With the deep market penetration of mobile phones in Africa, the continent has “leapfrogged” technology without waiting on governments to provide landlines and develop phone infrastructure. The African Mortgage Development Corporation (AfMDC) is proposing to “leapfrog” the inefficiencies and underdevelopment of the housing industry by developing a mortgage origination platform (MOP) that will serve as the foundation of an integrated financing mechanism designed to deliver mortgages to middle class homebuyers who purchase homes in newly developed, sustainable communities. These communities will have 24/7 access to electricity, water and waste-water treatment. Our goal is to provide financing and develop communities that can be easily managed, replicated, and scaled. Building houses without creating better access to mortgage finance, will not resolve the problem, neither will increasing access to mortgage finance without an adequate housing inventory. The solution is a company that brings property development and mortgage financing under one roof.

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The Problem

The major problem in Africa is our inability to provide affordable housing and access to mortgage finance at scale. There is a major housing shortage on the continent but let’s imagine that we wake up tomorrow morning and 100,000 brand new affordable housing units appear. What happens then? What do we do? How do we get people into these houses? The list of major obstacles to the development of the housing finance market in Africa includes the lack of long-term finance, weak credit markets, and an unstable macroeconomic environment. The housing sector on the continent suffers from the low capacity of the construction industry, the high cost of construction, and the lack of development of the housing finance sector, including the absence of a strong mortgage market and the liquidity for mortgage funding. Lenders do not have the ability to originate quality mortgages in volume as all the inputs that go into the development of a strong housing sector are underdeveloped or inefficient.

 

Mortgage lending in Africa is largely in the hands of retail commercial banks or state owned or state affiliated institutions. These banks are inflexible by nature especially when it comes to change and innovation. Banks tend to be cumbersome and slow in adopting new systems partly due to their inherent bureaucratic structure and culture which hampers their ability to adopt or develop new technologies. Governments are worse.

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Banks also engage in other lending activities with mortgages being a small part of their portfolio. One of the major issues facing the banks when it comes to mortgage lending is that they deal with short term deposits that are largely short-term liabilities. This creates a problem if they want to engage in long term lending because there is a maturity mismatch. Another major issue facing banks in Africa is the difficulty in assessing credit risk among the population that are not their customers. It is not possible for banks to engage in mortgage lending at scale if they can’t evaluate the credit risk of potential borrowers who are not their customers.

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The Solution

To build houses and provide mortgage financing at scale you must be able to originate a pool of mortgages that can later be sold or used as collateral for some type of bond issuance. This will create the liquidity needed for scaling. To do this requires some type of standardization during the origination process so that potential investors can understand and evaluate the mortgages produced. Standardization is the foundation of mortgage underwriting as it helps lenders create underwriting guidelines that are used to determine the three C’s of residential mortgage underwriting: Capacity, Collateral, and Character.

Our solution is to develop a mortgage origination platform (MOP) that will be used to take mortgage loan applications, assess an applicant’s credit risk, and underwrite the loan. It is designed to mitigate the origination risk and credit risk at the point of origination. The centerpiece of the MOP is a credit risk mitigator (CRM) that will be used to make the credit decision. This CRM will generate a proprietary “MOP” score that is like a FICO score. It will be used as our credit standard

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We will build these housing communities and incorporate alternative building technologies. There will be no need for separate construction financing as the mortgages funded will serve as both construction and permanent financing. The loans will fund in groups rather than individually. The construction will take place between the funding and the day of occupancy 30 days later. We are combining innovative housing finance techniques and alternative building technologies to create a module that can be replicated and scaled throughout Africa.

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It is very important to see each housing community as a singular module. At the input of the module is a quality loan origination process that provides mortgages to home buyers to purchase the houses within the module. The tangible aspect of the module is the infrastructure that is being built and the community that is being developed. You can identify it, locate it, touch it, feel it, and experience it. Coming out of the module is an intangible pool of quality mortgage loans that will provide the liquidity necessary to replicate the module and scale it.

 

 

Each community/module will be sustainable and will have 24/7 access to electricity, water and waste-water management treatment. The communities will be family friendly with several amenities including playgrounds, tennis courts, exercise facilities and parks. The AfMDC will be involved in the management of these communities in order to preserve the quality of the collateral. Effective quality management will also serve as a credit risk mitigation strategy and a way to increase property values. The fact that homeowners will live in a safe and secure environment with continuous access to electricity and water will serve as a motivating factor for them to pay their mortgages on time and it will also create a demand for others to want to live in these communities which will put upward pressure on property values. Classic supply and demand.

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