PROJECT ON MORTGAGE LOANS IN GHANA

1.0 INTRODUCTION

It is undeniable that mortgage financing is vital to every economy because it accounts for a sizeable portion of a country’s productive activity through backward linkages to land and labor markets, as well as related industries.

Since it is inextricably linked to a country’s economic development, apart from strengthening financial institutions, promoting social stability and improving people’s lives, the sector should have by now seen enormous growth, culminating in affordable houses for Ghanaians.

At the individual level, housing finance or mortgage - the pledging of a property to a lender as a security for a mortgage loan not only enables access to homeownership but also to meet basic needs – a means of economic empowerment.

However, the situation seems not to be encouraging because only the rich or a few people have access to it. With a population of over 22 million, Ghana currently has a labour force of over 11.29 million and its economic fortunes are looking brighter with a per capita income of $1,400 as at 2007.

An analysis of housing conditions reveals that on a national basis, 48.9 percent of all Ghanaian households live in accommodation associated with the compound (44.5 percent live in compound rooms). Another 25.3 percent lives in separate houses and 15.3 percent resides in semi-detached houses.

Economic performance has improved in recent years with growth rate reaching 6.4 percent in December 2007 while inflation had remained slightly stable keeping interest rates also slightly firm but the housing finance market has not seen massive development due to the inability of the urban poor to acquire their own houses.

Though the real estate companies such as Regimanuel Gray, Manet Cottage and Ayensu Real Estates Limited have constructed some affordable houses for sale, the prices have been high, ranging from $35,000 upwards.

The situation calls for serious mortgage financing since it could assist people to get their own houses, Charles Bonsu, Head of Mortgage and Consumer Loans at HFC Bank said. “HFC Bank, then Home Finance Company was the pioneering company to begin housing finance in Ghana somewhere in the 1980s assisting the development of the housing sector, but the industry has not seen much growth since the concentration has been low.

However, the involvement of some financial institutions such as Ghana Home Loans, UBA, and Barclays gives some hope that the housing deficit in the country which as at 2006 was between 500,000 to 800,000 could see some improvement.

It is said that 500,000 houses are needed annually according to studies conducted by the Ghana Real Estates Developers Association (GREDA).

In August 2007, the International Finance Corporation invested $25 million to support three financial institutions –Ecobank Ghana, Merchant Bank and Fidelity Bank, to boost their mortgage operations in Ghana.

A loan of US$30 million was also facilitated in 2006 by the Overseas Private Investment Corporation (OPIC) to support a solely private Ghanaian housing company, Ghana Home Loans.
Between 1990 and 1998, the Social Security and National Insurance Trust (SSNIT) provided over 30,000 blocks of flats in the country, principally in regional capitals like Accra, Cape Coast and Takoradi but the development stopped until government stepped in with an ongoing affordable housing programme.

The construction of these affordable housing units is taking place at Borteyman and Kpone in Greater Accra and Asokore Mampong in the Ashanti region. The same is being replicated in other regions such as the Eastern region.

population of approximately 4 million, is estimated to grow at approximately 4 percent per annum so housing becomes important to the city. Since the adoption of a market-oriented mortgage system will help improve the lives of many Ghanaian families that live in substandard or severely cramped housing conditions, policy makers and the private sector should embrace it to the fullest and make it affordable for the average Ghanaian.

Again, mortgages serve as a source of investment for many investors particularly those with long-term liabilities such as Pension Funds and Insurance Companies. It is indeed a huge area of investment.

Therefore the objective of this study is to evaluate the performance of mortgage loans in Ghana of Ghana Home Loans (GHL). It is hoped that the findings of this study will give Ghanaian a clear understanding of the various performance challenges of mortgage loans.

2.0 PROBLEM UNDER INVESTIGATION

The problem under investigation is to evaluate the performance of mortgage  loans in ensuring that Ghanaian have access to better home facilities that is, What are the trends in house prices in Ghana, and what is driving this trend, How does the mortgage market affect the provision of housing in Ghana, and overall performance of mortgage loans.

3.0 OBJECTIVES OF THE STUDY

The main objective of this research is to:-

        i.            To evaluate the performance of mortgage loans in Ghana, case study at Ghana Home Loans (GHL).

  ii.            Factors leading to poor mortgage financing.

    iii.            To make recommendation as to how the improvement of mortgage loan accessibility to Ghanaian.

4.0 SIGNIFICANCE OF THE STUDY

A mortgage is a long-term loan that a borrower obtains from a bank, thrift, independent mortgage broker, online lender or even the property seller. The house and the land it sits on serve as collateral for the loan. The borrower signs documents at closing time giving the lender a lien against the property. If that borrower doesn't make payments as agreed, the lender can take the home through foreclosure. Because mortgages are such large loans, consumers pay them off over long periods -- usually 15 to 30 years. Their monthly payments gradually whittle away the principal balance, slowly at first then rapidly toward the end of the loan.
When escrow is used, a monthly mortgage payment is called a PITI payment. That's because each one covers a portion of the following four costs:

Principal:-                    the loan balance

Interest:-                     interest owed on that balance

Real estate Taxes:-     taxes assessed by different government agencies to pay for school construction, fire department service, etc. 

Property Insurance:- insurance coverage against theft, fire, hurricanes and other disasters

Borrowers can choose to pay their real estate taxes and insurance in lump sums when they come due, rather than in monthly installments to their escrow accounts.

