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Mortgage Finance

Home Ownership Training Workshop)

A presentation

The Federal Capital Territory Administration and
Federal Mortgage Bank of Nigeria


Sonnie Ayere
MD/CEO UBA Global Markets

16th of September, 2005

Estimated Mortgage Affordability

Average House Price NGN 2,500,000.00

Loan-To-Value 95%
Amount Borrowed NGN 2,375,000.00
Combined Income Per Annum NGN 678,571.43
Combined Income Per Month NGN 56,547.62
Monthly Income in US$ $ 418.87

Total Population 130,000,000.00

Amount of Eligible borrowers 17,550,000.00
% of total population 13.50%

• If 13.5% of the total population can earn a monthly income of NGN60k per month upwards then…….

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Estimated Nigerian Mortgage Market

Estimated Population 130,000,000.00

Estimated Working Population (%) 30%
Number of working Adults 39,000,000.00

% working adults acceptable as mortgagors (Prime / Sub-prime) 45%

Number of Adults eligible to borrow 17,550,000.00

Average House Price NGN 2,500,000.00

Possible current mortgage Market NGN 43,875,000,000,000.00

UBA's estimated balance sheet size NGN 400,000,000,000.00

Mortgage Market Cover 109.69x

• Approximately NGN44 trillion could easily be the market in Nigeria

• To cover the market, we would require 100 banks with NGN400bn all invested in mortgages!!
• So what’s all the fuss on a NGN100bn bond issue ????..its a trickle!
• NB - All numbers and percentages are estimates..

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Mortgage Finance
A Market Maker’s Perspective
What is a Mortgage
What is a Mortgage Bond

• A mortgage bond can simply be described as a long term borrowing by one or more
individuals where the borrowing is secured by a lien, first or otherwise over a purchased

• Mortgage loans could be advanced from as little as 10 years and in some cases, particularly
the USA, 30 years

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General Amortisation Profile

2 4 0 M o n th M o rta g e A m o rtis a tio n P ro file

3 ,0 0 0 ,0 0 0 .0 0

2 ,5 0 0 ,0 0 0 .0 0

2 ,0 0 0 ,0 0 0 .0 0

1 ,5 0 0 ,0 0 0 .0 0

1 ,0 0 0 ,0 0 0 .0 0

5 0 0 ,0 0 0 .0 0






















N o . o f M o n th s

• Mortgages generally amortise, paying principal and interest over the life of the loan

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Mortgage Amortisation Profile
Principal Balance
2,400,000.00 Interest Principal Monthly Repayment
• In the initial years, principal Month 1 2,396,628.85 19,000.00 3,371.15 22,371.15
repayments are negligible Month 2 2,393,231.01 18,973.31 3,397.84 22,371.15
Month 3 2,389,806.28 18,946.41 3,424.74 22,371.15
Month 4 2,386,354.43 18,919.30 3,451.85 22,371.15
• In the latter years interest Month 5 2,382,875.25 18,891.97 3,479.18 22,371.15
Month 6 2,379,368.53 18,864.43 3,506.72 22,371.15
repayments are negligible Month 7 2,375,834.05 18,836.67 3,534.48 22,371.15
Month 8 2,372,271.59 18,808.69 3,562.46 22,371.15
• All through, monthly Month 9 2,368,680.93 18,780.48 3,590.67 22,371.15
Month 10 2,365,061.83 18,752.06 3,619.09 22,371.15
repayment remain the same – Month 11 2,361,414.09 18,723.41 3,647.74 22,371.15
assuming Fixed rates Month 12 2,357,737.47 18,694.53 3,676.62 22,371.15
Month 229 255,135.18 2,019.82 20,351.33 22,371.15
Month 230 234,783.85 1,858.71 20,512.44 22,371.15
Month 231 214,271.41 1,696.32 20,674.83 22,371.15
Month 232 193,596.57 1,532.64 20,838.51 22,371.15
Month 233 172,758.07 1,367.67 21,003.48 22,371.15
Month 234 151,754.59 1,201.39 21,169.76 22,371.15
Month 235 130,584.83 1,033.80 21,337.35 22,371.15
Month 236 109,247.48 864.88 21,506.27 22,371.15
Month 237 87,741.20 694.62 21,676.53 22,371.15
Month 238 66,064.67 523.01 21,848.14 22,371.15
Month 239 44,216.54 350.05 22,021.10 22,371.15
Month 240 22,195.43 175.71 22,195.43 22,371.15

