Professional Documents
Culture Documents
A presentation
to
The Federal Capital Territory Administration and
Federal Mortgage Bank of Nigeria
By
Sonnie Ayere
MD/CEO UBA Global Markets
• If 13.5% of the total population can earn a monthly income of NGN60k per month upwards then…….
• 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
property
• Mortgage loans could be advanced from as little as 10 years and in some cases, particularly
the USA, 30 years
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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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• 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
• 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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• Exponential increase in the issuance of Mortgage Backed Securities as depicted above
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
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• Exponential increase in the issuance in all Agency Mortgage Backed Securities as depicted
above
• An example of the benefits to home buyers of using mortgage financing and its effect on
individual RoE
• Financing via the capital markets can be complex for hedging reasons
Flexible Mortgages
• Interest net-off
Combination 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
• Consistent economic growth – leading to the creation of jobs and economic prosperity
• Internet
• Direct mail
• Disbursement
• Collection Procedures :-
• Core deposits
• Tier II Capital – issuance of 10yr non-call 5yr bonds – typical in the United Kingdom
• Traditionally, banks funded mortgages using core deposits however, to reduce asset/liability
mismatch
• Banks funded mortgages with a combination of short term deposits and issuance of medium
term debt
• Draw-down of warehouse lines are repaid via a refinancing into longer term securities
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
• 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
Actively
Non tradable Tradable Commercial Public
Traded
Private Placements Private Placements Paper issue
bonds
• 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
• Trade Receivables
• Workers Remittances
SPV
Special Purpose
Sale & Service of Issuing Vehicle
Receivables
Seller, Servicer Assets Liabilities
• Servicing
• Placement
• Monitoring
SPONSORING COMPANY
Accounts
Receivable
Sale or Assignment
SPECIAL PURPOSE
VEHICLE
ISSUES
Accounts
ASSET-BACKED
Receivable
SECURITIES
• 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
• Some factors need to be in place before a securitisation can occur. Some of which
are:-
– Corporate commitment
– Management depth
– Origination capacity
– At least a 5 year fixed rate government curve – the longer the better
Homeowners
With loans from UBA
Loan Agreement
UBA
Homeowners
Principal &
Interest
proceeds proceeds
UBA
UBA Mortgage Receivables Investors
Funding Trust
Sale of Assets Mortgage Backed
Securities
Homeowners
Principal &
Trustee
Interest Principal &
Interest
proceeds proceeds
UBA Mortgage
UBA Receivables Investors
Funding Trust - A
Sale of Assets Mortgage Backed
Securities
Homeowners
Principal &
Trustee
Interest Principal &
Interest
proceeds proceeds
UBA Mortgage
UBA Receivables Investors
Funding Trust - A
Sale of Assets Mortgage Backed
Securities
Excess Spread +
Servicing Fees
Homeowners
Principal &
Trustee
Interest Principal &
Interest
proceeds proceeds
UBA Mortgage
UBA Receivables Investors
Funding Trust - A
Sale of Assets Mortgage Backed
Securities
Excess Spread +
Servicing Fees Financial
Swap Guarantor
Counter party
Homeowners
Principal &
Trustee
Interest Principal &
Interest
proceeds proceeds
UBA Mortgage
UBA Receivables Investors
Funding Trust - A
Sale of Assets Mortgage Backed
Securities
Excess Spread +
Servicing Fees Financial
Swap Guarantor
Counter party
Homeowners
Principal &
Trustee
Interest Principal &
Interest
proceeds proceeds
UBA Mortgage
UBA Receivables Investors
Funding Trust - A
Sale of Assets Mortgage Backed
Securities
Excess Spread + AAA
Servicing Fees Senior
Swap
Counter party
BBB
Mezzanine
Equity
• 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
• As noted above, the cost of funding to the issuer is close to the interest rate of the AAA
bond
• Legal
• Asset Transfer
• Bankruptcy Remoteness
• Regulation
• Taxation
• 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
• The influence the seller has on the assets after the sale
• Title ownership
• Only assets in the SPV are available to protect and pay investors
• The vehicle can only receive the assets as purchased and issue notes or certificates
• 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
• Strong incentive for banks to issue or invest in higher rated debt given the penal capital weights allocable to
bonds below investment grade
• 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
• Adopt new foreclosure law and implementation – Ethiopian model – Give notice in papers
and to individuals after the charge-off period
• Universal stamp duty rate – only applicable on the primary sale of residential or commercial
property
• 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
• 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
Pakistan
• 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
• 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
• 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
authorities
• 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
STAGE 2
Consumer Loan
Financial Intermediary
Car Loan Indiviual
Hence
Indiviual Indiviual
Total Networth as a Total Networth without
result of term financing term financing
availability availability
Conclusion
Pension Reforms that mobilize domestic long term capital can be a strong catalyst for sustainable growth