Depending on the kind of mortgage a borrower has, the monthly payment may also include a separate levy for private mortgage insurance (PMI) or government-backed mortgage insurance premiums.

The breakdown of each payment (the amount that goes toward principal, interest, etc.) changes over time because mortgages are based on a repayment formula called amortization. That's a fancy term meaning the lender spreads the interest you owe on the mortgage over hundreds of payments so that the overall loan is as affordable as possible.

On a 30-year, $150,000 mortgage with a fixed interest rate of 7.5 percent, a homeowner who keeps the loan for the full term will pay $227,575.83 in interest.

The lender can't possibly expect that person to pay all that interest in just a couple of years so the interest is spread over the full 30-year term. That keeps the monthly payment at $1,048.82.

But the only way to keep the payments stable is to have the majority of each month's payment go toward interest during the early years of the loan.

Of the first month's payment, for instance, only $111.32 goes toward principal. The other $937.50 goes toward interest. That ratio gradually improves over time, and by the second-to-last payment, when we're all driving hover cars and have colonized the moon, $1,035.83 of the borrower's payment will apply to principal while just $12.99 will go toward interest.

5.0 LITERATURE REVIEW

5.1.0 Theoretical Literature

Under the theoretical review of this study, concepts, principles and some basic theories of mortgage loan in Ghana will be covered as follows;

Ø  Overview of mortgage loans in Ghana.

Ø  Types of mortgage loans.

Ø   Mortgage Market Development In Ghana.

Ø   Definitions of Mortgage loan

Ø  Housing problem in Ghana.

Ø  Housing types and prices in Ghana.

Ø  Factors affecting the development of a vibrant mortgage market in Ghana.

Ø  Research Of House Providers And Mortgage Providers.

Ø  Role of Mortgage loan.

Ø  Importance of Mortgage loan.

Ø  Functions of Mortgage loan,

Ø  The link between Mortgage loan and corporate loan.

Ø  Models of mortgage loan.

5.1.1 Overview and meaning of mortgage loan

In simple terms, a mortgage is a loan in which your house functions as the collateral. The bank or mortgage lender loans you a large chunk of money (typically 80 percent of the price of the home), which you must pay back -- with interest -- over a set period of time. If you fail to pay back the loan, the lender can take your home through a legal process known as foreclosure.

For decades, the only type of mortgage available was a fixed-interest loan repaid over 30 years. It offers the stability of regular -- and relatively low -- monthly payments. In the 1980s came adjustable rate mortgages (ARMs), loans with an even lower initial interest rate that adjusts or “resets” every year for the life of the mortgage. At the peak of the recent housing boom, when lenders were trying to squeeze even unqualified borrowers into a mortgage, they began offering “creative” ARMs with shorter reset periods, tantalizingly low “teaser” rates and no limits on rate increases.

When you couple bad loans with a bad economy, you get rampant foreclosures. Since 2007, more than 250,000 Americans have entered foreclosure proceedings every month. Now those foreclosures are turning into full-on repossessions, which are expected to reach 1 million homes in 2010.

Looking back at the flood of foreclosures since the housing crash, it’s clear that many borrowers didn't fully understand the terms of the mortgages they signed. According to one study, 35 percent of ARM borrowers did not know if there was a cap on how much their interest rate could rise. This is why it’s essential to understand the terms of your mortgage, particularly the pitfalls of “nontraditional” loans.

In this research, we'll look at each of the many different types of mortgages, explain all of those confusing terms like escrow and amortization, and break down the hidden costs, taxes and fees that can add up each month. We’ll start with the most basic question: What is a mortgage?

5.1.2.0 Types of mortgage loans.

Basically there are five (5) types/products of a mortgage in Ghana and they are explained below;

5.1.2.1   Home Purchase Mortgage (HPM) / First Time Buyer:

Home Purchase Mortgage is a loan product designed to assist individuals and companies to purchase residential properties for their own use or for rental. This program is for both first-time buyers and existing homeowners. The borrower is usually expected to make a minimum 15% down-payment and the bank provides a loan equivalent to a maximum 85% of the purchase price. The loan terms are usually 15 years and interest rates on home loans in Ghana are always variable (ARM) interest rates.

 5.1.2.2    Home Equity Mortgage (HEM) / Equity Release:

This product is designed to enable borrowers who currently own a home to release the equity in those properties to improve their liquidity position. Individuals or companies who have properties that are either fully paid for or are currently financed, but do have equity, may apply for this loan. The loan proceeds could be used for home improvement, expansion of businesses, paying overseas school fees, buying a car or taking a well-deserved vacation. The maximum loan allowed under this program varies from bank to bank, but the loan term is usually for 15 years and the interest rates are always variable.

5.1.2.3   Home Completion Mortgage (HCM) / Refinance:

This product is designed to assist borrowers with financing to complete the construction of their homes. These houses could have been started with the borrower’s own resources or through financing from their employers, bankers or another mortgage company. The idea is to help bring the project to completion to help the borrower achieve the goal of homeownership. Again, the maximum loan varies from bank to bank but the loan term is 15 years, the maximum loan-to-value is usually 50%, and the interest rate is variable.

