Kenya has taken initial steps towards setting up a secondary mortgage market where lenders will sell home loans to long-term investors such as pension funds and insurers at a discount.
The Kenya Mortgage Refinancing Company (KMRC) is working with banks to develop mortgage-backed securities where the lenders will pool home loans of similar characteristics to sell to investors, who will then gain by earning monthly mortgage repayments from home buyers.
KMRC chief executive Johnson Oltetia said the state backed firm is holding talks with Kenya Bankers Association and other stakeholders to come up with common lending terms for mortgages across banks, microfinance institutions and savings and credit co-operative societies.
These uniform lending standards are necessary for such loans to be packaged as asset backed securities that can then be sold on to third party investors.
“That (uniform lending standard) will lead to a very critical thing (in mortgage market development).
“Once you have attained standardisation, we expect that we can issue more structured products like mortgage-backed securities at some stage,” he said.
“At the moment, you cannot issue mortgage-backed securities because there are no uniform terms.”
Mortgage-backed securities enable long-term investors such as pension funds, insurance firms and hedge funds to essentially lend cash to home buyers and get returns through monthly repayments on interest and principal sums.
Under the mortgage-backed securities framework, banks act as an intermediary between an investor and a home buyer. The securities were at the centre of the 2008-09 global financial market crisis following massive defaults in the US.
Kenya’s mortgage market — whose potential is estimated at one million home loans — remains underdeveloped with Central Bank of Kenya (CBK) data showing 26,971 active loan accounts worth Sh232.7 billion last year. That was a slight drop from 27,993 accounts valued at Sh237.7 billion in 2019.
The average mortgage size last year increased to Sh8.6 million from Sh8.5 million, further locking out low to mid-income workers — the space KMRC is bidding to fill through refinancing of home loans of up to Sh4 million in Nairobi metropolis and Sh3 million elsewhere with a repayment period of 20 years.
KCB Group, the largest mortgage financier with a 27.8 percent market share last year, had in November 2014 revealed plans to offer mortgage-backed securities on the Nairobi Securities Exchange (NSE), but subsequently cooled its ambitions.
The KMRC added that it has developed uniform lending standards for saccos participating in the State-backed affordable housing financing plan targeted at workers earning less than Sh150,000 a month.
The agency is currently processing applications for 4,000 mortgages worth Sh6.2 billion from 11 lenders.
Last financial year ended June 2021, the firm refinanced 1,400 mortgages valued at Sh2.76 billion from four institutions — KCB Group (Sh2.14 billion), HFC (Sh515 million), Stima Sacco (Sh69 million) and Tower Sacco (Sh30 million).
The mortgage refinancing firm offers funds to banks and saccos for onward lending to homeowners at an annual interest of five percent.
The recipient lenders are, in turn, expected to lend out the cash at a single-digit interest rate — a lower than average market rate of 12.1 percent as of September 2021.