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Mortgage Amortisation Profile

P rin c ip a l a n d In te re s t A m o rtis a tio n In te r e s t

P r in c ip a l
2 5 ,0 0 0 .0 0 M o n th ly A m o u n t

2 0 ,0 0 0 .0 0

1 5 ,0 0 0 .0 0

1 0 ,0 0 0 .0 0

5 ,0 0 0 .0 0

1 17 33 49 65 81 97 113 129 145 161 177 193 209 225

• Financing Institution’s profits are normally front-ended as the bulk of interest is paid within
the first 10 years – depending on term of loan

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Global View of Mortgage Market

• Mortgages have existed globally in one form or the other for centuries

• However, in Sub-Saharan Africa, only South Africa, Namibia, and recently Kenya to some
extent can really boast of a vibrant mortgage market

• Most countries across the sub-region are beginning to develop the necessary criterion to begin
a market

• This is due to the importance we are all now realising of the correlation between having
mortgage markets and a middle class

• This is due to the leverage they provide to individuals to increase their wealth

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US Debt Securities Issuance
M u n ic ip a l
T o t a l is s u a n c e o f d e b t s e c u r it ie s - U S M a r k e t s
U S T re a s u ry
M o rt g a g e R e la t e d
$ 6 0 0 0 .0 0 b n
C o rp o ra t e
F e d A g e n c ie s
$ 5 0 0 0 .0 0 b n M o n e y M a rk e t
A sset B acked
$ 4 0 0 0 .0 0 b n

$ 3 0 0 0 .0 0 b n

$ 2 0 0 0 .0 0 b n

$ 1 0 0 0 .0 0 b n

$ 0 .0 0 b n
























• Exponential increase in the issuance of Mortgage Backed Securities as depicted above

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Debt Securities Issuance by Agency

O u t s t a n d in g V o lu m e o f A g e n c y M B S

$ 4 0 0 0 .0 0 b n

$ 3 5 0 0 .0 0 b n

$ 3 0 0 0 .0 0 b n

$ 2 5 0 0 .0 0 b n GNM A
$ 2 0 0 0 .0 0 b n
$ 1 5 0 0 .0 0 b n To ta l

$ 1 0 0 0 .0 0 b n

$ 5 0 0 .0 0 b n

$ 0 .0 0 b n




























• Exponential increase in the issuance in all Agency Mortgage Backed Securities as depicted

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Positive Effects of Leverage

• An example of the benefits to home buyers of using mortgage financing and its effect on
individual RoE

• 1333% RoE higher than if 100% equity..

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Types of Mortgages
Types of Mortgages

Fixed Rate Mortgages (Fully Amortising)

• Fixed rate coupon for the life of the mortgage

• Repayments remain the same for the life of the mortgage

• Generally available where you have a capital market

• Financing via the capital markets can be complex for hedging reasons

• Interest rate risk is borne by financing institution

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Types of Mortgages

Variable Rate Mortgages (Fully Amortising)

• Repayments can vary throughout the life of the mortgage

• Interest rate risk is borne by the mortgagor

• Generally easy to finance via the capital markets

• Easier to fund even via financing institution’s balance sheet

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Types of Mortgages

Interest Only Mortgages

• Repayment of principal is via a balloon payment

• This could be via insurance or endowment policy or alternatively pension payout

• Lower payment obligations for the borrower

• Back ended risk

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Types of Mortgages

Flexible Mortgages

• Repayments can be variable

• Redraws are allowed

• Payment holidays are allowed

• Further advances allowed

• Interest net-off

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Types of Mortgages

Combination Mortgages

• Balloon mortgages – fixed rate capped periods

• Refinancing risk borne by borrower

• Proved very popular with first-time buyers

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Categorisation of Mortgages

• Prime Mortgages
• Higher income earners
• No default history
• Verified Income
• Lower Loan-to-values
• Lower interest rates
• Sub-Prime Mortgages
• Lower income earners
• History of default / foreclosure
• Self certified income
• Higher Loan-to-values
• Higher interest rates

