Experience from the past has however clearly demonstrated that, individual savings can hardly meet the financial requirements to provide the required quantity and quality housing. For instance, the Managing Director of the Federal Mortgage Bank of Nigeria, Mr. Taminu Yakubu, recently estimated the financing need in Nigeria to ensure housing for all at between N36 trillion and N43 trillion. This has necessitated the establishment of various building related societies/committees to bridge the gap.

It is obviously in recognition of this fact that Mr. Yakubu also expressed the view that home ownership should not be based on deposit system but on the anticipating income thereby enabling workers to draw mortgage loans to purchase a house and not put down cash from savings.

The history of formal and institutional mechanism for mortgage lending in Nigeria dates back to the establishment of the Nigeria Building Society (NBS) in 1959. This was a joint venture of the Common wealth Development Corporation, the Federal Government and the Eastern Nigerian government. The main objectives of the NBS were to fund individual mortgage loans from savings mobilized from both the formal and informal sectors.

Mortgaged-Backed Securities (MBS) are debt obligations that represent claims to the cash flow pools of mortgage loans, most commonly on residential property. They are purchased from banks, mortgage companies and other organizations and then assembled into pools by a governmental, quasi-governmental, or private entity that issues securities which represent claims on the principal and interest payments made by borrowers on the loans in the pool.

The regional governments had on the eve of independence established their own housing corporations to provide credit facilities to individuals to build or purchase their own houses.

However, the NBS and housing corporations were unable to achieve much because of inadequate capitalization and also the poor response of the public to their savings schemes.

A feature of the operating environment at the period was that mobilization of savings by these statutory bodies was in direct competition with commercial banks, which had the advantages of wider network of branches, larger scope of operations and longer history. This limited linked the quantum of savings they could mobilize. This, and the low level of awareness of mortgaged lending and the opportunities it has presented have made the NBS operations to appeal mostly to the more enlightened upper income borrowers.

Therefore, public concern for healthy development of the mortgage industry was recently culminated into a decisive reorganization of the bank by the appointment of a Presidential Technical Committee on Urban Development and Housing. The Committee has met with a wide spectrum of the stakeholders in the industry and a road map has emerged to re-organize and re-capitalized the bank. The bank and the federal mortgage finance limited are now to merge into a more responsive financial institution under an enhanced capital structure with the federal government holding 50%, CBN 30% and NISTF 20% of the issued capital.

In the new context, the bank is strengthening its internal operations and repositioning its functions towards embedding its services into the larger economy. Thus, its main operational thrust is to make the Nigerian Social Insurance Trust Fund (NSITF) customer friendly and then, link it (FMBN) to the capital market by trading in Mortgaged-Backed Securities (MBS).

Nevertheless, the logic for the bank to embrace the capital market keeps beckoning especially as the federal government is increasing sensitivity to the social urgency to house the middle and low income earners. The primary mortgage market alone can no longer accommodate the enormous financial requirements to respond to the deluge of mass housing demands. Moreover, it makes economic sense to release tradable instruments (perfect mortgages) to the capital market to create constant liquidity in the mortgage industry.

In spite of its recognized economic and social importance, housing finance has remained underdeveloped in Nigeria because of the state of its financial market. Lending for residential accommodation is typically small, poorly accessible and depository-based. Lenders are vulnerable to significant credit, liquidity and interest rate risks. Consequently, housing finance is relatively expensive and often rational.

GOVERNMENT INTERVENTION

By the early 1970’s when government was to become more directly involved in the housing process, unaffordable high interest rates on housing loans, and shortage of long-term finance were identified as the major constraints to the policy.

Besides, the limited number of mortgage institutions was also recognized as a serious limitation to the expansion of their lending services. Government therefore, resolved to address these constraints by taking decisive measures to improve the housing delivery system. The measures were as follows:

The acquisition of NBS sequel to the indigenization Act of 1973 by which the Federal Government acquired 100% ownership of the company. The objectives then, were that given government’s full ownership, the NBS would be an effective vehicle for the actualization of government policy to increase the mobilization of long-term funds, lending volume and to expand services to all parts of the country.

Conversion of NBS into Federal Mortgage Bank of Nigeria in 1977. This was done with the aim of extending mortgage-lending operations to the entire country. Also, whereas, the NBS served mainly as a primary mortgage institution, mobilizing savings and giving out mortgage loans, the Federal Mortgage Bank of Nigeria, by its enabling act in 1977, was empowered to carry out both primary and secondary mortgage functions.

