WHY CAN’T A MORTGAGE MARKET DEVELOP WHEN WE ARE AMIDST A HOUSING DEFICIT?
IN A somewhat foretelling way, much has been written about an Africa Rising. It is an almost foreordained narrative that the continent will remain a mid-to-high single-digit GDP annual growth economy with an increasingly middle class expecting rising incomes.
Although geopolitical risks and other noneconomic factors will continue to put pressure on the outlook in sub-Saharan Africa, it cannot be denied that between 2005 and 2016, growth in the African economies including that of Zambia increased by over 50 percent compared to economies elsewhere where growth was subdued. This Africa Rising narrative was only interrupted in 2016 when the commodity price slump slowed the African per capita growth which was unrelenting for a decade.
As can be expected in an era of rising GDP growth amidst a growing population and rapid urbanization, the level of housing deficit in the country was also exacerbated. This was confirmed in 2016 by the Local Government and Housing Minister Vincent Mwale’s speech to the United Nations Conference on Housing and Sustainable Urban Development (Habitat III) in Quito, Ecuador where he announced that the current housing deficit in the country was standing at about 1.5 million.
At that conference, the Minister also announced that Zambia was currently reviewing the National Housing Policy of 1996 and the housing implementation strategy to deal with the housing deficit and to align the policy to the greater projected demand for housing in urban areas of over 60 percent by 2050. This demand for housing was estimated to represent five times growth in absolute numbers, hence posing challenges in terms of proper planning, housing provision, and unplanned settlements. So what can be done about this challenge?
Karley (2003) ‘Challenges in Mortgage Lending for the Underserved in South Africa’ noted about the similar experiences in South Africa that “expanding access to finance can play a very important role in reducing poverty among underserved communities by among other things facilitating income-generating opportunities and assisting with opportunities to build capital and improve living conditions, especially if they are homeowners because homeowners are able to accumulate wealth as the investment in their homes grows.
Unfortunately, Karley (2003) noted that financial exclusion is a common phenomenon in most developing parts of the world, in particular, sub-Sahara Africa, in most cases, aggravated by a lack of well-developed financial systems, inadequate infrastructure, limited products, or affordability problems. Karley (2003) further noted that the absence of adequate and credible information and records to properly assess affordability and credit risk implied that lenders might take high risk, which was reflected in the lending profile. To deal with this issue, Karley (2003) suggested the introduction of an insurance or guarantee scheme (particularly from a government) to help mitigate the risk associated with lending to households in affected areas.
At the other optimistic end, I read an article by the Zambia Business Times titled ‘Zambia’s Mortgage industry set to take off following the successful 15 year bond auction by Central bank’ in which it was anticipated that the successful issuance of the 15 year tenure government bonds by the central bank in 2016 signaled strong demand by both onshore and offshore players that could be leveraged to launch a robust mortgage industry in Zambia.
The argument from this article was that a lot of middleclass citizens rely on personal loans to develop their homes and given the limited tenure (payment period) of personal loans to a maximum of about 5 years, a number of housing constructions are abandoned for lack of finance resulting in high incidences of uncompleted structures in Zambia. Therefore, with an active national mortgage industry, the author foresaw a more affordable and competitive mortgage home offering with more Zambians preferring to buy completed houses.
It is difficult to argue against this conclusion but perhaps the Zambian penchant for super profits might make the completed house offering unattractive to a large group of people, there is still a question that needs answering. Whether the mortgages industry in Zambia is appropriately structured with the right regulatory framework to support its growth.
Let us look at one scenario to emphasize the current status of the mortgage industry in Zambia.