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Improving Macroeconomic Stability

• Consistent economic growth – leading to the creation of jobs and economic prosperity

• Low inflation rates

• Low interest rates

• Stable exchange rates

• House price stability or better still, growth

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Mortgage Origination, Underwriting and
Mortgage Underwriting
• Eligibility Criteria
• Maximum Loan-to-value
• Maximum Payment-to-Income ratio
• Applicant age
• Type of property
• Maximum Amount
• Minimum Amount
• Maximum Term
• Prepayment Penalties
• Location of property
• Life Insurance
• Building + contents insurance
• Mortgage Indemnity Guarantee insurance
• Verification of income and employment
• Credit Reports – Fair Isaac Scores (Credit Scoring)

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Mortgage Origination

Methods of originating mortgages - sales

• Direct Sales from branches / outlets

• Third party sales

• Call centers – including cold calling

• Internet

• Direct mail

• Mobile Phones – yes!

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Mortgage Origination Process

• Completed Application Form

• Verification of :-
• Income
• Employment
• Stability of income
• Income / expenditure statement
• Property existence – location / independent valuation
• Title check and insurance
• Credit checks
• Property, Life, MIG and Insurance Details
• Borrower contribution – received and not borrowed

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Mortgage Servicing

• Perfection of Title – (Deed of Trust)

• Disbursement

• Collection Procedures :-

• Set-up standing order or direct debit instructions

• Verification of contact details – on-going

• Setting delinquency and charge-off buckets

» 30 days
» 60 days
» 90 days
» 180 days charge-off

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Mortgage Servicing cont’

• Need for an executable and transparent foreclosure process

• Generally speaking can be between 18 – 24mths (most countries)

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Key Administrative Issues
• Marketing, Origination and underwriting
• Origination guidelines and/or policies and procedures
• Underwriting guidelines and/or policies and procedures
• Quality control
• Risk Management – setting and monitoring of targets
• Assignment of MIG and other insurance policies
• Procedures for approval
• Corporate governance re: reporting and compensation structure of underwriting
• Customer service
• Collections – incentive programs
• Automation and use of technology
• Staff experience and continuous training
• Work-out – reduction in timeline and incentive programs
• Tracking of performance – delinquencies, charge-offs, static pool analysis
• Disaster Recovery systems and back-up
• Cost of servicing a loan
• Number of loans serviced per employee

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Post Origination, underwriting and

How do you finance the portfolio on an evergreen basis..?

Mortgage Financing
Part 2

Transforming the dream into reality

How to Finance Mortgages

• Core deposits

• Tier II Capital – issuance of 10yr non-call 5yr bonds – typical in the United Kingdom

• Warehouse and subsequent take-out financing

• Residential Mortgage Backed Securitisation

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An Example of Traditional Bank Funding Sources

• Traditionally, banks funded mortgages using core deposits however, to reduce asset/liability

• Banks funded mortgages with a combination of short term deposits and issuance of medium
term debt

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Financial Intermediation

• Origination of mortgages financed via funding from a warehouse line

• Mortgages are originated under a homogeneous criteria

• Draw-down of warehouse lines are repaid via a refinancing into longer term securities

• Longer term securities issued using securitisation

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A primer on
Residential Mortgage Backed Securitisation

What is Securitisation ?

• Securitisation is the raising of debt secured on the cashflow and/or collateral value of a
selected pool of assets

• Securitisation debt is non-recourse to the originator, so that investors depend solely on the
performance of the assets and are insulated from the financial condition of the originator

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What is Securitisation cont’

• Pure asset securitisation is generally achieved by legally and economically isolating the
receivables / assets from the balance sheet of the originator

• This is achieved by what is commonly referred to as a “True Sale” of the assets or receivables

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Range of Debt Markets

Illiquid Highly liquid

Non tradable Tradable Commercial Public
Private Placements Private Placements Paper issue

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Range of Assets

• Generally, any asset that produces a certain level of predictable cashflow can be securitised

• Both short-term (e.g. trade credit ) and long-term (residential mortgages) can be securitised

• Even up to rights to receive flows – e.g. Airline ticket receivables etc

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Range of Assets cont’