5.1.2.4 Home Improvement Mortgage (HIM) / Home Completion:

Home Improvement Mortgage is designed to assist borrowers with financing to undertake renovation and extension work on their existing homes. The target group for this product is existing homeowners and companies who have properties that need renovation or improvement. This loan product is pretty similar to the Home Equity Mortgage described above, but under this program the proceeds must strictly be used on the existing home.

5.1.2.5 Construction Finance / Home Construction:

Construction Finance is currently offered in three (3) different ways (a) Construction finance to the real estate developer (b) Construction finance to the borrower and (c) Construction finance to the customer of the real estate developer. In all cases this facility will be for the construction of homes. The target market for this product is mainly real estate developers

5.1.3.   Mortgage Market Development In Ghana.

Housing is very important to the social and economic fabric of a nation, hence the need to have insight into the industry that produces and manages the development of housing in the economy. Experiences from developed countries indicate that the mortgage industry is the most capable and superior financier of housing needs of a people.

The ratio of Mortgage Debt Outstanding (MDO) to Gross Domestic Product (GDP) for any economy is an important proxy for measuring mortgage market development. Ghana has indeed achieved some moderate improvement in the mortgage market over the past three years as mortgage debt outstanding grew from 2.5 per cent in 2004 to 3.9 per cent in 2006. Even though this improvement is significant when compared to the less than 0.1 per cent of GDP for Russia for example, it still falls short by a significant margin in comparison with the range of 7-15 per cent in most other middle-income countries.

5.1.4   Definitions of Mortgage loan.

Mortgage is a legal document that pledges a property to the lender as security for payment of a debt. Instead of mortgages, some quarters use First Trust Deeds. Like any other markets, the mortgage market has two main primary players; the Mortgagor (the borrower on the demand side) in a mortgage transaction who pledges property as security for a debt and the Mortgagee (the lender on the supply side) who offers the loan.

The secondary players in the market, mostly on the supply side, include:

ü  Mortgage Bankers (generally assumed to originate and fund their own loans, which are then sold on the secondary market);

ü  Mortgage Brokers (that originate loans, then place those loans with other lending institutions with whom they usually have pre-established relationships);

ü  Mortgage Insurance Companies (providing insurance to cover the lender against some of the losses incurred as a result of a default on a home loan); and

ü  Mortgage Regulatory Institution (a legal body providing the legal framework for the enforcement of laws of contract and standard of practices, including procedures for foreclosures etc.)

A fully developed mortgage industry has two main markets.

Ø  The Primary Mortgage Market (PMM) where transactions between companies

that originate and service mortgage loans (banks, savings & loans, credit union, mortgage bankers, institutional lenders) are affected. Then,

Ø  the Secondary Mortgage Market (SMM), where existing mortgages are bought

and sold. These markets are inter-twined and are affected by both domestic and foreign monetary developments. A well functioning mortgage industry has the primary function of increasing funding for housing at competitive cost and pricing.

It is noteworthy to emphasize that, a successful development of a vibrant mortgage market depends on the existence of certain fundamentals: a stable macroeconomic environment which attracts external funds, availability of long-term finance, an efficient regulatory framework that ensures a secure and transparent land title, effective delivery system, capacity to ensure repayment and foreclosures. Like all prices, any factors which affect demand or supply will affect the price and the overall development of the markets. The case for Ghana is considered in the next sect.

5.1.5   Housing problem in Ghana.

The housing problems in Ghana are characterized by both backlog in the provision of formal housing and the resultant sprawl of informal settlements. The informal construction industry is not capable of meeting demand and providing large quantities of houses. The formal sector therefore has a role to play in provision of housing especially in the urban areas. Formal housing construction was in the past undertaken by government through state agencies (Karley and Akomea 2007). But government realized that its housing financing policy was not sustainable and that it would rather facilitate construction by encouraging the private sector to participate. This changed the role of its agencies to becoming market players and competing with the private real estate developers. But housing delivery process is characterized by high costs.

Attempts to resolve the housing problem requires seeking solutions to the problem of land availability. Other constraints faced by housing developers include the lack of capital, utility infrastructure issues, inability to procure materials at low cost and inadequacy of labour. For most private sector developers, the typical housing unit cost breakdown is as shown in Table.

Table 1: Housing unit cost breakdown Accra, Ghana.

Cost Items	Proportion of Cost
Land	15 %
Financing	20 %
Infrastructure	13 %
Material and Labour	36 %
Overheads and profit	16 %

 Depending    the location and circumstances, costs for similar housing units in the UK are for land (up to 50%), finance (up to 10%), material and labour (up to 40%) and overheads and profits (about 20%).

5.1.5.1    Land cost

Land acquisition and registration constitutes about 15% of the cost of housing unit. This normally includes costs associated with the extremely time consuming, expensive and cumbersome process involved in land acquisition and registration. The country’s land market is concentrated in Accra and other major cities. Land prices are extremely high in upscale residential areas in Accra such as Cantonments, Labone and the Airport Residential Area with price range from US$120,000 to US$200,000 for a 0.4 acre plot. According to NTHC Properties (2007) source serviced 100x70ft plot in areas near the capital such as East Legon, Tema and Sakomono is for sale at between US$12,000 to US$18,000. A study of informal urban land transactions in Accra also shows that whilst the land price is often artificially over priced, the willingness to pay a high price for a plot of land is influenced by several factors including the level of development, water and electricity nearby, access road availability, litigation and layout approval. But location has been the strongest determining factor.

