NMRC AND THE NIGERIAN MORTGAGE MARKET:

NMRC AND THE NIGERIAN MORTGAGE MARKET: An Intermediate Step to a full Secondary Mortgage Market 2014 CAPITAL MARKET COMMITTEE (CMC) RETREAT & CONFERENCE Sonnie Ayere Interim CEO, NMRC Chairman, Dunn Loren Merrifield Group November 27, 2014

Contents The Nigerian Housing Market 3 Establishment of NMRC 5 NMRC: Capital Structure 7 NMRC: Mode of Operation 9 NMRC: Implementation Phase 10 NMRC s Footsteps in Time 11 Setting the Standard for an Efficient Secondary Mortgage Market 13 Developmental Impact of the NMRC 16 CMC RETREAT PRESENTATION November 2014 2

Nigeria Housing Market NIGERIA HOUSING DEFICIT - 2013 Housing Demand and Supply Gap Million of Units 40 30 20 10 0-10 -20 Current supply 21 Gap -17 Current Housing demand 38 an estimated 17 million housing units are needed to fill the supply gap. Mortgage loans to GDP ratio for Nigeria is abysmally low compared to other countries According to the World Bank, a study on the housing situation in Nigeria puts the country s housing deficit at 17 million houses, while about 700,000 units are needed every year to meet rapidly expanding demand. Mortgage loans as a percentage of GDP in Nigeria is only 0.35 percent as at end of 2011. Comparable mortgage loans to GDP ratio elsewhere include Botswana (2 percent), China (13 percent), India (6 percent), South Africa (31 percent). Some key factors have stifled robust development of the residential housing market. CMC RETREAT PRESENTATION November 2014 3

Nigeria Housing Market Key Issues LAND REGISTRATION & TITLING HOUSING CONSTRUCTION COSTS FORECLOSURE ACCESS TO LONG TERM FINANCE Prolonged registration process and high cost of registration High cost of locally produced building materials Protracted foreclosure process High interest rate and funding mismatch CMC RETREAT PRESENTATION November 2014 4

Establishment of NMRC Overview Formation and Ownership Aims Strategy and Operations A private company, sponsored by the Federal Ministry of Finance, CBN, FMLUD, the World Bank, financial institutions, and licensed by CBN. To maintain its developmental focus and operate on an economic sustainable basis, it is majority private sector owned and managed, with limited public sector involvement (mainly supportive for the early foundational stage). To encourage and promote home ownership by providing longer tenors and reduced cost funding to mortgage bankers, for on-lending at affordable rates to borrowers. Thereby increasing availability and affordability of mortgage loans to residential mortgagors. NMRC acts as a simple intermediary between mortgage lenders and the capital markets. By using its size and credit worthiness, NMRC will be able to raise funds at an affordable rate. This is attributable to the strong shareholders, strong capital base, excellent quality of assets in its books and good corporate governance (regulated by CBN and SEC). Lenders can only refinance through NMRC if they are members/shareholders of the latter. CMC RETREAT PRESENTATION November 2014 5

Establishment of NMRC Business Objectives Increase Mortgage Lending Increase Maturity Structure Increase Industry Efficiency Introduce New Asset Class for Investors To encourage financial institutions to increase their mortgage lending by providing them with long term funding; To increase the maturity structure of mortgage loans and assist in providing affordable mortgage rates; To increase the efficiency of mortgage lending by taking a lead role in proposing changes to the enabling environment for mortgage lending as well as by standardising mortgage lending practices of financial institutions; and To introduce a new class of high quality long-term assets to the pension funds and other investors. CMC RETREAT PRESENTATION November 2014 6

Capital Structure Bond Issues (FGN Guaranteed) NMRC is expected to issue bonds for refinancing USD$250 Million IDA Loan Subordinated Debt (Tier 2 Capital) To be disbursed in 6 tranches based on Performance Linked Indicators Regulatory Tier 1 Capital N7.05 Billion capitalised by initial Investors CMC RETREAT PRESENTATION November 2014 7

Capital Structure (contd.) TIER 1 CAPITAL Tranche 1 Equity Capital Nigerian Sovereign Investment Authority 23% 22.70% Primary Mortgage Banks (PMBs) 50% Total value of Tier 1 Capital is N7.05 billion Ministry of Finance Incorporated 17% 17.02% 49.65% Additional Equity Commitments of N2.88 billion have been made by Shelter Afrique, IFC and 5 other mortgage lending banks. Awaiting CBN Final Licence 10.64% Deposit Money Banks (DMBs) 11% TIER 2 CAPITAL World Bank IDA Loan Subordinated Debt US$250 Million IDA Loan to be disbursed to NMRC in 6 tranches based on performance linked indicators such as preselected mortgages, value of mortgage portfolio originated, and bonds issued. Financing Agreements for the IDA Loan have been executed with the Central Bank of Nigeria. CMC RETREAT PRESENTATION November 2014 8

Capital Structure (contd.) TIER 2 CAPITAL Performance Linked Disbursement Milestones $20 Million Compliance with Effective Conditions $100 Million NMRC has conducted Due Diligence for Mortgage Loans $70 Million NMRC has issued bonds to refinance mortgages of $120 Million $20 Million NMRC has issued additional bonds to refinance mortgages of $100 Million $20 Million NMRC has issued additional bonds to refinance mortgages of $50 Million $20 Million NMRC has issued additional bonds to refinance mortgages of $50 Million CMC RETREAT PRESENTATION April 2014 9