• Examples of asset types that have been securitised

• Residential and Commercial Mortgages

• Auto / Equipment / Aircraft Leases

• Credit Card Receivables

• Auto and Consumer Loans

• Bank and Corporate Debt

• Trade Receivables

• Export and Domestic Corporate Receivables

• Air Ticket Receivables

• Workers Remittances

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Typical Structure of a Securitisation

Special Purpose
Sale & Service of Issuing Vehicle
Seller, Servicer Assets Liabilities

Assets Liabilities Sr. ABS Sell ABS Senior

Receivables (AAA) Investors
Debt Service
Pool Purchase
Receivables Receivables
Pool Mezz. ABS Sell ABS Subordinated
(BBB/BB) Debt Service or Mezzanine
Jr. ABS Investor

Retain Residual Interest (First Loss)

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Key Elements of Securitisation

• In-depth knowledge of the assets

• Isolation / transfer of assets

• Servicing

• Credit Rating (Domestic or International)

• Legalese and Deal Documentation

• Placement

• Monitoring

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Basic Transfer Mechanism



Sale or Assignment


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Methods of Asset Transfer

• Novation – An arrangement that involves the termination of the existing contract and the
writing of a new one
• Sub-Participation Funded or Unfunded - Involves one party depositing monies which may
only be repaid when the underlying assets pays or unfunded when the related loan is drawn or
the the asset defaults
• Assignment – Full transfer of the assets to the assignee

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Case Study
UBA GROUP Securitise its Mortgages

• Some factors need to be in place before a securitisation can occur. Some of which

– Corporate commitment

– Management depth

– Track Record (Loan Administration)

– Internal systems (originating, servicing, and collection)

– Available and up to date information (company and collateral)

– Origination capacity

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Initial Contract and Receivable

• Other factors necessary are :-

– Clear and enforceable foreclosure Laws

– Enforceable eviction policies

– Ability to perfect interest quickly

– At least a 5 year fixed rate government curve – the longer the better

– Electronic payment systems e.g. direct debits

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Initial Contract and Receivable

With loans from UBA

Loan Agreement


Principal & Interest

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Transfer of Receivables to SPV


Principal &

proceeds proceeds
UBA Mortgage Receivables Investors
Funding Trust
Sale of Assets Mortgage Backed

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Independent Trustee appointed & reallocation of

Principal &
Interest Principal &
proceeds proceeds
UBA Mortgage
UBA Receivables Investors
Funding Trust - A
Sale of Assets Mortgage Backed

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Allocation of Excess Spread

Principal &
Interest Principal &
proceeds proceeds
UBA Mortgage
UBA Receivables Investors
Funding Trust - A
Sale of Assets Mortgage Backed
Excess Spread +
Servicing Fees

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Introduction of a Swap counter-party and Guarantor

Principal &
Interest Principal &
proceeds proceeds
UBA Mortgage
UBA Receivables Investors
Funding Trust - A
Sale of Assets Mortgage Backed
Excess Spread +
Servicing Fees Financial
Swap Guarantor
Counter party

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Other form of Credit Enhancement considered

Principal &
Interest Principal &
proceeds proceeds
UBA Mortgage
UBA Receivables Investors
Funding Trust - A
Sale of Assets Mortgage Backed
Excess Spread +
Servicing Fees Financial
Swap Guarantor
Counter party

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Use of Senior/subordinated Structure

Principal &
Interest Principal &
proceeds proceeds
UBA Mortgage
UBA Receivables Investors
Funding Trust - A
Sale of Assets Mortgage Backed
Excess Spread + AAA
Servicing Fees Senior
Counter party

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Senior Subordinate Structure

• This is the most common kind of structure /credit enhancement for the following reasons :-

– Internal credit enhancement and therefore, generally speaking, the cheapest form of
credit enhancement

– However, the ability to calculate the expected loss of each tranche and size and size the
required credit enhancement is imperative

– The adviser and rating agency is usually responsible for this work

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Typical Senior/Sub structure example

• As noted above, the cost of funding to the issuer is close to the interest rate of the AAA

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Legal, Regulatory and Taxation Issues
Legal and Regulatory