The Bank was also to nurture and promote the growth of primary lending institutions, which were expected to be established by private entrepreneurs. In addition, it was to intermediate long-term funds from the Capital Market to the Primary Mortgage Market through a Secondary Mortgage Market mechanism. This had until now remained a mere policy desire.

THE NATIONAL HOUSING POLICY
The National Housing Policy which was launched in 1991 represented the first attempt to provide a codified framework to guide government intervention in the housing sector. The policy thrust was for direct construction of houses as the most expedient way to reduce the demand pressure and this was embraced as the housing component in the 4th National Development Plan. The outcome of this policy was the direct involvement of government in mass housing.

This policy led to the emergence of such low-cost housing projects as “Shagari Houses” or “Jakande Houses” which became common during the period. However, the observed inadequacies of this approach to housing and mortgage finance later led to a drastic shift of policy towards making the private sector the main vehicle for the organization and delivery of housing products and services. Government was to serve only as an active promoter and enabler.

As conceived by the policy makers, the concept was to rationalize the intervention of government in housing delivery services through the collaboration of public and private enterprises. These stakeholders (including Estate Developers, Building Societies and Housing Corporations), being a vital arm of the mortgage housing tripod were expected to induce stability in the mortgage industry through increased generation of investible funds and the stimulation of housing construction. As a result, home ownership would be extended down the income ladder triggering positive multiplier effects within the economy. The centerpiece of the policy was a dual-component strategy comprising of a two-tier framework for housing finance and a mandatory savings schemes.

NATIONAL HOUSING FUND DECREE 3 OF 1992
A second component of the policy on housing finance was the establishment of a contributory saving scheme known as the National Housing Fund to which every Nigerian earning N3,000.00 and above per annum is required to contribute 2.5% of his monthly salary or declared income. Banks Insurance companies and the Federal Government were also to contribute to this Fund. These institutional contributions however, as well as the requirement for commercial banks to ensure that 10% of their loan portfolio were in mortgages never fully crystallized.

The Fund which is managed and administered by the Federal Mortgage Bank of Nigeria is suppose to provide the cheap source of funding to the Primary Mortgage Institutions (PMIs). The PMIs in turn trade their existing fund mortgages to the Bank for liquidity to create more mortgages. Loans are to be granted to contributors to the fund at a low interest rate over an amortization period of up to 25 years.

Unfortunately, the Fund has not made the desired impact for a number of reasons. For instance, many PMIs were affected by the distress that plagued the financial sector in the 1990’s. Consequently, the number dropped from about 300 in earlier years to 74 as at December 2001. Their impact was also limited, as at the beginning, as the PMIs were concentrated in a few urban areas which fact limited their capacity to mobilize savings deposits. The high interest regime that prevailed in the country during this period had acutely limited the attraction of PMIs to small savers who were seduced by higher interest rate offered largely by the new banks. However, beyond these factors, it was the inability of the PMIs to differentiate themselves from finance companies, and the fact that there was no widespread association of the PMIs with home ownership, that had stifled the mortgage industry.

CURRENT REFORMS IN THE MORTGAGE INDUSTRY
The outcome of two important committees set up by the Federal Government has set in motion, a wave of reforms touching the core of the Nigerian mortgage industry. These were the committees on the Merger of FMBN and FMFL set up in 2000 and the Governor Peter Odili - led Presidential Committee on Urban Development and Housing in 2002. The reforms constitute what is now known as the New National Housing Policy. By virtue of the policy, the mortgage industry is being steered to sustainably deliver affordable mass housing with the active participation of the private sector. Another distinct feature of the reforms borders on the institutional framework.

The National Fund Act allows only PMIs to have access to the Fund. This obviously places an unnecessary barrier to the free flow of loan facilities, thereby defeating the objectives of the scheme. The National Housing Trust Fund (NHTF) Act opens several windows for directly accessing the Funds by Cooperatives, State Housing Corporation and Estate Developers which makes for greater impact. Additionally, responsibility for administering the Fund is being placed in the Board of the NHTF while its management rests with the FMBN. The NHTF Board is made up of:

(a) A Chairman who shall be a retired Supreme Court Judge to be appointed by the President and Commander-in-Chief of the Armed Forces;
(b) One representative of the Nigerian Labour Congress;
(c) One representative of the Nigerian Employers’ Consultative Association (NECA);
(d) One representative of the Federal Ministry of Housing and Urban Development;
(e) The Managing Director and Chief Executive Officer of FMBN.

