Mortgage Financing by UBA Global Markets

8/9/2019 Mortgage Financing by UBA Global Markets

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Mortgage FinanceHome Ownership Training Workshop)

A presentation

to

The Federal Capital Territory Administration and

Federal Mortgage Bank of Nigeria

By

Sonnie AyereMD/CEO UBA Global Markets

16th of September, 2005


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Debt Capital Markets 2

Estimated Mortgage Affordability

If 13.5% of the total population can earn a monthly income of NGN60k per month upwards then.

Average House Price NGN 2,500,000.00

Loan-To-Value 95%

Amount Borrowed NGN 2,375,000.003.5

Combined Income Per Annum NGN 678,571.43

12.00

Combined Income Per Month NGN 56,547.62

135

Monthly Income in US$ 418.87$

Total Population 130,000,000.00

Amount of Eligible borrowers 17,550,000.00

% of total population 13.50%


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Estimated Nigerian Mortgage Market

Approximately NGN44 trillion could easily be the market in Nigeria

To cover the market, we would require 100 banks with NGN400bn all invested in mortgages!!

So whats all the fuss on a NGN100bn bond issue ????..its a trickle!

NB - All numbers and percentages are estimates..

Estimated Population 130,000,000.00

Estimated Working Population (%) 30%

Number of working Adults 39,000,000.00

% working adults acceptable as mortgagors (Prime / Sub-prime) 45%

Number of Adults eligible to borrow 17,550,000.00

Average House Price NGN 2,500,000.00

Possible current mortgage Market NGN 43,875,000,000,000.00

UBA's estimated balance sheet size NGN 400,000,000,000.00

Mortgage Market Cover 109.69x


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Mortgage FinanceA Market Makers Perspective


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What is a Mortgage


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What is a Mortgage Bond

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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General Amortisation Profile

Mortgages generally amortise, paying principal and interest over the life of the loan

240 M on th M ortage Am ort isat ion P rof ile

-

500,000.00

1,000,000.00

1,500,000.00

2,000,000.00

2,500,000.00

3,000,000.00

112

23

34

45

56

67

78

89

100

111

122

133

144

155

166

177

188

199

210

221

232

No. o f M onths


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Mortgage Amortisation Profile

Financing Institutions profits are normally front-ended as the bulk of interest is paid within

the first 10 years depending on term of loan

P rinc ip al an d Interest Am o rtisa t ion

-

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

1 17 33 49 65 81 9 7 113 1 29 1 45 16 1 177 193 209 225

Interest

Pr inc ipa l

Month ly Amoun t


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Global View of Mortgage Market

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 someextent can really boast of a vibrant mortgage market

Most countries across the sub-region are beginning to develop the necessary criterion to begina market

This is due to the importance we are all now realising of the correlation between havingmortgage markets and a middle class

This is due to the leverage they provide to individuals to increase their wealth


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US Debt Securities Issuance

Exponential increase in the issuance of Mortgage Backed Securities as depicted above

T o t a l is s u a n c e o f d e b t s e c u r it ie s - U S M a r k e t s

$ 0 . 0 0 b n

$ 1 0 0 0 .0 0 b n

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M u n ic i p a l

U S T re a s u ry

M o rt g a g e R e la t e d

C o rp o ra t e

F e d A g e n c i e sM o n e y M a rk e t

A s s e t B a c k e d


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Debt Securities Issuance by Agency

Exponential increase in the issuance in all Agency Mortgage Backed Securities as depicted

above

O u ts t a n d in g V o l u m e o f A g e n c y M B S

$ 0 .0 0 b n

$ 5 0 0 .0 0 b n

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G N M A

F N M A

F H L M C

T o t a l


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Positive Effects of Leverage

An example of the benefits to home buyers of using mortgage financing and its effect onindividual RoE

1333% RoE higher than if 100% equity..


