfolio Management

After the completion stage of NHF Loans, both the FMBN and the PMIs are required to undertake necessary follow up actions on the loans granted. Such actions include:

a) Execution of mortgage deeds on NHF individual loans by the respective PMIs;

b) Disbursements to individual NHF loan beneficiaries by the respective PMIs;

c) Monitoring of disbursement process in PMIs by FMBN;

d) Exchanging executed NHF mortgages with the requisite 'consent to assign' for block of existing mortgages or other security earlier submitted for the NHF Loan to the respective PMIs;

e) Repayment of NHF loans by the PMIs. The attention of PMIs are drawn particularly to the Statutory Instrument of 1996 Clauses 4(1) and 4(4), where it is required that "a Mortgage Institution shall repay monthly, to the Bank, ... ... whether or not repayments are collected from borrowers by the Mortgage Institution" and that a Mortgage Institution w hich is in default of repayment ... ... shall be refused further access to the Fund",

4.0 FACTORS FOR MAKING SUBSTANTIAL DISBURSEMENTS ON NHF LOAN SCHEME

The National Housing Fund Decree No. 3 of 1992 prescribes that the interest rate on loans to individuals shall not exceed 9 per cent (9%) and that repayment period shall be up to 25 years. This prescription therefore makes the NHF Loan Scheme the cheapest funding for long term investment in the provision of affordable houses for Nigerians. One may then wonder there has not been a deluge of applications since the loan operations commenced a little over three years ago.

Appendix "C" shows the Status of packaged applications by PMIs on individual applications for NHF Loans, as at 15 June 2002. It can be seen that, as at that date, 3,002 individual applications have been packaged in 90 batches by 28 (twenty-eight) PMIs and the Nigerian Army Housing Scheme (NAHS) for a total loan amount of over N2.4 billion. Loans amounting to Over N1.3 billion had so far been approved for disbursement to 2,319 NHF contributors through 26 (twenty-six) PMIs and the NAHS. It follows therefore that the Bank had approved over 75 per cent (75%) of individual applications submitted to it by PMIs for NHF Loans.

The Bank has registered, to date, over 1.8 million contributors and collected about N8.8 billion. The sum of loan applications received to date is therefore a far cry from the built up capacity of the Fund. Applications for .

NHF loans have been slow in coming, due to a number militating factors which have become sources of concern to FMBN but which it can do little or nothing about. The factors identified include the following:

4.1 Difficulties Encountered in obtaining Legal Documents on Land

One of the major conditions for granting a mortgage loan (NHF loan, not exempted) is that the applicant needs to have legal title over the land on which he wants to build, buy or renovate a house. Most States are either not granting these titles at all or have made it difficult and costly to acquire such title deeds or even the necessary 'consent to mortgaged The provisions of the Land Use Act and the attitude of land administrators bring about this problem, which lias been frustrating the desire and effort of the average Nigerian to access the NHF facility.

In many southern states, an applicant is required to pay as much as N5 0,000 (fifty thousand naira) or more in various charges before a certificate of occupancy (C of 0) is issued by the State Governor and, inexplicably, even higher charges for granting 'consent to mortgage' the property. These problems combine to make it really difficult, if not impossible, for the average Nigerian to acquire a C of 0 in terms of terms and financial resources involved.

The only solution to this problem is for State Governors to make issuance of title deeds and other ancillary legal documents to land very cheap and less cumbersome in their respective States. On the part of the Bank, it has been making appeals to land administrators in all the State of the Federation during their annual gathering at the Council on Housing as well as visits to the various States by Executives of the Bank.

4.2 Dearth of PMIs in the States

As the financial resources of the NHF can only be accessed and disbursed through PMIs, the operations of the Bank and the aspirations of prospective borrowers are hampered and frustrated by the insufficient number of PMIs and their poor spread. Currently, there are 60 primary mortgage institutions accredited to access the NHF facility. Of that number, only 12 (twelve) PMIs are owned by Federal/State Governments and their agencies. Majority of the other private ones are concentrated in Lagos and have presence in only a few other towns.

For easy access to the NHF facility, there should be at least one PMI in each state capital and each major population centre. The Bank has been encouraging State Governments to establish their own PMIs to facilitate easy access to housing finance and, especially to enable contributors to NHF in the various Slates to benefit from the Fund facility.

4.3 Affordable Houses in Short Supply

There is inadequate supply of affordable turnkey houses/apartments in the country. This is why the Bank had in 1998 advised State Governments to provide a minimum ofN20 million seed funding to their respective housing corporations or property development agencies for them to build houses and sell or allocate same to NHF contributors at costs within the range of the current N5.0 million NHF loan ceiling. The Bank will in turn grant loans to enable purchasers or allottees who are NHF contributors pay for the houses. This will facilitate the replication of the housing estates in the States and the process continues ad infinitum,

Private estate developers are also being encouraged to build houses, which will be affordable to NHF contributors. Where such developers submit proposals to the Bank ,on such housing development, the Bank will be willing to assist them. The conditions for obtaining financial assistance from the Bank for residential housing estate development are as indicated on the attached Appendix "D"

4.4 Rising Cost of Building Materials

The exorbitant cost of building materials is another inhibiting factor to making it possible for the individual to develop or acquire a dwelling house. In this regard, individuals will need to check their taste in the standard of house construction and design housing projects to suit their means/financial resources. On the part of Government, there is the need to provide the enabling environment for bringing down the cost of building materials.