The proposed Act further provides for the tenor of Estate Development Loan Facilities to be for more than 24 months. This is to encourage early disposal and repayment in order to make similar loans available to as many developers that meet the conditions for lending. The facilities obtained from the Fund are limited to the deployment of only residential accommodation.

Also, there is a provision empowering the Board of the NHTF or any person authorized by it to prosecute defaulters of the Act, especially through refusal to deduct the stipulated quantum of contribution or remit such sum to the Fund. It is therefore envisaged that the mortgage industry would experience far-reaching changes under the current reforms.

Estate developers and state government housing agencies would hopefully be able to directly access the NHF with a view to enhancy the supply of housing stock. When the consents to mortgage and assign are dispensed with, tittles to land would be accessible to loan applicants. Foreclosure would be made easy and fast. While the Federal Mortgage Bank of Nigeria would concentrate on the secondary mortgage operations.

In the new context, the Bank is strengthening its internal operations and repositioning its functions towards embedding its services into the larger economy. Thus, its main operational thrust to promote mass and affordable housing delivery is to make the NHTF customer friendly and, then, link it (FMBN) to the capital market by trading in Mortgage-Backed Securities (MBS). The Federal Government of Nigeria should continue to support the Federal Mortgage Bank of Nigeria to guarantee all issues of MBS by the latter.

The Bank is, indeed, aware of the tremendous potential of its primary mortgage market, which is now being re-awakened by the many innovative approaches to sustainable funding for mass and affordable housing production. The federal Government’s recent monetization programme presents a new pool of funds for mass housing production. So also the proposed contributory pension scheme when ever it takes off, and the legislative changes underway that are expected to release life and non-life insurance and pension funds into the housing sector to sustain both mass housing production and mortgage lending. Nevertheless, the logic for the Bank to embrace the capital market keeps beckoning, especially as the Federal Government is showing increasing sensitivity to the social urgency to house the middle and low income earners. The primary mortgage market alone can no longer accommodates the enormous financial requirements to respond to the deluge of mass housing demand. Moreover, it makes economic sense to release tradable instruments (perfect mortgages to the capital market to create constant liquidity in the mortgage industry.

The development of the mortgage industry is on course and the operators be assured that the new and improved FMBN has identified the need for unique partnership with the stakeholders to build foundation for a viable housing finance sector in Nigeria.

INVESTMENT OPPORTUNITIES IN THE SECTOR
There are no doubt vast investment opportunities in the housing sector especially in the light of the obvious gap between demand and supply. It is therefore not surprising that activities has seen the appearance of many private developers of mortgage properties in recent times. It is instructive to note that whereas the mortgage sector was dotted by many mortgage banks which were generally involved in things other than mortgage financing, the trend seems to changing. Today the land scope technics group such as the Real Estate Developers Association of Nigeria who as investors, are clearly genuine stakeholders in the sector.

Evolution of Secondary Mortgage Market
A recent and perhaps more interesting development for investors is the interest in the development of a secondary window for investment in the sector through mortgage backed securities (MBS). The mortgage-backed securities are not only a necessary complement to encourage investment in primary mortgage industry, they in themselves constitute attractive investment opportunities for those seeking attractive or supplementary investment outlet for their surplus or idle funds. It is necessary to review the context for its operation. The secondary mortgage market is so called because it merely facilitates the refinancing of mortgages that have been originated at the primary market level.

The secondary market was first used in U.S to provide a market for government guaranteed or government – insured. In 1935, the Reconstruction Finance Corporation (RFC) was established to stabilize the U.S mortgage market. This was in the wake of the economic ravages of the Great Depression. To avoid a massive forceclosure that may result from mass default on mortgage loan repayment and a drastic fall in property values. The RFC was established to purchase the loan portfolios of primary lenders, who were thus able to recycle the proceeds into their operations. To finance the loan portfolio purchase, RFC issued government – guaranteed bond as a debt instrument but backed by the expected repayments from mortgages.

In order to include credibility into the market operations, minimum standards of underwriting were prescribed for all lenders, especially as the loans portfolios of lenders may invariably end up in a secondary market transaction.

This was done to facilitate compensation between the mortgages originated by different lenders. Otherwise substandard mortgages could affect the system. As a result, mortgages that were to be traded must demonstrate good investment quality which include the following:

- Regular and timely repayment.
- It must be secured.
- It must have a maximum of 90% loan to value ratio.
- The value of the property must be sufficient to recover the investment in case of default.
- The mortgager must be credit worthy.