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Types of Mortgages


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Types of Mortgages

Fixed Rate Mortgages (Fully Amortising)

Fixed rate coupon for the life of the mortgage

Repayments remain the same for the life of the mortgage

Generally available where you have a capital market

Financing via the capital markets can be complex for hedging reasons

Interest rate risk is borne by financing institution


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Types of Mortgages

Variable Rate Mortgages (Fully Amortising)

Repayments can vary throughout the life of the mortgage

Interest rate risk is borne by the mortgagor

Generally easy to finance via the capital markets

Easier to fund even via financing institutions balance sheet


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Types of Mortgages

Interest Only Mortgages

Repayment of principal is via a balloon payment This could be via insurance or endowment policy or alternatively pension payout

Lower payment obligations for the borrower

Back ended risk


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Types of Mortgages

Flexible Mortgages

Repayments can be variable

Redraws are allowed

Payment holidays are allowed

Further advances allowed

Interest net-off


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Types of Mortgages

Combination Mortgages

Balloon mortgages fixed rate capped periods

Refinancing risk borne by borrower

Proved very popular with first-time buyers


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Categorisation of 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


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Improving Macroeconomic Stability

Consistent economic growth leading to the creation of jobs and economic prosperity

Low inflation rates

Low interest rates

Stable exchange rates

House price stability or better still, growth


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Mortgage Origination, Underwriting andServicing


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Mortgage Underwriting Eligibility Criteria

Maximum Loan-to-value

Maximum Payment-to-Income ratio

Applicant age

Type of property

Maximum Amount

Minimum Amount

Maximum Term Prepayment Penalties

Location of property

Life Insurance

Building + contents insurance

Mortgage Indemnity Guarantee insurance

Verification of income and employment

Credit Reports Fair Isaac Scores (Credit Scoring)


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Mortgage Origination

Methods of originating mortgages - sales

Direct Sales from branches / outlets

Third party sales

Call centers including cold calling

Internet

Direct mail

Mobile Phones yes!


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Mortgage Origination Process

Completed Application Form

Verification of :-

Income Employment

Stability of income

Income / expenditure statement

Property existence location / independent valuation

Title check and insurance Credit checks

Property, Life, MIG and Insurance Details

Borrower contribution received and not borrowed


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Mortgage Servicing

Perfection of Title (Deed of Trust)

Disbursement

Collection Procedures :-

Set-up standing order or direct debit instructions

Verification of contact details on-going

Setting delinquency and charge-off buckets

30 days

60 days

90 days

180 days charge-off


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Mortgage Servicing cont

Need for an executable and transparent foreclosure process

Generally speaking can be between 18 24mths (most countries)


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Key Administrative Issues Marketing, Origination and underwriting

Origination guidelines and/or policies and procedures

Underwriting guidelines and/or policies and procedures

Quality control Risk Management setting and monitoring of targets

Assignment of MIG and other insurance policies

Procedures for approval

Corporate governance re: reporting and compensation structure of underwriting

department Customer service

Collections incentive programs

Automation and use of technology

Staff experience and continuous training

Work-out reduction in timeline and incentive programs Tracking of performance delinquencies, charge-offs, static pool analysis

Disaster Recovery systems and back-up

Cost of servicing a loan

Number of loans serviced per employee


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Post Origination, underwriting andservicing

How do you finance the portfolio on an evergreen basis..?


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Mortgage FinancingPart 2

Transforming the dream into reality


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How to Finance Mortgages

Core deposits

Tier II Capital issuance of 10yr non-call 5yr bonds typical in the United Kingdom

Warehouse and subsequent take-out financing

Residential Mortgage Backed Securitisation


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An Example of Traditional Bank Funding Sources

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


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Financial Intermediation

Origination of mortgages financed via funding from a warehouse line

Mortgages are originated under a homogeneous criteria

Draw-down of warehouse lines are repaid via a refinancing into longer term securities

Longer term securities issued using securitisation


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A primer onResidential Mortgage Backed Securitisation


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Securitisation

What is Securitisation ?