5.1.5.2   Finance cost

One of the biggest problems facing housing construction is the lack of funds for developers of all sizes. Finance constitutes one-fifth of cost of a housing unit. But lending terms in Ghana in the last few years have been extremely onerous for developers. The interest rates were about 40% in the early 2000s, but went down to a still high 29% in 2004 when inflation had fallen from 30% to about 15%.  Currently, development loans from financial institutions, if granted, are often at very high rates, in the region of 25% to 30% but maturities in the market are very short from a few months to a maximum of two years in most cases (ISADA 2007).  Banks appear to be interested in investing in relatively low risk financial instruments such as government bonds and treasury bills. The high development cost means Housing construction is often undertaken incrementally through personal savings. But some large developers pool funds from other sources including overseas. For example, Regimanuel Construction Ltd is One of the successful developers to attract investors from Texas in the US to invest in Regimanuel Company and now changed the company name to Regimanuel Gray Ltd in 1991. Other real estate developers raise capital by selling housing products to potential buyers off plan. But this often proves dif ficult in view of the fact that not all potential buyers are able to keep to the payment schedules.

5.1.5.3   Infrastructure provision and Cost

A key attraction to a housing estate is the infrastructure available in the area. Access roads, water, sewerage and electricity connections are the most important utility services which needed to be provided. But the lack of development of these facilities by municipalities in the country means that real estate developers have to ensure that these infrastructures are developed to ensure that the end housing product will be purchased. Real estate developers wanting to connect their residential projects to this infrastructure must bear the full costs of connectivity to the main system, which can be very expensive. It is estimated by developers that investment in infrastructure varies from 10% to 30% of the price of a housing unit depending on the location of the site in relation to existing utilities’ infrastructure. All these charges are, however, passed onto the ultimate house purchaser. Owing to recent increases in government investment in infrastructural development, there has been a reduction in infrastructure cost in the overall cost of housing unit to about 13% for major real estate developers.

5.1.5.4   Materials cost and labour

In Ghana there appear to be an overdependence on external markets particularly for building materials for which local substitutes can be developed and for which there is comparative advantage for local production. Iron rods, cement, tiles, paint and a host of other materials are imported. Although there are no capacity constraints, the level of material prices can have a negative impact on housing programmes. The average price increase for cement between 2005 and 2007 was excessive, at r oughly 100%. Also, the high cost of credit has had adverse effects on the cash flow of building materials enterprises. Thus, a common factor cited for low plant capacity utilization was the lack of working capital to purchase raw materials. Housing delivery is also limited due to the fact that real estate developers do not have enough capacity. Mass housing programmes will require more and skilled construction companies. The unavailability of construction companies with the required skills and expertise for the development of significant real estate projects highlights market failures which hinder housing market development.

5.1.6   Housing types and prices

Typically, the range of current housing products available in the formal residential property sector in Ghana can be categorized as shown in Table 2 (a). However, it must be noted that the product range and prices depend on the type of developer. For government construction companies and agencies such as the State Housing Company (SHC) and the Social Security and National Insurance Trust (SSNIT) they tend to deliver housing with a focus on affordable housing and so their products are arguably developed to suit this market. Since the SHC was established in 1955 it has delivered a total of about 20,773 housing units, 8,417 of which are in Accra. This is a fairly low number, considering over 50 years of operation. Over the years SSNIT has been involved in a number of housing schemes including built to rent; approximately 12,000 housing units were built under this scheme but later most were offered for sale to sitting tenants. The products and average price range of these parastatal development institutions can be seen in Table 2(b). Table 2(c) also shows the housing products and average price range of residential property developed by private developers such as Regimanuel Gray Ltd (current market leader), Manet Ltd, NTHC properties Ltd, ISADA Homes Ltd etc. Generally, houses priced at GH¢50,000 and above in 2007 comprised 70% of the total development/sale volume by private developers (GREDA 2007). Besides, most transactions above the GH¢100,000 category were in the Tema and Accra metropolis. But sales over GH¢250,000 were predominant in the city of Accra. By type, detached houses are the most preferred house type capturing over 50% of units launched by most real estate developers in Accra and Tema during the past 5 years. However, there has been an increasing trend towards, and popularity of, semi-detached houses that have relatively lower construction cost and are also attractive to smaller families. High rise units were introduced by SNNIT in major regional capitals in the country as part of their housing schemes mainly for letting but most of these units have been sold to sitting tenants. High rise buildings appear to be unpopular because of their small sizes and for reasons including cultural factors. In spite of this range of prices, most of the delivered housing units are in the mid to high income range. Most customers of private developers tend to be Ghanaians living abroad as demonstrated in Figure 1 that shows client profile of the major real estate developers. Distribution of households by occupancy status in urban areas in 2000 as shown in Figure 2 suggests a high share of rentals in Ghana. In 2000 only 24% of urban population was owner occupiers and nearly 40% were renting. The high level of housing relative to income and unaffordable mortgages contribute significantly to the high share of rentals. This phenomenon was also encouraged by certain tax advantages. Currently, the tax code (Internal Revenue Act, 2000 (ACT 592) section 17) provides a five-year tax exemption to a person earning rental income, residential or commercial but this does not apply to owner occupation. A five-year tax exemption status is also provided to real estate developers (who construct for sale) and rental management companies (that manage residential premises only), during the first five years of existence (Internal Revenue Regulations, 2001 (LI 1675) section 16). These types of residential properties for commercial purposes are growing in popularity but still make up a small element of institutional portfolios compared to offices and other types of commercial properties (SSNIT 2007). In the rental market, most cities in Ghana registered growing rentals between 2005 and 2007. But in the Accra and Tema metropolis higher rental increases of 30% to 40% were reported across all types of residential properties. Monthly rentals are normally quoted in US dollars. For a typical three bedroom house in a good location in Accra depending on facilities such as furnishing, air condition etc, the monthly rent ranges from US$400 to US$600 per month. Rents for a one bedroom flat or bed sit accommodation in down town Accra and other suburbs are between GH¢40 and GH¢60 per month. These are often with limited or shared facilities. In most situations tenants are required to make advanced payment equivalent to a minimum of one year full rent.