The Bank has the mandate to encourage the development of relevant domesticated construction technology to encourage the use of locally available or processed building materials and cheaper methods of building construction. The Nigerian Building and Road Research Institute (NBRRI) has been developing prototype low cost houses built with local building materials and use of cheap construction methods. The impact of such effort is yet to be felt by Nigerians.

5.0 PMIs' OPERATIONS vis-a-vis NHF LOAN SCHEME

Possible solutions to the problems on PMIs' operations as inhibiting successful implementation of NITF Loan Scheme may not necessarily be to eliminate the prescribed role of PMIs in the short run. This is because such elimination and/or allowing for direct disbursement by FMBN to individual applicants would require amendments to Decree No. 3 of 1992 and other subsidiary statutes and negate the objective of creating real mortgage industry in the country. It is also not advisable to disburse to State Housing Corporations, given the experience on loan recovery of facilities earlier extended to these institutions. For FMBN. to disburse directly to contributors, it will spell doom for, and even bring about the demise of the PMIs. Certainly they will no longer have patronage and the nurturing to maturity of the fledgling mortgage industry will no longer be realised. However, in the long run, it may be necessary to review NHF Loan Scheme to make it more easily implement-able.

For immediate improvement on the operation of the Scheme, the following suggestions are being considered:

a) Instead of the block of existing mortgages, other forms of securities, such as other properties owned by the PMI or indeed any other marketable security are now being accepted by the Bank. FMBN wi1l ensure that any amount of loan approved is fully secured in every case.

b) The introduction of other conditions for NHF loans not approved by FMBN brings to focus the issue of supervision of the PMIs. If FMBN does not supervise the PMIs activities, then it will be difficult

for the Bank to control extraneous conditions being introduced by them (PMIs). In view of this therefore, the Bank has again approached Government with the suggestion that the supervision of the PMIs be returned to FMBN for effective policing of their operations.

c) PMIs are being encouraged to identify residential housing estate developments which meet NHF requirements (i.e., with housing Links costing not more than N6.0 million and having title documents that are readily transferable to individual allottees/buyers for mortgage creation) throughout the Federation; and match or introduce same to NHF contributors/prospective loan applicants. Such housing estate developments can then be financed by NHF with the ultimate aim of creating NHF mortgages for contributors.

I hope I have been able to provide the necessary information and enlightenment that will enable you to take that bold step to access the National Housing Fund Loan Scheme today.

I thank you for your attention.

AKlNWALE.,J.A.

FEDERAL MORTGAGE BANK OF NIGERIA

CONDITIONS TO BE MET BY PRIVATE DEVELOPERS SEEKING FOR A LOAN TO DEVELOP HOUSING ESTATES

1. A loan for residential housing estate development only shall be for a short period not exceeding 24 months. Such loan will not include infrastructural development.

2. The proposed estate must have good title that can be sub-leased to individual allottees/purchasers of the housing units therein.

3. Mousing units under the proposed project must cost not more than N6.0 million so that they can be affordable to buyers within the range of low- to medium-income earners.

4. There must have been firm commitment from buyers/allottees of the housing units. For this purpose, an accredited Primary Mortgage Institution is to be identified in order to facilitate introduction of the project to prospective buyers/allottees who must be contributors to the National Housing Fund (NHF).

5. A financial projection to suit the proposed financial arrangement on the project must be provided. The projection must include developer's equity participation on the project, competitive interest rate proposed and exitent of loan required.

6.. Full security for the financing which the Bank is going to be exposed to, for the period of the exposure must be provided In the case of a State Government housing agency, the State Government concerned will be required to provide an irrevocable standing payment order (ISPO) to be confirmed with the Federal Ministry if Finance.

7. The following documents to back up the proposal should be forwarded to the Bank

: > Photocopy of Articles and Memorandum of Association of the company (estate developer) with certified true copies of Forms C02 and C07 attached.

> Audited Annua! Accounts for the previous three (3) years.

> Photocopy of Tax Clearance Certificate of the organization for recent three years.

> Photocopy of registered title document on the land for the proposed project

. > Approved bulding plan and layout plan.

> Valuation Report on the proposed security for the loan.

> Bill of Quantities (BOQ) giving adequate cost estimate for the project.

> Cash Flow Projection stating the proposed competitive interest rate for the loan as well as proposed per odic repayment.

8. Evidence of registration with the National Housing Fund as an employer and up to date remittance of employees' contribution to the Fund.

9. Payment of a non refundable application fee ofN20,000.00 (twenty thousand naira only).

10. Other information. that may facilitate quick consideration of the loan.

FEDERAL MORTGAGE BANK OF NIGERIA

LIST OF PRIMARY MORTGAGE INSTITUTION (PMIs) ACCREDITED FOR ACCESSING NATIONAL HOUSING FUND (NHF) FACILITY

Loans and Advances Department, FMBN

June 2002.