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10.06.2013 Feature Article

The Search for a Competitively Priced Long-Term Sustainable Housing Finance: The New Pension Law (Act 766) in Perspective

The Search for a Competitively Priced Long-Term Sustainable Housing Finance: The New Pension Law Act 766 in Perspective
10.06.2013 LISTEN

The history of Ghana's housing finance system has been chequered with failed attempts to establish an efficient mortgage finance system; which is touted as the most capable and superior financier of housing. The mortgage market in Ghana like many developing economies is a form of Braudel's Bell Jar; which according to Hernando De Soto skews the market to the rich. This market is conceptually set within an economy of weak institutional property law, which undermines the intrinsic basis of a mortgage; the guarantee of property as security for a loan is hugely constrained.

This coupled with a lack of or inadequate sources of long-term finance, low income levels, high and increasing inflation rate as well as exchange rate fluctuations, the lack of refinancing and reliable credit rating mechanisms are symbolic of a risky lending environment; thus, serving as a disincentive to long term investments. The composite of these factors has resulted in the current astronomical mortgage interest rates, averaging 30%. Hence, about 90% of Ghanaians made up of the low and middle-income earners are excluded from the mortgage market.

The maximum term of a mortgage in Ghana is 20 years whereas its 30 years and more in most developed economies. Undoubtedly, a long-term source of funding reduces the interest rate and monthly mortgage repayments and thus improves affordability. According to the SSNIT, only 112,522 out a total membership of 1,390,945; representing approximately 8% are pensioners. Research has also revealed that the majority of SSNIT members are between the ages of 31-40 years and have worked for less than 16 years. Interestingly, just a hand full of the members in this age group can afford a mortgage to purchase the least developer built unit of about GH¢30,000. However, they have about 25-30 years more to work towards retirement.

The above statistics reveal that the SSNIT has a youthful pension membership which presents the 2nd tier of the new pension scheme as a possible source of longer term mortgage finance than hitherto. Section 103(2) of the National Pension Law (Act 766) allows a member to use that member's 2nd tier benefits to secure a mortgage for the acquisition of a primary residence. Similar provisions in the pension laws in most countries in Southern Africa and Singapore has engineered what has emerged as pension loans and pension-secured loans for housing.

Pension loans are direct loan from the fund, which is secured by the fund in two ways: over the member's accrued benefits or effectively as a mortgage loan in favour of the fund over the property in question. Pension-secured loans on the other hand enable contributors to secure housing loans with their accumulated benefits from third party; the pension fund (or administrator) in this case acts as a guarantor. This allows members to release the equity in their pension to improve their housing situations.

Why Pension Loans and Pension-Secured Loans are Feasible: Propositions

Pension funds having long-term liabilities have long-term investment horizons. It is therefore a prerequisite in eliminating liquidity risk premium and the potential maturity gap created by the use of short-term assets in financing long-term liabilities. This inures pricing benefits to the borrower; for instance, loans are priced at the prime rate in South Africa (which is 16% currently in Ghana) relative to traditional mortgages.

Providing an alternative impetus for loan underwriting and pricing, pension assets enhance the viability of contributors as good borrowers regarding the 5Cs lending criteria. The amount and frequency of pension contributions are a readily effective means of assessing the credit worthiness of a borrower; as the regularity of payments could serve as a proxy and substitute to character and capacity. Accumulated pension contributions are a relatively liquid form of collateral and simultaneously provide live capital towards mortgaging; unlike the many houses without proper title in Ghana.

Repayment of pension loans and pension-secured loans is senior-subordinated to mortgage repayment. This means that the 2nd tier contributions are deducted before mortgage obligations. Thus, a lender is relatively more secured upon loan default. Further, the positive co-movement of house values and inflation makes it a viable investment in very high inflationary economies with little or no inflation-hedging investment vehicles aside the potential of strong future cashflow generation where rented out.

With 24.36% equity in HFC Bank, Cal bank (34.4%) and Ecobank Transnational Incorporated (9.04%), the Social Secuirty and National Investment Trust (SSNIT) of Ghana is prominent for its role in housing development and indirect financing of mortgages. Yet, majority of SSNIT members cannot afford this mortgages because these two roles are disjointed. The Central Provident Fund of Singapore remains a quintessence; about 81% of the Singaporean population own an HDB flat, and over 95% of the adult population are homeowners largely due to pension and pension-secured loan (HDB 2000; McCarthy, Mitchell and Piggott, 2001).

Although Section 103 (2) of the Pension law of Ghana is clear on the intention of the 2nd Tier mandatory pension scheme in support of a contributor's first mortgage, it is vague on the form in which it should be utilized: pension loan and or pension-secured loan? More so, the law does not specify the threshold of borrowing and whether it should be used for a down payment and or repayments.

Pension loans and pension-secured loans as a possible source of long-term finance will eliminate liquidity risk and the maturity gap problem which contributes to high interest rates on mortgages. They present competitive pricing advantages to the borrower than the current traditional mortgages. This will improve borrowers' affordability positions and expand mortgage funding opportunities as well as increases mortgage market participation. It will achieve efficiency by providing funds to the low and middle-income earners who need it most than hitherto, but its sustainability is a question of further research.

In conclusion, in a country where pension benefits are meagre, the value of which has also been eroded by high inflation, the dilemma is whether making compulsory contributions to a pension fund is feasible? This is even worsened by the fact that life-expectancy is dropping rapidly as most contributors may not live to enjoy retirement benefits. This confirms the findings of previous researchers that most people forced into a pension fund do not benefit from it. What is the use even where beneficial to be assured a comfortable pension without a roof over one's head today? The National Pensions Regulatory Authority (NPRA) should be looking at the feasibility of implementing section 103(2).

Kenneth A. Donkor-Hyiaman
MPhil Planning, Growth and Regeneration
University of Cambridge
[email protected]

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