• Legal

• Asset Transfer

• The Special Purpose Entity or Vehicle

• Bankruptcy Remoteness

• Regulation

• Taxation

• Stamp Duty / Transfer

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Conditions for True Sale

• Transfer must be a true sale, or its legal equivalent. If originator is only pledging the assets to
secure a debt, then it becomes a collaterised financing in which the originator would stay
directly indebted to investor

• The assets must be owned by a special purpose entity, whose ownership of the sold assets will
in all probability survive the bankruptcy of the originator/seller

• Actual ownership of the special purpose vehicle must be independent of the originator

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Confirmation of a asset sale

• The treatment and form of the transaction

• The influence the seller has on the assets after the sale

• The extent and nature of benefits transferred via the sale

• The purchase price

• Notification (if necessary) to underlying borrowers when assets are sold

• Title ownership

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The Special Purpose Vehicle

• Generally set up by the originator with ownership vested in a charitable trust

• Commonly set up in tax havens
• Mauritius
• Cayman Islands
• Jersey
• Apart from legally isolating the assets it also helps to avoid double taxation and hence reduce
the expenses (if any) of the trust
• Cost of set-up an SPV is low

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Why Bankruptcy Remote

• Only assets in the SPV are available to protect and pay investors

• No need for protection from creditors

• All obligations are limited to those available from the assets

• No recourse to the originator

• The vehicle can only receive the assets as purchased and issue notes or certificates

• Hence, probability of Bankruptcy is remote

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• Bank Regulators will place a strong emphasis on the the amount of regulatory capital
accorded to the transaction

• For instance, regulators in certain countries will insist that issuing bank hold 100% Risk
Weighted Capital to Equity portion of the transaction *

• This will differ from country to country and will normally be defined by the securitisation
laws of the country

• *FASB 46 …? Consolidation of VIEs - Somewhat mitigated by QSPE under FAS 140

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Current Basel II Proposals

• Strong incentive for banks to issue or invest in higher rated debt given the penal capital weights allocable to
bonds below investment grade

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SPV Taxation

• Generally speaking, the Special purpose Entities are carefully structured to ensure that its
income is offset by its expenses so that little or no tax is incurred

• Tax incentives are however provided to special assets classes – e.g. most countries exempt the
transfer of mortgages from Stamp Duty

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Current Market Constraints
Some Suggestions
Primary Mortgage Market Key Current Constraints

• Lack of long term domestic currency denominated debt

• Difficultly in implementing the current foreclosure law
• Lengthy title perfection process
• Governor’s consent
• Multiple and expensive stamp duty rates (especially at state level)
• Monetary and fiscal volatility
• Lack of mortgage-able properties
• Weak or non-existent underwriting skills
• No government incentives at the primary mortgage level

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Practical Solutions

• Issuance of long term debt by banks to manage the asset-liability mis-match.

• Adopt new foreclosure law and implementation – Ethiopian model – Give notice in papers
and to individuals after the charge-off period

• Titling process to be re-engineered – removal of governors consent is critical

• Universal stamp duty rate – only applicable on the primary sale of residential or commercial

• Continued fiscal and monetary discipline by the authorities

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Practical Solutions cont’

• Empower National builders association to have stringent standards. Key is to improve build
quality of homes secured by long term mortgages – (Implications for foreclosure costs)
• Tax relief on mortgage interest payments
• Eradication of multiple stamp duty rates and the reduction in current rate on residential
property sale
• Increased capacity, technical assistance and training
– Credit underwriting and systems
– Collections (wide spread direct debit accounts) / Monitoring
– Recovery – REO properties

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Implementation cont’

• We need to propose a new foreclosure law similar to that of the Ethiopian model. The
advantage of this is also public persona issues.
• Alternatively, implement property courts in all states – similar to that practiced in say
• In summary there are many models available to choose from worldwide
• Key to this, is the need to implement a fast, efficient and transparent process that works for
the country

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Implementation cont’

• We need to execute the re-engineering of the current tilting process – key sticking point will
be the governor’s consent issue.

