Mortgage Warehouse, given the liquidity constraint experience by primary mortgage lender in the Nigerian mortgage sector, it became very important to come up with a plan for diversified sources of short–term funds that will facilitate the funding capacity and origination of mortgages in Nigeria. Despite its attractive demography and impressively sustained economic growth for a large part of the last two decades, huge infrastructural gap and structural deficiencies remain major inhibitors of the development of many sectors of the Nigerian economy; one of which is the hugely important housing sector. From high cost of funds brought about mainly be extremely low levels of deposits, to a weak legal and regulatory environment, the Nigerian housing sector has for a long time been plagued with multiple interrelated challenges that continue to limit its growth even as the country continues to experience vast supply-demand gap.

Nigerian Mortgage Market

With access to long-term finance identified as the main limitation to the development of the Nigerian housing sector, it was thus imperative that if any reasonable gains were to be made in addressing the subject of housing shortages in Nigeria, then the challenges of long-term finance faced by the mortgage sub-sector must first be addressed. Between the years 1960 and 2009, a period of over 40 years, the Nigerian mortgage sector recorded less than 100,000 transactions. Between 2006 and 2009 the market grew significantly, experiencing a surge of around 61% from NGN54 billion (US$342million) to NGN226 billion (US$1.43 billion). In 2010, following the 2008 financial crisis, outstanding loans experienced a drop of 7 percent, before starting back on its upward trend going into 2011. Despite this rapid increase, the ratio of mortgage loans to GDP stood at just 0.6 percent as at end 2011.

About the Mortgage Warehouse Funding Limited

The Mortgage Warehouse Funding Limited (MWFL) has been set up to operate as a Special Purpose Company with the objective of providing short-term local currency, competitively-priced funding to Primary Mortgage Lenders to enhance their mortgage origination capacity without the reliance on commercial banks for bridge funding lines. Up until the creation of the MWFL, primary mortgage lenders have had to in addition own equity rely on a combination of extremely low levels of deposits and unbearably expensive lines of credit for commercial banks; whom themselves are competitors of Primary Mortgage Banks as funding sources for the creation of mortgages. The result being that a lot of Primary Mortgage Banks have struggled to make any sense of their business. This is evidenced by the extremely low levels of leverage seen on the Balance Sheets of most mortgage Banks.

In a bid to find a solution to this challenge, Primary Mortgage Banks at a stakeholders’ meeting held [——] resolved to create a lasting solution to this challenge and following consultation with Dunn Loren Merrifield (DLM) a decision to mutualise the funding needs and strengths of Primary Mortgage Banks into one vehicle member-user was reached. Incorporated in December 2014, MWFL is sponsored by Member mortgage Banks (MMBs); as mobilised by Mortgage Bankers Association of Nigeria (MBAN), as well as certain other carefully selected parties each of which bring a critical element to the success of the Company and of which include: the Nigeria Mortgage Refinancing Company Plc. (NMRC), CitiHomes Finance Company Limited (“CitiHomes”); a CBN-licensed financial institution, Lion’s Head Global Partners through the African Local Currency Bond Fund; as Initial Subordinated Note Subscribers, and Dunn Loren Merrifield Advisory Partners as Transaction Structure Adviser and Sole Arranger.

The aim of MWFL is to create an intervention mechanism at the short-end of the mortgage funding curve in support of other on-going efforts aimed at easing the current housing finance challenges faced by the Nigerian housing sector.  The activities of MWFL are aimed to complement those of NMRC in that whilst NMRC is licensed to provide matching long-term secondary market refinancing to the mortgage sector via the issuance of medium-to-long-term bonds into the  Debt Capital Market, MWFL will however serve to provide an equally reliable and parallel source of short term/interim funding for financing primary mortgage originations by tapping the domestic Money Markets through the issuance of high investment grade corporate commercial papers. This short-term interim finance will enable MMBs to expand their origination capacity and ultimately enable them run their businesses more efficiently and profitably, whilst ensuring the steady growth of the mortgage subsector in the Nigerian housing market.

Adopting the Debt Securitisation framework as permissible to Finance Company

The funding activity of MWFL is based on Debt Securitisation; a process by which identified pools of contractual debt/receivables are transformed into marketable securities e.g. bonds or notes through suitable repackaging of cash flows that they generate as permissible to Finance Companies by the Central Bank. Based on this, CitiHomes as co-sponsor to MWFL being a finance company will manage the funding program of MWFL utilizing the debt securitisation framework.

Mode of operations and market impact

MWFL will provide short term financing, through the issuance of high quality investment grade rated Commercial Paper Notes, the proceeds of which will be on-lent to MMBs for the origination of mortgages pre-qualified based on NMRC Uniform Underwriting Standards.  The MMBs will have access to MWFL funding upon meeting certain Eligibility Criteria for accessing funding, as well as execute the Mortgage Warehouse Master Purchase, Prefinance And Servicing Agreement (and applicable Prefinancing Supplemental). The MMBs may then from time to time draw down on their respective lines of credit with MWFL under the executed Mortgage Warehouse Master Purchase, Prefinance and Servicing Agreement to fund booked mortgages at origination closing with all mortgages financed under this arrangement subsequently refinanced by NMRC once the mortgages have undergone a period of seasoning – 6 months.

By acting as a financial intermediation vehicle which connects mortgage origination with money market investors, MWFL will improve capital formation at the primary mortgage finance level, which will help drive up mortgage volumes and as such it is expected that primary mortgage banks, having access to both short-term money; through MWFL and long-term funds by means of NMRC refinancing can now begin to do the business for which they were set up – providing mortgage finance to intending homeowners.