Fusion Capital sees mortgage backed securities as enhancers to housing loan access in Kenya

Fusion Capital sees mortgage backed securities as enhancers to housing loan access in Kenya

Mortgage-backed security can be used to help potential home-owners secure housing loans, real eastate developer and investment services group, Fusion Capital has affirmed.

The announcement follows the August 2017 release of the realtor’s publication, Fusion African Monitor (FAM), which focuses on access to Mortgages in Kenya.

The report seeks to explain how mortgage backed securities (MBS) will affect the real estate industry as it will increase the access of mortgages to buyers.

A mortgage-backed security (MBS) is a type of asset-backed security that is secured by a mortgage or collection of mortgages. The mortgages are sold to a group of individuals (a government agency or investment bank) that securitizes, or packages, the loans together into a security that investors can buy.

At the end of 2016, Kenya had less than 25,000 mortgages amounting to USD$ 2 billion (Ksh206.5 billion) worth of mortgages.

This value, compared to 2015, declined by 8%, a factor that can be attributed to a decline in credit growth generally reported in the second half of 2016 after the legislation of the interest rate capping.

After the legislation, the commercial banks tightened their credit standards leading to lower volumes of loans going to customers.

For the period between August 2016 and April 2017, commercial bank lending to small and medium-sized enterprises (SMEs) fell by 5.7%.

With the interest rate cap (currently at 14%) and where the government securities are paying lower double digits, commercial banks may find it hard and unattractive to do the long term loans, and would prefer to do the short term loans. Secondly, the deposits in banks may not be large enough to finance all the mortgage applications.

It is estimated that Kenya faces a deficit of 150,000 units annually which has continued to rise due to fundamental constraints on both the demand and supply side.

One of the ways that Kenya can overcome the demand side is through introduction of Mortgage Backed Securities ‘MBS’. Mortgage-backed securities are debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property.

These loans are purchased from banks, mortgage companies, and other originators and then assembled into pools by a governmental, quasi- governmental, or private entity. The entity then issues securities that represent claims on the principal and interest payments made by borrowers on the loans in the pool.

Fusion Capital CEO, Mr. Daniel Kamau

"Fusion Capital as a real estate Investor and developer appreciates the critical role that mortgages play in ensuring sustained demand and uptake of developed units and hence there is a need to grow the access to mortgages in Kenya and East Africa at large."

Fusion Capital CEO, Mr. Daniel Kamau

In particular, secondary mortgage institutions ‘SMIs’ have been established to contribute to the development of the private securities market.

These institutions purchase housing loans originated by banks or other financial institutions and convert these loans into freely tradable investment instruments or securities.

"In developed countries including those in Asia, mortgage-backed securitization (MBS) has been the main strategy to expand housing finance."

Fusion Capital Head of Treasury, Michael Kimondo

MBS has been effectively used in these countries to address not only liquidity constraints but also rising interest rates on housing loans and in overcoming constraints faced by financial institutions e.g, capital adequacy in expanding their loan portfolio for home lending.

The MBS also enable the transformation of sticky debt into a more tradeable asset. The MBS would also open up the capital markets to individual investors and to borrowers that were previously out of reach.

The Kenya Capital Markets Authority has already published a Policy Guidance Note (PGN) to facilitate the issuance of Asset-Backed Securities (ABS).

ABS, which has been tested and proven in other countries and helped expand housing finance, will be a great opportunity for both developers and potential homeowners in Kenya.

Potential homeowners will appreciate that increased financing will be availed and for the developers, the home ownership uptake will increase.

However, the experience of the US subprime mortgage crisis in late 2000’s should never be ignored as it shows what need to be avoided and the need for rigorous evaluation of mortgages to be securitized.

The Fusion African Monitor (FAM) is a monthly sub Saharan report published by Fusion Capital Ltd. The report is intended to inform local and international investors on the Money Market conditions in the region.

The report gives a comprehensive coverage of the East African Community and the rest of sub Saharan Africa including Nigeria, Ghana, Ivory Coast, Angola and Mozambique. It gives a comprehensive focus on the Bond Market as well as currencies covering the entire region with an in-depth review of the Capital Markets with a bias on Nairobi.

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