• We need to execute the removal of multiple stamp duty and the lowering of the rate. This can
be encompassed in the new titling regulation or appropriate regulation

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Implementation cont’

• MoF and CBN to continue fiscal and monetary policies that impart discipline into the
management of the economy going forward – We need to continue to lobby appropriate

• National Home Builders Association to provide quality assurance to buyers and such buyers
can sue a developer and/or association via the property court (to speedup procedure) for poor
construction quality

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Implementation cont’

• Banks and Non-Bank Financial Institutions to invest in Training, systems etc.

– Housing Finance courses
– Beef-up collections teams and systems – to minimise delinquencies and
– Recovery teams to be put in place to reduce loss severity
– Research and data collection and monitoring teams to be put in place in
preparation for future capital markets issuances

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Case Study - Housing Finance

provides mortgage loan

Financial Intermediary Indiviual

Initially, a financial intermediary provides a mortgage to an individual say at 80% LTV

The financial intermediary is more comfortable lending fully secured by the property
As the property and loan seasons, a relationship and credit payment history is built by the intermediary


Consumer Loan

Financial Intermediary
Car Loan Indiviual

Other types of Loans


Indiviual Indiviual
Total Networth as a Total Networth without
result of term financing term financing
availability availability


Pension Reforms that mobilize domestic long term capital can be a strong catalyst for sustainable growth

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Summary Key Obstacles and solutions

• Foreclosure Law – to be reworked, committee in place

• High Stamp Duty rates – new regime to be advised & adopted
• Cumbersome Titling Process – to be re-engineered
• Governor’s Consent – to be discarded
• High interest rates – already being addressed via DMO
• Lack of long term money – already being addressed via DMO
• Government Yield Curve – already being addressed via DMO
• Securitisation Law for Nigeria – to be put in place, committee in place

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We are getting there…
Thank You
Mr. Sonnie Ayere
Mr. Ayere has over 12 continuous years of solid Corporate and Structured Finance, Banking and Asset Management experience
working with HSBC, Royal Bank of Scotland (formerly, NatWest), Sumitomo Mitsui Bank, Bank of Montreal Nesbitt Burns in London
and the International Finance Corporation (The World Bank Group).
He began his structured finance career in 1997 when he joined the structured finance / securitization team of Sumitomo Mitsui Bank,
London. He was part of the team that structured the first ever Japanese de-linked Balance Sheet Collaterised Loan Obligation
securitisation – GBP1.4bn Aurora Funding. He was also responsible for managing the bank’s fixed income portfolio in ABS
investments in other asset classes for the bank’s own balance sheet.
Following this, he joined BMO-Nesbitt Burns (the investment banking arm of the Bank of Montreal) London in 1998 as part of the
team responsible for setting up a US$20bn Fixed Income Structured Investment Vehicle (“SIV”), with a US$2bn Capital Note Program
which launched in 1999. He was involved in the company’s set up, compiling aspects of its procedures manual, system evaluation and
testing and subsequently responsible for analyzing and investing in various ABS/MBS and other asset classes – bank subordinated debt
and other corporate debt plus the on-going credit monitoring of the portfolio.
He joined the Global Structured Finance Group of the International Finance Corporation (The World Bank Group) in Washington DC
in 2001 where he was responsible for originating structured finance and securitization transactions globally, notable transactions
include IFC’s role as structuring investor in South Africa Home Loans first Residential Mortgage Backed ZAR 1bn Offering and
structuring securities backed by Contracts-to-sale in the Philippines. Mr. Ayere assumed the role of Structured Finance Specialist for
Sub-Saharan Africa in July 2002 and to date has been responsible for developing structured finance and securitization transactions and
developing debt capital market instruments for the bank and its clients across the continent. In September, 2004 he also became co-head
/ sector lead for financial markets business development for Sub-Saharan Africa. Here, he was responsible for generating financial
market investments across the region to includes US$ lines of credit to new and existing IFC relationship banks. He was also and
continues to be a key adviser to the DMO on the development of the Nigerian Federal Government Debt Capital Markets
He joined UBA Group as Managing Director/CEO of UBA GLOBAL MARKETS, the combined investment banking subsidiary of the
bank group in August, 2005
Mr. Ayere obtained an MA (Hons.) in Financial Economics from the University of Dundee – Scotland. He is an Alumni of City
University Business School London (MBA) and London Business School (Corporate Finance Program).

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