…says poor mortgage financing is structural
The nation’s rising housing deficit would tumble, as more household would be able to access mortgages at competitive rates, if a mechanism existed where mortgage-originating institutions, particularly banks, were able to ‘swap’ their liabilities with pension funds, who have far more patient capital to deploy.
This is according to former investment banker, and now, financial consultant, Kweku Adoboli, in what was his highest-profile public engagement since his return to Ghana in 2018.
A swap is a derivative contract between two parties that involves the exchange of pre-agreed cash flows of two financial instruments. The cash flows are usually determined using the notional principal amount (a predetermined nominal value). Each stream of the cash flows is called a “leg.”
Speaking at the 2021 edition Pension Strategy Conference organised by Axis Pension Trust in collaboration with the Chartered Financial Analyst (CFA) Society in Ghana, which had at its theme, ‘Adding value to pension funds through alternative investments’, he argued that despite several factors hampering the growth of mortgages, the primary cause is structural.
Explaining, he stated that this is as a result of the nature of the typical source of funding for mortgages, which are closed-ended and often from development finance institutions (DFIs). This, he noted, creates a situation the banks are left with a deficit on their balance sheets for the outstanding long-term facilities.
“There is a duration mismatch; the banks pay out lump sum at the origination of the loan and their balance sheets becomes drained at the moment, as they wait to receive coupons or payments during the course of the facility. Meanwhile, there is no mechanism for banks and pension funds to exchange their liabilities.
The banks obviously would love to refinance the mortgages on their balance sheets and move them to someone who is looking for a long-term liability, so that they can generate new loans. In our economy, there is a fundamental flaw where the banks are stuck with long-term liabilities and there is no mechanism to transfer them to pension funds,” he said.
He further explained that the proposed model, which is not novel and has been employed in other countries on the continent, would see mortgage-issuing banks hold the mortgages for a short-term duration to prove the worthiness of the home-buyer. The bank can then take a portion of the portfolio to the Mortgage Finance Company (MORICO), which packages these as bonds and sells them to pension funds or other interested parties.
Offering insight into the potential benefits to all stakeholders, Adoboli pointed to an analysis conducted by himself, which the shows there are approximately 9,000 outstanding mortgages in the Ghanaian economy, with an average value of US$55,000 per mortgage.
“There is about US$510 million worth of mortgages in the Ghanaian economy across all mortgage-originating banks, representing 0.75% of our GDP. This is poor when compared to other places like Argentina where it is 5% of GDP.
If we were to get to the level of South Africa, which is at 35%, we would be creating a powerhouse of an asset class in this economy. 5% of our GDP would create a mortgage market of about US$3.5 billion and just the securitisation fees alone represents a huge opportunity for market members to generate some huge revenue,” he said.
Addressing concerns over the possibility of a fallout similar to the 2008 U.S subprime mortgage crisis, he stated that strict regulation and enforcement would serve as “pressure valves to ensure the system does not overheat.”