Table 2 (a): Typical house type and price in Ghana.

House Type	House Price GHS
Low income housing	Up to 50,000
Mid income housing	50,000  -  100,000
Mid – high income housing	100,000  - 150,000
High income housing	200,000  -  300,000
Executive housing	Over 300,000

Table 2(b): Typical house type and price range delivered by parastatals

House type	House price (GH¢)
1 Bedroom semi-detached	Up to 30,000
2 Bedroom semi-detached	35,000 – 42,000
2 Bedroom detached	48,000 – 50,000
3 Bedroom detached	60,000 – 75,000
4 Bedroom detached	Over  80,000

Table 2(c) housing products and average price range

House type	House price (GH¢)
2 Bedroom semi detached	Up to 48,000
3 Bedroom semi detached	60,000 – 80,000
3 Bedroom detached	80,000 – 120,000
3/4  detached Executive house	150,000 – 200,000
Two storey semi detached	200,000 – 250,000
Two storey detached	Over 300,000

Figure 1:  Client profile of private real estate developers in Ghana

Table 3: Estimates of average income according to expected tax return

Number of employees	% out of total	Monthly household income ranges (GH¢)
245,881	17	30-85
354,679	28	85 – 415
781,623	52	415 – 835
32,881	2	835 - 1,665
17,710	1	Above 1,665

Table 4: Characteristics of housing loans in Ghana mortgage market

Loan Types	Loan Characteristics
	Resident Ghanaian (Cedi Loans)	Nonresident Ghanaian (Foreign currency loan)
Home purchase mortgage     Maximum loan    Minimum down payment     Maximum term     Processing fee     Deposit against statutory       fees (towards registration        of legal documents)	$120,000 or cedi equivalent (revised upward) 20% of proposed loan 20 years 1.5% of proposed loan 3.5% of proposed loan	$120,000 (revised  upward periodically) 20% of proposed loan 20 years US$250/£150 3.5% of proposed loan
Home Completion Mortgage   Maximum loan   Minimum contribution   Maximum term   Processing fee   Facility fee   Management fee   Legal fee	$120,000 or cedi equivale 50% of cost, construction 15 years 1.5% of proposed loan Nil 2.5% of proposed loan 1% of proposed loan	$120,000 or cedi equivalence 50% of cost, constru. at lintel 15 years $250 / £150 1% of proposed loan 2.5% of proposed loan 1% of proposed loan
Home Improvement Mortgage   Maximum loan  Maximum term    Processing fee    Facility fee    Deposit against statutory       fees  (towards registration      of legal documents)	50% of the value of the property and not exceeding the ceiling of $45,000 or its equivalent in cedis 15 years 1.5% of proposed loan Nil 2% of proposed loan	15 years US$250/£150 1% of proposed loan 1% of proposed loan
Home Equity Mortgage    Maximum loan    Maximum term    Processing fee    Facility fee    Deposit against statutory      fees (towards registration      of legal documents)	80% of the forced sale vale of the property or $120,000 its equivalent in cedis (whichever is lower) 15 years 1.5% of proposed loan Nil 1% of proposed loan	15 years US$250/£150 1% of proposed loan 1% of proposed loan
Buy, Build and Own a Home    Maximum loan (BUY   LAND)    Minimum loan (BUILD)         Maximum term    Minimum down payment       Processing fee    Facility fee    Design and inspection fee	$15,000 or its equivalent in cedi $35,000 or its equivalent in cedi 10 years each for a total of 20 ye 10% of total cost of the land 1.5% of proposed loan Nil 1% on Build and Own portion of loan only(3.5% of loan on new plots)	$15,000 $35,000 10 years each for a total of 20 10% of total cost of the land $250/£150 per each proposed loan 1% per each proposed loan

Figure 2: Distribution of households by occupancy in urban areas, 2000

5.1.7.    Factors affecting the development of a vibrant mortgage market in Ghana.

Informal financing approach to the provision of housing has prevailed and dominated the economy of Ghana since independence. Efforts to institutionalize the system of financing housing have been limited by either an unstable macroeconomic environment or a weak legal and regulatory environment. For instance, the First Ghana Building Society (FGBS), Bank for Housing and Constructions (BHC) and Social Security Bank were established to develop formal financing alternatives for housing. However, they made little or no impact in the mortgage industry primarily due to the absence of long-term financing opportunities necessary for the development of a well functioning mortgage market. Indeed, an efficient and sustainable mortgage industry thrives on activities in the secondary mortgage market where mortgage-backed securities (MBS) are traded. Such a system links investors, housing suppliers and house buyers (households) in a sustainable housing delivery framework. The reasons for the lack of development of this framework in Ghana can be attributed to both supply side factors on one hand; and demand side factors on the other.

