ne of the most defining moments in the life of a man is when he moves into his own house, wakes up on his own and proceeds to his daily work from his own house. The feeling is like someone who has accomplished a great milestone, no matter how small the house. And it is indeed a great milestone. This is the reason that most organizations incentivize the workforce with a housing loan when they are qualified for it. Aside from being a motivation for increased productivity, it engenders commitment to organizational goals by the employees because it solves one of the basic necessities of life. Food and clothing, the other basic needs are usually ongoing and never milestones. Therefore, a national housing policy that leaves out linkages with the various housing funds will achieve little to meet the needs of the majority of Nigerians.
Conventional practice dictates that where a mortgage is presented, mortgage insurance comes into play to reduce the financial outlay that would have been the case if the entire 25 to 30 per cent equity is to be paid by the borrower. However, pension mortgage borrowing presents a rather difficult and complex situation. Insurance was not factored into the guidelines issued by the National Insurance Commission (PenCom). What can be inferred is that pension asset managers and insurers did not come together in a bid to fashion a product that would have a tremendous effect on pension savers.
This product and similar other products would have a positive impact only when it is framed to benefit the saver and not the duration that money would be in the management of PFAs to make it profitable. The return on investment for asset owners should be the first line of thinking for those initiating and developing these products. This may be the reason for the slow uptake of the product by retirement savings account holders. In addition, the conditions for the so-called borrowing are themselves disincentives to those who qualify for the borrowing.
The real estate sector in Nigeria has struggled for decades contributing less than an average of 7 per cent to GDP and under one per cent to employment. In terms of contribution to GDP growth, the sector has been declining for the most part of the last 5 years. And compared to the rest of the world it is the largest sector in countries like the US and Australia in terms of contributions to GDP and also provides the largest employers in Australia. The failure of the real estate sector in Nigeria stems from a weak salary structure and wrong incentivizing for commercial players. The bulk of those targeted to swell housing funds are salary and self-employed whose mandatory or voluntary contributions are very insignificant for the pool of resources demanded.
Constitutional Right to shelter
Access to decent, affordable, quality shelter is a fundamental human right guaranteed under section 16 (2) (d), of the Constitution of Nigeria. Expressly, it provides that the “State shall direct its policy towards ensuring suitable and adequate shelter for all citizens.”
The Universal Declaration of Human Rights also enjoins national governments the right to a standard of living adequate for the individual’s family’s health and well-being, including food, clothing, housing, medical care, and necessary social services.
The International Covenant on Economic, Social, and Cultural Rights (ICESCR), a multilateral treaty adopted by the United Nations General Assembly with Nigeria as a signatory, also guarantees the right to housing as part of an adequate standard of living. This does not only mean having a roof over one’s head, but it also includes the right to live in safety and dignity in a decent home. It also means affordability, the security of tenure, protection against forced evictions, and availability of services, such as access to drinking water, energy, or transportation.
Furthermore, as a party to the Covenant, Nigeria is expected to ensure that all enjoy all components of the right to adequate housing, including the security of tenure, access to services and infrastructure, affordability, habitability, accessibility, and location in proximity to services.
The disconnect of NHF, pension mortgage with reality
Before the Pension industry packaged mortgages, there were the NH-Fund, private mortgage institutions, and the Mortgage Refinance Company. Their intentions are similar –– to bridge the huge housing deficit. Unfortunately, these efforts are not linked together. The core service of mortgage insurance is not factored such as reducing the equity contribution through premiums. It is doubtful if insurers’ input was sought on the basis of what works for other well-developed housing markets.
The National Housing Fund (NHF) was established by the NHF Act of 1992 to mobilize funds that will facilitate the provision of affordable housing for Nigerians. Under the law, every Nigerian earning N3,000 or more per annum must contribute 2.5 per cent of their basic monthly salary to the NHF. However, on 18 February 2019, the law was repealed and replaced in 2018 with an Act of the National Assembly. The minimum wage replaced the N3,000 provision in the earlier legislation.
Other defining provisions of the new law include;
▪ Mandatory 2.5% contribution of monthly income by employees earning minimum wage and above in public and private sectors to be deducted and remitted monthly by all employers
▪ 2.5% of income by self-employed individuals
▪ 2.5% levy on cement, locally produced or imported
▪ 10% profit before tax minimum investment by insurance companies, banks and pension fund administrators into the NHF at an interest rate not exceeding one per cent above the rate payable on current accounts by banks.
Significant downsides of NHF, residential mortgage equity contribution
If proper linkages were established, the National Housing Fund would have benefited from the more flexible pension mortgage equity contribution of the RSA holders. When combined, the two can rise significantly for each contributor, particularly the low-income groups.
▪ In the case of PenCom’s equity contribution for a residential mortgage, there were no housing models and packages that will suit the various categories of contributors under the management of PFAs. To prequalify contributors only on the basis of the various fund categories is too simplistic. If the guidelines had indicated, for instance, that contributors under Fund II can bring up applications for houses of N8million to N10million, this would be clearer.
▪ Aside from the draconian penalty of up to N100 million and N10 million for non-compliance for corporates and individuals respectively, there is also a possible sanction of operating license cancellation for violation by the financial players listed above. The premium, pension and deposit assets under the management of insurers, PFAs (Pension Fund Administrators) and banks respectively have cost implications for the managers and any unfair legislation that mandates them to place such funds in an investment that may not guarantee good yield would be resisted.
▪ Pegging access to housing fund by contributors at 60 years or 35 years of service assumes the typical civil service system whereas, in the private sector, early retirements before 45 years is becoming a norm. Harmonizing the exit age for pension mortgage and national housing fund contributors would be a good deal. It would also benefit contributors if the possible exit age could be put at a minimum of 10 years contribution to qualify for withdrawal.
▪ A 2.5% levy on cement is a property tax that will make housing even less affordable considering that cement input is a major component. There is also no mention of incentives for innovators of purpose-built locally sourced and affordable building inputs.
▪ Absence of proper education about mortgages and the high rates of defaults by borrowers.
Red Flags in the mortgage borrowing
Although findings indicate that no significant activity has been recorded in the pension equity mortgage window, still it is important to not forget the subprime crises in the United States that ushered in the global financial meltdown from 2007 to 2008. The financial crisis was caused by cheap credit and relaxed lending standards which fueled the housing bubble. The erosion of savings, massive job losses and loss of homes were the outcomes.
Abrupt and interest rate hikes have always been the bane of mortgages and homeowner defaults that follow. Nigeria’s economy is too skewed to the rich that any attempt to take over homes from people whose life savings had gone into it will be catastrophic.
During the subprime crises cited here, many homeowners were unable to afford the increased monthly payments on their subprime loans and were also unable to refinance or sell their homes due to the real estate market slowdown.
A subprime mortgage is a type of loan granted to individuals with poor credit scores who wouldn’t qualify for conventional mortgages. Subprime mortgages are now making a comeback as nonprime mortgages. It is hoped that the funds targeting the savings of workers will be carefully weighed and applied so they will not implode.
In fact, the term, mortgage, used for the pension product negates the principle of and meaning of mortgage in the real practice of the concept. The security of workers’ savings so that it can serve them when it matters most should be uppermost. If mortgage equity should come into play at all, then insurance ought to be factored into it.