Mode of Operation NMRC Refinance On lending at affordable rate; provide liquidity flexibility Participating Mortgage Lenders FGN Guarantee Security assignment of mortgage portfolio with recourse Issue Aaa rated Bonds Longer tenor funds at FGN rates Bond Proceeds Grant Eligible Mortgage Loans Provide long tenor mortgage at affordable rates Assign Collateral and Repay Principal & Interest Bond Investors Borrowers CMC RETREAT PRESENTATION November 2014 10

NMRC s Footsteps in Time Nov 2012 Launch of the Nigeria Housing Finance Programme Mar 2013 CBN issues Regulatory Framework for NMRC June 2013 NMRC obtains CBN Approval - in-principle July 2013 Negotiation of USD $250 Million World Bank IDA Loan to be capitalised as Tier 2 Capital in NMRC Dec 2013 Constitution of NMRC s Board Dec 2012 Appointment of Task Manager May 2013 Received Expression of Interest of N7.75 Billion to invest in NMRC June 2013 Incorporation of NMRC Aug 2013 Commencement of Recruitment Process for CEO, CFO, CRO, COO Jan 2014 Official Launch of NMRC CMC RETREAT PRESENTATION November 2014 11

NMRC s Footsteps in Time (contd.) Jan 2014 Appointment of Interim CEO May 2014 June 2014 Commence Drafting of Model Mortgage and Foreclosure Law NMRC receives 1 st disbursement of Tier 2 Capital - IDA Loan from CBN July 2014 NMRC publishes 1 st draft Uniform Underwriting Standards November 2014 Appointment of CEO Designate Mar 2014 Completion of World Bank Effectiveness Conditions July 2014 U n i f o r m Underwriting Standards workshop for Primary Lending Institutions Sep 2014 Final Allotment Approval obtained from SEC CMC RETREAT PRESENTATION November 2014 12

Setting an Efficient Secondary Mortgage Market NMRC has devoted considerable time in its first year to technical activities that are critical to managing the risks inherent in the primary mortgage market for the long-term benefit of market development and sustainability of the secondary mortgage market: Standardisation Legislative Reforms Performance Data NMRC s Uniform Underwriting Standards for eligible mortgage loans has now been finalised This process will effectively convert mortgage loans into commodities and lower costs of due diligence. It will enable investors, rating agencies and guarantors to quantify credit risk. The Model Mortgage and Foreclosure Law is in its final form for engagement with the Pilot States Successful passage will fast track the process for creating legal mortgages, ensure timely resolution of disputes and create an efficient foreclosure process. NMRC is initiating an IT Framework that will link NMRC s system directly to the participating mortgage lending banks mortgage information system Availability of credible historical performance data on mortgage loans (e.g., default and prepayment) will enhance risk assessment and pricing of NMRC s credit risk CMC RETREAT PRESENTATION November 2014 13

Proposed Land Administrative Reforms State Government Commitments Expected Impact - Delegation of Governors Consent with a maximum time to obtain consent - Replacement of Consent Fees with flat fees where applicable rather than fees as a % of property value - Reduce or merge the number of steps to register a property - Digitise Land Registries - Creation of specialized Court Division to deal with mortgage foreclosures - Adoption of model mortgage and foreclosure law - Where needed training for specialist circuit of judges able to deal with mortgage enforcement Financial/Technical Support 27m UK DFID Funded Business Environment Reform Technical Assistance Programme Max of 5 steps to register Max time of 30 days Max cost of 5% of property value Enabling environment for NMRC to Refinance Mortgages Max of 6 months to foreclose on a property Max cost of 10% of property value in total costs Enabling environment for NMRC to Refinance Mortgages - Transparent provision of land under a PPP arrangement to developers for the purpose of affordable housing development by States - Establishment of a clear and transparent pricing methodology for the land and allocation process - Provision of basic services on the land - Fast track approval process for housing construction permits - Where applicable some waivers on fees and State taxes associated with housing construction Large scale production of housing at affordable prices Enabling environment for NMRC to Refinance Mortgages CMC RETREAT PRESENTATION November 2014 14

NMRC Business Implementation Phases Phase 1 Completed Phase 3 Preparatory activities to commence operations Recruitment and office organisation Commence marketing Establish Uniform Underwriting Standards Undertake technical activities for risk management Purchase/refinance only mortgages that comply with set standards Issue corporate bonds without guarantees Continue working on setting standards for mortgage lending and spearheading legal reforms Year 1 Year 4-6 Phase 2 Refinance legacy mortgages with recourse only (mortgages that comply with set standards) Issue corporate bonds with FGN guarantees Continue work on setting mortgage standards Refinance new mortgages that comply with set standards with recourse only Year 2-3 Phase 4 Purchase mortgage loans without recourse Securitise mortgages from its portfolio and/or on behalf of its client mortgage originators Continue purchase with recourse scheme Continue developmental activities Year 7 and onward CMC RETREAT PRESENTATION November 2014 15

Developmental Impact of NMRC Significant expansion of mortgage origination activities Improved affordability of mortgage loans driven by reduced interest rates and tenor elongation Improved risk management processes on the back of the standardisation requirements Substantial improvement in the liquidity of long-term mortgage assets More stringent consumer protection procedures as a result of the standardisation requirements CMC RETREAT PRESENTATION November 2014 16

Developmental Impact of NMRC (contd.) Provide a new kind of investment class for investors which are of high quality and long-term in duration Increased number of professional and semi-professional jobs in the financial sector Large and positive development in the real sector on the back of increased demand for new, high quality and affordable housing CMC RETREAT PRESENTATION November 2014 17

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