The mortgage market in
Ghana like many developing economies is a form of Fernand Braudel’s Bell Jar
alluded to by De Soto (2000); which makes the market “… a private club, opened only to a privileged few”, referring to
the rich in society. Research has shown that about 90% of Ghanaians cannot
afford a mortgage to purchase the cheapest developer-built unit. This is
largely due to the general low levels of income, high house prices and the high
mortgage interest rate regime in Ghana.
High mortgage rates are
a function of unfavourable borrowers’ characteristics, unstable macroeconomy
and the scarcity of long-term funds in the mortgage market. Hence, from a
pricing perspective according to a recent study, all the three determinants of
the mortgage rate; the real risk-free rate, inflation premium and the risk
premium, are significantly high. Scarcity of long-term capital means the cost
of capital, loosely referred to as the real risk-free rate is high. Inflation
is high and volatile, which rationally induces investors to prefer short-term
investments than long-term investments like mortgage; as a guard against purchasing
power losses. Default risk, the probability that borrowers will not be able to
pay the principal and interest on a mortgage are substantial; estimated at 95%
in 1999 and 11% in 2009 (Gyasi, 2010). Further, the difficulty in converting
mortgage loans and collaterals into cash increases liquidity risk, which
together with high default risk constitutes the high risk premium regime (about
13% on T-bill rates) for Ghana cedi-denominated mortgages.
The substantial
liquidity risk could be attributed to the underdeveloped nature of the capital
market and the difficulty with Ghana’s land administration system. Without
refinancing mechanisms like a secondary mortgage market, where primary lenders
like banks can sell their mortgage loans to enhance their liquidity, borrowers
will always have to compensate lenders with a “term” (liquidity) premium for
carrying the risk until the maturity of the loan. With a weak land titling and
registration system, ownership to property is uncertain; which constrains the
basic principle of pledging property as collateral for a loan. This was
worsened by hitherto biased mortgage legislation (Mortgage Decree, 1972), which
favoured borrowers to the detriment of lenders. The composite ramification
manifests in increased length of time in converting collaterals into cash;
thus, making mortgage financing very risky, for which reason mortgage rates are
commensurately high.
In the absence of an
exclusive solution to high mortgage rates in Ghana due to the multi-faceted
nature of the problem, efforts to decompose the inherent risk and to deal with
each individually are welcome. On this note, Ghana Home Loans Limited’s
proposition to securitize their mortgages is a step in the right direction. In
this article, I seek to discuss the essence of mortgage securitization in
dealing with the scarcity of long-term capital, liquidity risk and how this
could effectively reduce mortgage rates; which is necessary to improve
affordability and mortgage market participation.
Securitization
is the financial practice of pooling various types of contractual debt, such as
residential mortgages, commercial mortgages, auto loans, or credit card debt
obligations, and selling said securities to various investors. Securities
backed by mortgage receivables are called mortgage-backed securities
(MBS). The structure of MBS allows the originator, in this case, Ghana Home
Loans to sell off the full or part of its mortgage portfolio to a special
purpose vehicle (SPV), usually an investment bank which subsequently issues
securities on the mortgage receivables to investors with different risk
appetites. These securities are then traded on the secondary mortgage market
(non-existent in Ghana). The different types include mortgage pay-through
securities, mortgage pass-through securities, collateralized mortgage
obligations (CMOs) and collateralized debt obligations (CDOs).
Now, how will
securitization reduce liquidity risk? By selling its mortgage portfolio to the
SPV, the Ghana Home Loans removes liquidity risk from its balance sheet by
matching its assets with liabilities. Liquidity risk is then transferred to the
secondary mortgage market (SMM); which is reduced or purged by rigorous trading
between investors. By the existence of
the SMM, mortgages originated could be converted into cash within months
compared to holding it for 15-20 years as is the case now. Hence, the SMM would
enhance liquidity by reducing the length of time for converting mortgage loans
into cash for relending. The expectation is that with an active SMM, demand for
MBS should increase which would ensure that the price obtained is not
substantial low compared with a forced sale.
Why would
securitization increase the supply of long-term mortgage funds? Once mortgage
loans are liquid via the SMM, more cash (funds) would be released from Ghana Homes
Loans’ balance sheet for immediate relending. The SMM is a market where
investments with long-term liabilities and assets trade. Hence, this provides
an opportunity for better asset-liability matching depending on the structure
of securitization adopted; unlike the current situation where mortgage firms
mostly banks finance long-term mortgages with short-term deposits. This creates
a maturity gap problem which is funded at a high cost to banks and subsequently
transferred to borrowers. However, the Ghana Home Loans is not a deposit-taking
financial institution; and thus may not be affected by this problem. Therefore,
securitization could increase the Ghana Home Loans’ mortgage originations
substantially at a lower reinvestment rate to borrowers benefit.
This is possible
because, securitization enables a company even with a BB rating but with AAA–rated
mortgage receivables to borrow at the lower AAA rates; because the said
receivables are far less risky. In fact,
this is the fundamental reason to securitize mortgage loans which can have
significant reductions on borrowing costs. Accordingly, Liu, et al., (2009) opine that banks that
securitize their assets have lower mortgage interest rates or spreads than
depository institutions. This is because the securitization process is touted
as a “financial alchemy”; magic resulting from the tranching process. This
groups or builds different portfolios called “tranches” with similar risk
exposures which are well diversified. Experts assert that, if
the transaction is properly structured and the pool performs as expected, the
credit risk of all tranches
of structured debt improves, less tranches may experience dramatic credit
deterioration and loss. The tranching process is therefore everything about
securitization, a contributory factor to the global economic crisis and for
which reason, the Ghana Home Loans must be circumspect.
In summary, the
securitization process is first a risk transfer mechanism for primary lenders via
the secondary mortgage market. As a result, new investment opportunities varied
by risk appetites are created which suits the investment needs of many
investors especially for long-term investors like pension and insurance funds. This
would enhance liquidity through competition resulting from the exposure of
Ghana Home Loans’ primary mortgage loans to many more investors. Consequently,
assets and liabilities could also be better matched which will release more
long-term funds for increased mortgage lending at lower mortgage rates.
Notwithstanding these
benefits, the feasibility of securitization in any economy may be hindered by
many country-specific factors and the type of securitization adopted which are
not discussed in this article. It is my hope that extensive dialogue with all
stakeholders would reveal the possible bottlenecks and solutions which will
point the way forward for mortgage financing in Ghana.
Kenneth
A. Donkor-Hyiaman
MPhil
Planning Growth and Regeneration
University
of Cambridge
United
Kingdom
Kwakuhyiaman@gmail.com
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