Securitization: Implications for Economic Development in Nigeria
Securitization is chief among the many financial terms which have gain notoriety and new found (negative) meanings in light of the current global financial crisis, so it will seem very ambitious and even foolhardy to prescribe securitization as one of the tools and policies needed to drive Nigeria’s economic development.
Securitization in its most basic form involves the creation of securities from real assets, i.e. the process of turning real assets into tradeable securities. I believe the genesis of modern securitization is traceable to the pioneering work done on Wall Street to widen accessibility to mortgages by broadening the investor/creditor base for the mortgage markets. Prior to the creation of Mortgage Backed Securities (e.g. Pass through Securities and Collateralized Mortgage Obligations), lenders in the United States were constrained in their mortgage origination efforts by the size of their balance sheet as a result of this the mortgage business was largely a local business. This led to significant imbalances in the borrowing-lending dynamics, with regions of high savings and high growth not always colliding, i.e. there were regions with high savings rate (with large deposits in its lenders’ coffers) that did not have a high housing growth rate and as a result they had few mortgage lending originating opportunities. For a number of high growth regions the reverse was the case, the savings and deposit base was insufficient to fully utilize the mortgage lending opportunities. So there was a scarcity of mortgage lending opportunities in some regions, while there was a glut of mortgage lending opportunities in some other regions.
What securitization achieved was to create a system, whereby mortgage lenders in high growth areas could serve as “loan originators”, they originate mortgages which they repackage as securities which are then sold to investors from all over the world (particularly those from high savings regions such as the Far east). It is such a powerful tool because it creates a system whereby people savings can generate decent rates of return by funding growth opportunities in emerging/high opportunity markets. Through mortgage securitization, a pension fund or High Networth Individual in Norway or China can help finance the acquisition of a house or a car by someone living in the United States or United Kingdom.
Securitization is needed particularly for the Nigerian Housing industry to grow and for us to broaden home ownership in the country, it has been estimated that we may be a shortfall of about 12 Million housing units in the country presently. A conservative cost estimate of N3 Million naira per housing unit will imply that about N36 Trillion (roughly US$257 Billion) is needed to fix our housing deficiency. When this figure is juxtaposed with the 2009 Federal Budget of N2.87 Trillion (roughly US$20.5 Billion) and our current GDP of US$ 166 Billion, one quickly realizes that we are not dealing with small numbers. As the housing market stands, Primary Mortgage Institutions (PMI) who have the primary responsibility for housing finance are woefully under-capitalized (no PMI currently has total assets in excess of US$500 Million)and as such they are severely constrained in their mortgage underwriting efforts by the size of their balance sheets. This situation has led to a regime of a severely under-funded mortage market with full equity payments being the order of the day. In order to truly tap the opportunities inherent in the housing markets, we must broaden access to finance and apply the tools of the Capital Markets.
The Nigerian Capital Markets (i.e. both Equity and Debt Markets) are rapidly developing, with over N1 trillion (US$7 Billion) of Federal Government Bonds Outstanding and a Stock Market Capitalization in excess of US$48 Billion. Futhermore, Total Pension Assets are currently in excess of N1 Trillion (US$7 Billion) and is being projected to double within the next two years. A good way for the housing industry to grow is to develop a secondary market framework for the mortgages which are being created, this will allow the growing domestic and international investor base participate in the financing and development of this sector. If this Secondary Market framework is perfected, PMIs will be less constrained by the size of their asset base in originating mortgage loans. As they will be able to repackage the loans (which meet a certain underwriting standard) for on-selling on the secondary market to raise money for originating a new set of loans. This system will also provide investors (particularly Pension funds) with long term assets to invest their funds, these houses will then serve as a store of wealth whose equity can be tapped into by the homeowners for other productive ventures.
Although Securitization is now associated with unbridled greed and risk taking because of the role securities backed by sub-prime mortgage loans have played in this current economic crisis, it is still a very powerful and useful tool which can help harness savings potential in a country to aid its economic development.