The Federal Housing Loan Bank Act of 1932 created the Federal Home Loan Bank (FHLB) system to act as lender of last resort to thrifts suffering temporary liquidity shortages. When asset liquidity dried up, thrifts could pledge mortgage asserts as collateral for borrowings from their banks. The banking system could fund these advances by issuing short-term government debts. In return for cheap funding and other benefits including special tax benefits, thrifts agreed to submit to regulation by the Federal Home Loan Bank Board (FHLBB).

In 1933, the Government enacted the Home Owners Loan Act of 1933 and the Federal National Mortgage Associations (FNMA) mortgaged in 1948 may mark the beginning of the secondary market. Insurance companies soon retreated from single-family mortgage lendings, shifting their attention to large income property loans, with mutual savings banks following suit about 10 years later. By the late1950’s, saving and loans institutions had become the primary investors in single-family residential mortgage. The major evolution in the U.S has been the development of mortgage conduits or servicers. A conduct conduit simply defined, is an organization that buyers mortgages from correspondents, packaged the loans into collateral pools held by trustees, and sells mortgage securities through the capital market.

Primary mortgage market institutions created by the Federal Home Loan Bank Board (FHLBB) were relatively unchanged until the late 1960’s. Because primary market lenders had little need to buy or sell mortgage assets, the secondary mortgage market was fairly inactive until the late 1960s. The unstable economic conditions during this period, however, led to low earnings and made the thrift industry unable to generate new capital needed to support additional loan volume. This was especially so with the rising demand occasioned by the growth of a new generation. It was thus in an attempt to increase the supply of mortgage credit, that the government took some decisions to strengthen the secondary mortgage market. The most essential was the National Housing Act of 1968.

The market also came up in correcting regional imbalances of funds as thrifts in high growth areas of the country sold their mortgages to thrifts with excess of investible deposits. There was also a development in the market where mortgage bankers originated loans for sale to thrift investors.

It is necessary to reiterate that the market was first put in use in the United State of America as an avenue for providing a market for entirely government – guaranteed or government – insured loans. For instance, the Federal National Mortgage Association in 1938 purchased the loan portfolios of primary lenders who were thus able to recycle the proceeds into their operations. To finance the loan portfolio purchase, the Federal Mortgage Association issued government guaranteed bond as debt instruments, but backed by the expected repayments from the mortgages.

TYPES OF SECONDARY MORTGAGE
The traditional secondary mortgage market transaction is of two types. The first one is whole loan while the second one is known as participative sale Boris.

While loan – this type of transaction involves the entire outstanding principal due on a portfolio of mortgages.

Participation: this is another important method which involves a percentage (usually 50%-90%) purchase of portfolio.

PRICING
As in most mortgage transactions, it is rarely bought at per (face value) or at premium, as they usually need to be discounted to make the yield to the buyer comparable to the return available in the market place at the time of the transactions. Negotiable items generally include the delivery date/valuedate of the transactions the guaranteed yield to the buyer, types of properties comprised in the portfolio, prepayment penalty, participative percentage, and the service fee as may be applicable.

PARTICIPANTS IN MORTGAGED BACKED SECURITIES
The Regulators in the mortgage backed securities market are expected to include the following:

- Securities and Exchange Commission
- Corporate Affairs Commission
- Central Bank of Nigeria
- Pension Fund Commission
- Nigeria Deposit Insurance Corporation
- The Nigerian Stock Exchange
- Federal Inland Revenue Board.

While the expected operators in the market are

- Issuing House
- Stock brokers
- Reporting Accountants
- Solicitors
- Trustees
- Underwriters
- Registrations

The Investors in the Mortgage Backed Securities Market are

- Individual/House
- Pension Fund Managers
- Insurance Companies
- Banks
- Primary Mortgage Institutions
- Credit and Unfit societies

BENEFITS OF MORTGAGE-BACKED SECURITIES (MBS)
The benefits of mortgaged-backed securities are highlighted as follows:

