A Look at the Kenya Mortgage Refinancing Company – Cytonn Report

A mortgage liquidity facility is a financial institution that is meant to support long-term lending activities by Primary Mortgage Lenders (PML) such as banks, credit unions and mortgage brokers with the core function being to act as an intermediary between PMLs and the bond market.

In Kenya, mortgage lenders are banks, with KCB and Standard Chartered being the leading banks in mortgage lending as per the Residential Mortgage Survey by Central Bank of Kenya, as well as one mortgage finance institution, I.e., Housing Finance.

Mortgage refinancing works by:

1. Borrowers cede their property as security for a long-term mortgage loan,
2. The mortgage liquidity facility will lend its funds to PMLs with the mortgages as collateral,
3. The mortgage liquidity facility provides a bond to private institutions and investors, with the mortgages as collateral, and,
4. Institutions with medium to long-term liabilities buy the bonds at a margin above the usual government securities.

According to the Cytonn Investments weekly report, mortgages declined by 1.5 percent as of December 2016 to 24,085 from 24,458 in December 2015 attributed to the interest rates cap law. As property prices rose, the value of mortgage loan assets outstanding increased to 219.9 billion shillings in December 2016 from 203.3 billion shillings in December 2015, an increase of 8.1 percent.

However, following the interest rate cap law, average mortgage interest rates dropped to 10.5 percent-18.0 percent, from 11.9 percent-23.0 percent in 2015. As per the 2016 Kenya Mortgage Survey by CBK, factors hindering the maturity of the Kenyan mortgage market despite its potential include high costs of houses against low incomes, high lending rates, difficulties with property registration and titling, undeveloped standardization of loan underwriting, documentation or servicing procedures, and lack of access to long-term financing.

To address this the Ministry of lands is currently undertaking the land registration digitization process and effecting a computerized titling system and to enable multiple land titling, and According to Hon. Henry Rotich, the National Treasury is in the process of revising the interest rate cap law from the current 13.5 percent due to the negative effect it has had in the credit sector, such as the decline of private sector credit growth which dropped to 2.1 percent as at February 2018.

The key issues affecting mortgage liquidity facilities include:

1. Inefficient regulation schemes over MLFs,
2. Unestablished capital markets and institutional investors base,
3. Unfavorable government policies affecting the real estate sector such as monetary policies that promote high-interest rates as well as tax regimes,
4. Poor macroeconomic environments,
5. Insufficient supply of affordable homes, and,
6. Lack of an efficient land titling process.

According to Cytonn, the key conditions necessary for the success of Kenya Mortgage Refinancing Company will be:

1. Transparent and effective regulation of KMRC by a regulatory body.
2. Governance rules designed to ensure its efficiency, especially now that the government is the biggest shareholder,
3. A clear and efficient land titling process,
4. Sufficient support from the private sector, especially in regards to bond issuance, and,
5. Provision of affordable homes