5.1.8    Research Of House Providers And   Mortgage Providers

A survey on estate developers was conducted on the members of the Ghana Real Estate Developers Association (GREDA) in the Greater Accra, Ashanti, Central and Western Regions to sample respondent views on some important issues relating to the development of the housing market in Ghana, and ascertain the underlying causes of the sustained rises in property prices in\ recent times. Both interview schedules and questionnaires were used as survey instruments.  In all, a total of twenty-two (22) active members out of the total number of registered GREDA property developers  in the selected regions. (See Appendix for sampled list) The study did not include non-registered members of GREDA.

5.2.1     Role of Mortgage loan in Ghana.

Mortgage financing, also called loan administration, is the performance of the administrative duties associated with the loan from the time it is closed until it is paid off at the end of the loan term. Mortgage financing facilitates the day-to-day operations of a mortgage bank. It comprises the following activities:

       5.2.1.1   Mortgage Accounting.

The servicing of mortgage loans requires transfer of moving mortgages, accounting collection and there cording of monthly mortgage payments from borrowers, and the transfer of funds to investors.

      5.2.1.2    Customer Administration.

Servicers are responsible for answering any questions borrowers may have about the loan; officers in the servicing function answer questions, solve problems, and correct most errors in borrower records.

      5.2.1.3    Taxes, Insurance and Escrow Administration.

To protect the investor’s interest in the property, the servicer usually requires that the borrower makes monthly deposits to an escrow or impound account. The servicer then uses the money in the escrow account to pay property taxes and insurance premiums when they come due.

     5.2.1.4   Asset Management.

Servicers are also responsible for taking action when accounts become delinquent.  The aim is to work with the borrower to bring the account up to date and avoid lengthy and costly legal action. Mortgage servicing is where the bulk of a mortgage banker’s net income is produced. In fact the mortgage-servicing group is charged with the responsibility of safeguarding the mortgage banker’s most valuable asset, and usually it may be appropriate to call it the “backbone” operation of the mortgage banker. In a sense all the activities in the mortgage lending cycle are preparatory to setting up a profitable financial asset in the servicer’s books.

Origination is a necessary cost to mortgage banking. While origination fees are collected and applied against lender overheads, origination expenses usually exceed such fees. The income from servicing pays for the losses incurred in mortgage origination (Jess et al, 1997).Origination is the securing of a completed application from a prospective borrower and beginning the process of gathering supporting loan documentation. The link between origination and servicing is that origination, being the initial assessment of the mortgage process, will impact on the financing function; wrong assessment will create high default rates on the mortgage portfolio.  

5.2.2     Importance of Mortgage loan in Ghana.

5.2.3        Functions of Mortgage loan.

5.2.4         The link between Mortgage loan and corporate loan.

5.2.5        Models of mortgage loan market in Ghana.

Household Borrower

Lending Institution

Financial Advisor / Mortgage Broker

Securitization vehicle selling Mortgage Backed Securities

Retail Deposits with a Mortgage Lende

Global Capital and Money Markets

Other Retail Savings

Domestic Savers

Pension Funds Life Insurance Companies Unit Trusts

Overseas Savers

 

Figure 3: A Model Mortgage finance Industry.

5.3.0 Empirical Literature

Under the empirical review of the research question on evaluating the performance of mortgage loan in Ghana on a similar topic ‘the housing market in Ghana conducted by research department of bank of Ghana.

With reference to research department of bank of Ghana his project work finding brought out the following performance of mortgage loan in Ghana. His research sought to find out how mortgage loan product performed and how it is able to solve housing problems in Ghana.

The study reveals three major performances of mortgage loans in Ghana. This includes the availability of mortgage financers, the flexibility of the mortgage types in Ghana, and strong development of the industry. Hence, relevant and appropriate policies and procedures can be developed and implemented performance for an effective housing in Ghana.

6.0 METHODOLOGY

6.1 Introduction

This section of work discusses the research procedures that were adopted to carry out the study. It mainly focuses on the population and type of research conducted. It enhence, plot out, sources of data, population, sample size, sample method, data collection tools analysis of data with relative to the study.

6.2 Research Design

Both descriptive and quantitative survey method was used in this research work. This stems from the fact that a descriptive or qualitative survey involves the act of collecting, organizing, summarizing and presenting data in a manner that quickly and easily describe the given data (Nyarko Asiamah 2010).

To continue, quantitative survey method was also used in the analysis of questions, hypotheses, and the interpretation of data with a view of generalizing the results of the sample for the corresponding population parameter in our study. They basically involve data sets that are inherently numerical and non- numerical.

6.3 Sources of Data  

Source of date is made up of both primary and secondary data were used in conducting this study.

6.3.1        Primary Data

This is the name given to data that are used for the specific purpose for which they were collected. They consist of data collected at first hand in order to satisfy the purpose of a particular research. The instrument used for the collection of data was a questionnaire administration and interview conducted in some special cases were clarification of certain question was important. Questionnaire was considered as a suitable for this study because it was easier for respondent to explain and complied at their own convenience. Moreover, interviews were conducted on respondents to gather some relevant information. An interview as defined by Lewis and Thorn Hill (2000)   is purposeful discussion between two or more people.