• Off-Balanced Sheet Financing: Strict regulations in terms of capital adequacy ratios and reverse requirements encourage financial institutions to use MBS to efficiently remove mortgages from their balance sheet, financing them without raising new funds of deposits.
• In the context of high cost of capital, MBS provide conduit for raising cheaper capital for their businesses at the asset level instead of organizational level.
• The convergence of many capital markets and therefore generating heightened competition for low cost financing. It frees liquidity by releasing capital that would have been tied up with mortgages to be financed.
• The phenomenal growth in information technology has fuelled MBS, as it has helped pooling and packaging mortgages for financing globally.
• It will provide more affordable housing to homebuyers/builders because the volume, tenors, rates and payments schedules are consistent with requirements of the mortgage market.
• MBS provides good liquidity and efficiency to mortgage loan funding of the balance sheet.
• It provides superior returns to investors in fixed-income investments market.
• It makes more capital available to low and moderate-income homeowners at competitive rates, so that market access is enlarged.
• The risks are relatively manageable especially through hedging.
• MBS offers a wide range of structures and therefore flexibility.
• Given the level of imperfect information and transaction costs in Nigeria, MBS will be useful.
• ? MBS are expected to provides tax benefits especially the anticipated tax incentives from government and was an effective means of managing asset growth, increasing the firm’s borrowing capacity and achieving perfect asset/liability matching.
• ? Avoidance of asset substitution: Agency costs of risk debt are asset substitution problem, and under investment, these costs along with monitoring costs may be lower for secured debt than for unsecured debt.
• ? Asymmetric information: Secured debt may be safer than unsecured debt because there is less information asymmetry regarding the value of the firm. If this is the case, firms that face severe information asymmetry problem are more likely to issue secured debt.
• Expropriation of claimholders: It is argued that asset securitization can be used for expropriating existing bondholders or shareholders.
• It will lead to wealth creation for investors.
• It will reduce employment problem by creating more jobs.
• It will deepen the capital market with the multiplier effect of re-invigorating economic growth and stability.
• Corruption will be curbed, as more people will own their homes. The incident of graft would be reduced, as more people would be in the position to meet more than their basic needs without having to pay for cash.

THE EFFORTS MADE IN DEVELOPING MORTGAGE BACKED SECURITIES IN NIGERIA
The Commission has started exploring ways of enhancing housing delivery system in Nigeria by mobilising long-term funds through the introduction of mortgage-backed securities in the Nigerian capital market. To this end, the Commission in conjunction with other organisations has held a number of workshops.

Fall-outs from the workshops held are among others, the need for an enhanced inter-agency cooperation and substantial reforms of some existing laws in the country. In particular, agencies such as the Securities & Exchange Commission, Central Bank of Nigeria, The Nigerian Stock Exchange, Federal Mortgage Bank of Nigeria, Federal Housing Authority, the Tax authorities, Banks and Insurance companies, are expected to work together to put in place a framework for a vibrant mortgage-backed securities market in Nigeria.

The objectives of mortgage backed securities as listed in a communiqué issued after one of the workshops held are as follows:

• Provision of affordable housing and mortgage facilities for all Nigerian
• Economic empowerment of the people
• Provision of commensurate returns for investors
• Ensure sustainable growth in the mortgage industry and further develop the capital market
• Re-direct excess or idle funds to more profitable ventures which will have a multiplier effect on the economy as a whole among other benefits

Some bottlenecks that the programme may face for example in the area of legal reforms. The Land Use Act for instance needs to be amended to facilitate easy transfer/assignment and foreclosure of mortgages. Other laws that require amendments are Trustees Investment Act, Land Instrument Registration Act, FMBN Act, and the Conveyancing. In other words, development of a mortgage-backed securities market will be seriously undermined by a lengthy foreclosure process, high stamp duties on conveyance of property, unclear tax treatment of conveyed property and complex bureaucratic constraints of obtaining consents of State Governors for assignment, transfer and foreclosure of mortgages. On these particular problems, Nigeria may consider some of the solutions the South East Asian countries have adopted in getting round them, by granting exemptions with regard to consent, for the sale/transfer of mortgages arising from securitization.

Conclusion
Using of mortgage-backed securities to secure longer term funding for housing will definitely help to mobilise and release domestic savings for efficient housing delivery system in Nigeria as experienced in some countries. It will also help in the development and diversification of fixed-income securities markets. As a supplement to government bonds, they provide an alternate investment window, especially to institutional investors.

Mortgage securities serve as vehicle to tap the capital market for funds as well as improving the accessibility and affordability of housing and allow lenders to better manage the complex risks involved in long-term housing finance. It is hoped that the use of mortgage-backed securities will grow over time in Nigeria as demand for houses increase, and as lenders and investors become more familiar with their risks and the need to better manage their resources. Investments opportunities are expected to widen as mortgage-backed securities are developed. This will lead to increased housing finance as adequate banks would be provided to meet the needs of the populace. Investors also stand to better returns on their investments as the options available to them become broader.