It is only in the last five years when the tenure, of mortgages, has begun to increase with the latest mortgage offering from the Zambia National Building Society (ZNBS) of 14% interest over a 30-year tenor. The ZNBS has made various announcements in this regard starting in 2015 when the ZNBS had announced that they had disbursed a total of K61.8 million for mortgages creating 298 mortgages. Further, in 2017, it was announced that a partnership has been created by the ZNBS and NAPSA with respect to the specific NAPSA housing stock that was currently on the market. However, the value and number of mortgages created thus far is still a far cry when compared to the housing deficit of 1.5million pointed out by the Minister.
Against this background, the need for private sector ingenuity to address this challenge cannot be overemphasized and becomes much more urgent every day, however, the private sector to succeed require a properly structured mortgage industry than the one currently hampered by a lack of robust credit assessment mechanisms for individuals and high-interest rates.
So how can the mortgage industry be sustained to address this challenge? Let us look at the United States example, 30 years ago as a way to address this point.
In the United States, after similar challenges of financial underserving in less developed communities, in 1977 the Carter government introduced the Community Reinvestment Act (CRA). This was an act of Congress enacted with its main objective of requiring depository institutions to assist in meeting the credit needs of low to moderate income neighborhoods following concerns by community organisers that the major banks were not prepared to advance credit to minority communities.
In its element, the CRA required federal regulators to assess whether banks serving various communities were fulfilling their obligations to the communities they currently served. Any future federal regulatory approvals for the bank’s expansion, acquisitions, branch openings etc. would then only be granted if pre-agreed obligations to the communities the bank currently served were met. So how was the evaluation done? The CRA enabled communities served to assess the performance of the banks serving them on an annual basis. The CRA remained obscure for many years until the advent of Clinton administration who made the enforcement of CRA a priority, while previous successive Republican Administration did not persuasively or overlooked the enforcement this Act. In 1989, the CRA was strengthened by another act of Congress which prescribed that the assessment rating and a written evaluation of each assessment factor would be made public.
As a consequence of this, community groups were empowered to challenge mergers or acquisitions of banks that were not responsive to their community needs. For example, in 1989, the Federal Reserve declined to allow the Continental Illinois Bancorp to acquire Grand Canyon State Bank, a bank based in Arizona as a consequence of low CRA rating.
The rest is history, the Clinton era produced the highest ever recorded sustained growth in homeownership in 8 years as banks increased access to underserved communities in an effort that was in part, born of a desire by the banks to ensure that they were appropriately evaluated by the communities they served and in turn supporting their growth strategies in those communities and elsewhere.
The Clinton era growth was also enabled by the Federal National Mortgage Association (FNMA) (popularly known as Fannie Mae), which had a role of expanding the securitisation of mortgages (in the form of mortgage-backed securities) to allow front-line lenders to continue reinvesting their assets into more lending. Fannie Mae allowed banks to quickly free up its resources and in turn, made it possible to increase the number of lenders in the mortgage market.
Ultimately as a consequence of increased uptake in mortgages, as the sub-prime mortgages began to be securitised and with Fannie Mae as a ready buyer, the mortgage market became very lucrative, greed prevailed resulting in mortgage applicant financial suitability and stability assessments at the front-end becoming secondary in the placement of mortgages. The end result was the liquidity crisis in 2008, which saw investment banks such as Lehman Brothers falling by the wayside, however, a lot can be learned from what happened in the United States in terms of growing the mortgage industry. In short, as noted by Karley (2003) and as the example in the United States shows there has to be a government-led initiative if the mortgage industry can be developed sustainably.
It needs to be acknowledged that the high borrowing costs, lack of established formal credit assessment infrastructure and lack of lending policies restrict a large base of individual’s access to formal housing which then becomes a part of government challenge to provide a means to enable private sector involvement.
There is, however, a reason to be optimistic, because everywhere one looks, there is an individual managing to rent a good house and this by itself, suggests that there is a ready mortgage market available to be harnessed. It just needs to be properly structured and appropriately supported, perhaps in a way that Zambia Business Times article referenced above, suggests. What is clear is, it is appropriate to ask, why can’t a Mortgage market develop when we are amidst a housing deficit?