Interviews were also conducted to obtain certain data, which was important to the study where satisfactory response could not be obtained from the use of questionnaires. This method offers a fast means of gathering relevant data for the purpose of obtaining substantial information on the research objectives (Oppenheim 1992).

6.3.2        Secondary Data

Unlike primary data secondary data, is the name given to data that are used for some purpose other than that for which they were originally collected. Some of these may include; news papers, journals, magazines, textbooks, internet (websites) and the like. The research group consulted some of the above examples for the study.

6.4 Research Population

The population for the study is Ghana Home Loans Company Limited (GHL) (Head Office) and Home Financing Company Limited (HFC) (Legon Branch).

6.5 Sample size

The sample size represents the subset of the identified population. This include the Head of operation department all departmental and offices in administrative functions.

6.6 Sampling method

The research group used the simple random sampling method. The operation departmental Head were randomly selected to aid and provide certain information to the researchers. This method was to ensure that every possible element of the defined population has an equal or fair chance of being of selected.

6.7 Data Collection Tools

The data collection tool was a self development instrument which was basically descriptive and qualitative methods.

6.7.1        Descriptive Method

This method was used to provide a systematic description of the data collected. This includes percentages, charts, frequency tables and graphs.

6.7.2        Qualitative Method

This method was used in an interview responses received to generalize the opinions and attitudes of respondents. However, the type of person interview was both structured and unstructured interview.

6.8 Analysis Of Data

6.8.1 Demographic distribution of respondent (Operational manager)

Table 2 (source field data 2011)

Table 4: Source field data 2012

Variable	Description	Frequency
Gender	Male	2
Age (years)	48	2
Occupation	Operational manager	2
Marital status	Married	2

6.8.2   Distribution of housing in Ghana.

Table 5: Distribution of housing in Ghana

Distribution	Percentage
Compound Houses	46%
Detached	25%
Semi Detached	15%
Flat/Apartment	4%
Tents, Kiosks, Containers etc	2%
Huts, structures  in compound houses	4%
Others	4%

Figure 3:  Distribution of housing in Ghana

6.8.3 Research question

According to GREDA, the largest number of registered property developers in the country is located in the Greater Accra Region, particularly the Accra and Tema Metropolitan Areas. These constitute not less than 70 per cent of the total number of developers in the country. Table 6 provides the regional distribution of the respondents and the respective years of operation. Out of the 21 sampled developers, more than half of the respondents were located in the Greater Accra Region, followed by Ashanti, Western and Central respectively.

Table 6: Distribution and length of Operation of the Respondents.

Regions	Number of years in operations
	1–10 years	11-20 years	>20 years	Totals	Percent %
Western	1	--	1	2	9.5
Central	2	--	--	2	9.5
Ashanti	2	3	--	5	23.8
Grater Accra	5	4	3	12	57.1
Totals	10	7	4	21	100

The same distributional trend applies to the years of experience of the respondents. The greater number of experienced developers in the country is located in the capital than all other regions. In general, however, the survey showed that most of the respondent real estate developers have been in operation six years and more. 

Table 7: Type of Housing Units Produced by the Respondents

Types of Units	Number of developers	% of total developer
Semi detached	14	63.6
Standard detached	16	72.7
Flats	4	18.2
Luxury house (detached)	1	4.5
Stores and Offices	19	86.4
Students Hotel	1	4.5

The research results also indicate that the type of housing units developed in the country includes semi-detached and detached residential homes, condominiums and others such as student hostels and luxury holiday homes. Table 7 gives a breakdown of types of housing units.  Only a single respondent (4.5%) indicated that it produces luxury detached housing units.  Majority of developers in the market produce semi-detached (63.6%), standard detached (72.7%) or both.  It is also worthy to note that 86.4 percent of the respondents are engaged in the production of units for stores and offices whereas little interest is shown in the production of accommodation for students.

7.0 FINDINGS

7.1 Introduction

The research group carried out the study at Ghana Home Loans (GHL) and Home Financing Company (HFC) bank. The main purpose of this study was to evaluate the performance of mortgage loan in Ghana. Upon a successful data analysis the following findings were reached.

In terms of addressing the performance of Ghana Home Loans (GHL) and Home Financing Company (HFC) the following results was achieved.

Table 3 (Field data)

