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Ideas & Debate

Mortgage refinancing key to unlocking affordable housing

affordable houses
The government has embarked on a plan to provide affordable houses. FILE PHOTO | NMG 

Urban housing shortage is swelling by the day. There is no doubt. The shortage itself is a function of both supply and demand. Demand-side constraints are driven by the question(s) of affordability while the supply-side constraints are driven by funding challenges.

There has been a number of efforts, both by the government as well as the private sector, to address both sets of constraints. Anecdotally, it is increasingly evident that due to the heavy initial capital outlay involved in the provision of affordable housing en masse, the supply-side constraints are best addressed by social means—which usually falls right at the doorstep of the Government of the day.

Indeed, the government has attempted to kick a number of cans on previous occasions. For starters, there is the National Housing Corporation (NHC) whose primary mandate is to play a principal role in the implementation of the Government’s Housing Policies and Programmes. Well, let’s not delve deeper on it.

Second, in May 2014, a committee that had been constituted (by the National Treasury) to explore ways of enhancing private sector credit and mortgage finance in Kenya, externalised 13 recommendations, covering a broad range of issues.

One of their famous recommendations was the introduction, in July 2014, of the “KBRR+K” pricing formula for commercial banks to apply on variable-rate loans, and which was later overrode by the Banking (Amendment) Act, 2016.

Specifically, in regard to mortgage finance, the committee recommended the government facilitate lines of credit for large housing development projects targeted at lower income buyers for owner occupation. The premise here is that commercial banks cannot be able to efficiently provide the requisite capital for such purposes.

There is some background to this. Modern day banking is founded on Fractional Reserve Banking (FRB), where commercial banks take deposits, usually short-term and non-sticky in nature, from the public, keep a fraction with the central banks (in the form of mandatory reserve requirements) and lend the rest, usually at elongated tenures and at premiumised rates over the cost of deposit.

Conceptually, because commercial banks, in their intermediation role, have to borrow (for instance) a 90-day money and lend out for much longer periods (usually in excess of 12 months), they have to deal with significant amount of maturity risks.

The premiumisation is designed to compensate for maturity risks as well as other risks often associated with lending-credit, liquidity, repricing.

To successfully offer home ownership products, usually via mortgages, whether affordable or not, to its clients, a bank would need to stretch the tenure of its lending to in excess of 10 years, a level which significantly scales up maturity risks beyond its ability to handle.

This is where the government’s intervention(s) is always sought; partly because it has unique capabilities to absorb such risks.

This is why I find the latest effort by the National Treasury to establish a window for a mortgage refinance company highly laudable. The announcement by the National Treasury, back in April 2018, of the creation of Kenya Mortgage Refinance Company may have kicked off Government’s latest intervention.

Indeed, the Treasury Cabinet Secretary’s proposals, as contained in the Finance Bill 2018, to vest regulatory and reporting functions of mortgage refinance companies with the Central Bank of Kenya crystallises the intervention.

The debut mortgage refinance company can help drive housing affordability by playing two critical roles: (i) absorption of both maturity and credit risks from commercial balance sheets through a refinancing window thereby helping soften pricing; and (ii) sourcing and provision of long-term financing for either its own lending activities or social housing on-lending. This is a good start.

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