Securitisation is the raising of debt secured on the cashflow and/or collateral value of aselected 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


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What is Securitisation cont

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


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Range of Debt Markets

Actively

Traded

bonds

Commercial

Paper

Non tradable

Private Placements

Public

issue

Tradable

Private Placements

Illiquid Highly liquid


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Range of Assets

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 Even up to rights to receive flows e.g. Airline ticket receivables etc


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Range of Assets cont

Examples of asset types that have been securitised

Residential and Commercial Mortgages Auto / Equipment / Aircraft Leases

Credit Card Receivables

Auto and Consumer Loans

Bank and Corporate Debt

Trade Receivables

Export and Domestic Corporate Receivables

Air Ticket Receivables

Workers Remittances


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Typical Structure of a Securitisation

Subordinated

or Mezzanine

Investor

SeniorInvestors

Sale & Service of

Receivables

Debt Service

Debt Service

Purchase

Receivables

Sell ABS

Retain Residual Interest (First Loss)

SPVSpecial Purpose

Issuing Vehicle

Receivables

Pool

Sr. ABS

(AAA)

Mezz. ABS

(BBB/BB)

Jr. ABS

(Equity)

Sell ABS

Seller, Servicer

Receivables

Pool

Assets Liabilities

Assets Liabilities


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Key Elements of Securitisation

In-depth knowledge of the assets

Isolation / transfer of assets

Servicing

Credit Rating (Domestic or International)

Legalese and Deal Documentation

Placement

Monitoring


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Basic Transfer Mechanism

Accounts

Receivable

Accounts

Receivable

SPONSORING COMPANY

Sale or Assignment

ISSUES

ASSET-BACKED

SECURITIES

SPECIAL PURPOSE

VEHICLE


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Methods of Asset Transfer

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


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Case StudyUBA GROUP Securitise its Mortgages

Some factors need to be in place before a securitisation can occur. Some of which

are:-

Corporate commitment

Management depth

Track Record (Loan Administration)

Internal systems (originating, servicing, and collection) Available and up to date information (company and collateral)

Origination capacity


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Other factors necessary are :-

Clear and enforceable foreclosure Laws

Enforceable eviction policies

Ability to perfect interest quickly

At least a 5 year fixed rate government curve the longer the better

Electronic payment systems e.g. direct debits

Initial Contract and Receivable


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Initial Contract and Receivable

HomeownersWith loans from UBA

UBA

Loan Agreement

Principal & Interest


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Transfer of Receivables to SPV

Homeowners

UBA

Principal &

Interest

UBA

Mortgage ReceivablesFunding Trust

Investors

proceeds

Sale of Assets

proceeds

Mortgage Backed

Securities


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Independent Trustee appointed & reallocation of

cashflow

Homeowners

UBA

Principal &

Interest

UBA Mortgage

ReceivablesFunding Trust - A

Investors

proceeds

Sale of Assets

proceeds

Mortgage Backed

Securities

TrusteePrincipal &

Interest


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Allocation of Excess Spread

Homeowners

UBA

Principal &

Interest

UBA Mortgage


Investors

proceeds

Sale of Assets

proceeds

Mortgage Backed

Securities

TrusteePrincipal &

Interest

Excess Spread +

Servicing Fees


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Introduction of a Swap counter-party and Guarantor

Homeowners

UBA

Principal &

Interest

UBA Mortgage


Investors

proceeds

Sale of Assets

proceeds

Mortgage Backed

Securities

TrusteePrincipal &

Interest

Excess Spread +

Servicing Fees SwapCounter party

Financial

Guarantor


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Other form of Credit Enhancement considered

Homeowners

UBA

Principal &

Interest

UBA Mortgage


Investors

proceeds

Sale of Assets

proceeds

Mortgage Backed

Securities

TrusteePrincipal &

Interest

Excess Spread +


Financial

Guarantor


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Use of Senior/subordinated Structure

Homeowners

UBA

Principal &

Interest

UBA Mortgage


Investors

proceeds

Sale of Assets

proceeds

Mortgage Backed

Securities

TrusteePrincipal &

Interest

Excess Spread +


AAA

Senior

BBB

Mezzanine

Equity


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Senior Subordinate Structure

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


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Typical Senior/Sub structure example

As noted above, the cost of funding to the issuer is close to the interest rate of the AAA

bond


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Legal, Regulatory and Taxation Issues


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Legal and Regulatory

Legal

Asset Transfer

The Special Purpose Entity or Vehicle

Bankruptcy Remoteness

Regulation

Taxation

Stamp Duty / Transfer


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Conditions for True Sale

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


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Confirmation of a asset sale

The treatment and form of the transaction

The influence the seller has on the assets after the sale

The extent and nature of benefits transferred via the sale

The purchase price

Notification (if necessary) to underlying borrowers when assets are sold

Title ownership


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The Special Purpose Vehicle

Generally set up by the originator with ownership vested in a charitable trust

Commonly set up in tax havens

Mauritius

Cayman Islands

Jersey

Apart from legally isolating the assets it also helps to avoid double taxation and hence reduce

the expenses (if any) of the trust

Cost of set-up an SPV is low

h k


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Why Bankruptcy Remote

Only assets in the SPV are available to protect and pay investors

No need for protection from creditors

All obligations are limited to those available from the assets

No recourse to the originator

The vehicle can only receive the assets as purchased and issue notes or certificates

Hence, probability of Bankruptcy is remote

l i


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Regulation

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

*FASB 46 ? Consolidation of VIEs - Somewhat mitigated by QSPE under FAS 140

C B l II P l


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Current Basel II Proposals

Strong incentive for banks to issue or invest in higher rated debt given the penal capital weights allocable tobonds below investment grade

SPV T ti


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SPV Taxation

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


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Current Market Constraints&

Some Suggestions

P i M t M k t K C t C t i t


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Primary Mortgage Market Key Current Constraints

Lack of long term domestic currency denominated debt

Difficultly in implementing the current foreclosure law

Lengthy title perfection process

Governors consent

Multiple and expensive stamp duty rates (especially at state level)

Monetary and fiscal volatility

Lack of mortgage-able properties

Weak or non-existent underwriting skills

No government incentives at the primary mortgage level

Practical Solutions


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Practical Solutions

Issuance of long term debt by banks to manage the asset-liability mis-match.

Adopt new foreclosure law and implementation Ethiopian model Give notice in papers

and to individuals after the charge-off period

Titling process to be re-engineered removal of governors consent is critical

Universal stamp duty rate only applicable on the primary sale of residential or commercial

property

Continued fiscal and monetary discipline by the authorities

Practical Solutions


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Practical Solutions cont

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

Implementation


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Implementation cont

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 sayPakistan

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

Implementation


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Implementation cont

We need to execute the re-engineering of the current tilting process key sticking point will

be the governors 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

Implementation t


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Implementation cont

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

Implementation cont


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Implementation cont

Banks and Non-Bank Financial Institutions to invest in Training, systems etc.

Housing Finance courses

Beef-up collections teams and systems to minimise delinquencies andcharge-offs

Recovery teams to be put in place to reduce loss severity

Research and data collection and monitoring teams to be put in place in

preparation for future capital markets issuances

Case Study - Housing Finance


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Case Study Housing Finance

Example

STAGE 1

Initially, a financial intermediary provides a mortgage to an individual say at 80% LTVThe financial intermediary is more comfortable lending fully secured by the propertyAs the property and loan seasons, a relationship and credit payment history is built by the intermediary

STAGE 2

Hence

Conclusion

Pension Reforms that mobilize domestic long term capital can be a strong catalyst for sustainable growth

Financial Intermediary Indiviual

provides mortgage loan

Financial Intermediary

Consumer Loan

Car Loan

Other types of Loans

Indiviual

IndiviualTotal Networth as a

result of term financing

availability

IndiviualTotal Networth without

term financing

availability

Summary Key Obstacles and solutions


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Summary Key Obstacles and solutions

Foreclosure Law to be reworked, committee in place

High Stamp Duty rates new regime to be advised & adopted

Cumbersome Titling Process to be re-engineered

Governors Consent to be discarded

High interest rates already being addressed via DMO

Lack of long term money already being addressed via DMO

Government Yield Curve already being addressed via DMO

Securitisation Law for Nigeria to be put in place, committee in place


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We are getting there

Thank You


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Documents

Mortgage Financing by UBA Global Markets