MORTGAGE FINANCING  Descriptive Statistics
1.       Timeliness of the Mortgaging Transaction Process	Min	Max	Mean
Housing Finance Clients get/are treated gently even when are not able to service the Mortgage transaction.	2.00	5.00	3.5714
Few clients are complaining about the many installments within which to service the mortgage	2.00	5.00	3.500
Housing Finance clients are expected to keep the time schedules within which to service their  mortgage agreements	4.00	5.00	4.600
Clients discuss with Housing Finance management about the time within which to service their mortgages	4.00	5.00	4.222
Housing Finance delivers its mortgage services within the time periods that it projects	2.00	5.00	3.444
2.       Default Rate In the Mortgaging Transaction
Once clients fail to service their mortgage transactions, they easily resolve these cases with Housing Finance	2.00	4.00	2.700
In case of failure to service the Mortgage, Housing Finance policies are favorable for her clients	2.00	5.00	3.500
Housing Finance has few clients on record who have failed to service their mortgage transactions granted them by the financial institution	2.00	5.00	3.800
We feel that the time within which to service mortgages is favorable to the ends for which clients acquire mortgages	2.00	5.00	4.000
Conditions of mortgage servicing are all set by Housing Finance though client participation is highly welcome	1.00	5.00	3.800
Increasingly, more clients of Housing Finance are servicing the mortgages acquired from this institution	2.00	5.00	3.800
Many individuals are willing to access Housing Finance Mortgage services without fear of the consequences of failure to service the mortgages	2.00	4.00	3.300
Housing Finance’s mortgage department is never worried that clients will not service their Mortgages	1.00	4.00	2.375
3.      Interest Rate of the Mortgaging Financing
Clients are free to negotiate for interest rates.	1.00	2.00	1.777
Mortgaging is very profitable for Housing Finance because of Interests charged	2.00	5.00	3.444
Interest rates can be varied by Housing Finance	2.00	5.00	4.000
A fresh mortgage can be issued given if a client has not completed servicing the previous mortgage	4.00	5.00	4.300
4.      Turn Around Time for Mortgaging Transactions
Housing Finance considers the urgency of issuing the mortgage to a client	2.00	4.00	3.4000
The Mortgage process is simple	2.00	4.00	2.500
The Mortgage department normally updates clients on the progress of their mortgage applications	2.00	4.00	3.600
5.      Review of Profitability at Housing  Finance
Housing Finance’s profitability has been growing for the past 5 years Housing	4.00	5.00	4.100
Finance’s NPL Position has been declining for the past 5 years Housing	3.00	4.00	3.888
Finance’s provisions for non-performance have been declining	2.00	4.00	3.700
6.      Market Share of Housing Finance
Housing Finance introduced several new products in the past five years	2.00	5.00	3.600
Housing Finance constantly devises means and strategies of reaching out to its clients.	2.00	4.00	3.500
Housing Finance’s loan portfolio has been growing.	3.00	5.00	4.100
Our clientele is growing.	4.00	5.00	4.2500
Housing Finance’s share of total loans has been increasing in the banking industry	3.00	5.00	3.900
Housing Finance is favorably competing with other institutions in the industry	4.00	5.00	4.100
Customer confidence in Housing Finance has improved.	4.00	5.00	4.2000

8.0 CONCLUSION AND RECOMMENDATION

8.1 Conclusion

8.1.1   Nature of the mortgage financing transaction.

The researcher reviewed the nature of the mortgage servicing at Housing Finance Bank and observed that clients discuss with Housing Finance Bank management about the time within which to service their mortgages. However, even when Housing Finance Bank clients are unable to service their mortgage transactions, the company treats them gently. At the same time, however, respondents reported an uncertainty as to whether Housing Finance Bank can deliver its mortgage services within the time periods that it projects for the clients. The turnaround times are quite irregular varying between one month to six months or even more. From the findings of chapter four, the researcher further noted an uncertainty as whether the clients who fail to service their mortgage transactions can easily resolve these cases with Housing Finance. The results further indicated that loan officers are worried whether clients will service their mortgages and they are also not sure if individuals are willing to access Housing Finance Bank mortgage services without fear. Potential clients’ fears may include, though not be limited to; embarrassment and loss of surety assets such as land titles and other items at stake due to a client’s undertaking of the mortgage transaction. Housing Finance’s Mortgage transactions are also characterized by the company’s dictation of the interest rate terms and the company can vary the interest rates as it deems fit. The institution expressed uncertainty as to whether mortgaging is very profitable because of interests charged. The results further revealed that Housing Finance Mortgage department does not consider urgency in processing client’s mortgage transactions in spite of the fact that Housing Finance endeavors to update clients on the progress of their mortgage applications.

The relationship between mortgage financing and performance.

A positive and significant relationship between mortgage servicing and performance indicates that if mortgages are professionally and efficiently handled, this can result into a significant improvement in the performance of Housing Finance Company.

Implication of the findings of the research.

Basing on the available literature and the results of this study, the following are some of the possible implications of this research to the institutions in the banking industry in Ghana and other countries in Africa.

i)                    Loan officers’ uncertainty as to whether their department can actually deliver the mortgage transactions in the time that it promises speaks of inefficiency at the work place. This can result in loss of potential clients as they learn from others through negative word-of-mouth thus leading to a poor performance of the company.

ii)                   Results indicate that in case clients are unable to service their mortgages it is not easy to resolve these cases with Housing\ Finance. This creates a negative corporate image for the company although the corporate image has a positive relationship with the performance of an institution.

iii)                The mortgage department is unsure as to whether the clients of Housing Finance are very willing to access these mortgage transactions of the bank without any fear. On the other hand, the clients have their own fears they attach to these mortgages. This creates a very low turn-up for the mortgages, implying the bank will realize less from the mortgages.

iv)                Housing Finance dictation in matters of the interest rates without any client participation may not always be convenient for the client depending on the nature of economic activity they engage in. The interest installments may be set so as to hinder the progress of the client since the client participation is not entertained.

v)                   Results also indicated that the Mortgage department is slow at processing the Mortgage transactions with its clients. This can lead to dissatisfaction of the clients or make them look for alternative institutions to help meet their needs and hence Housing Finance loses out. In conclusion, a positive relationship between mortgage servicing and performance implies that efficient and skillful handling of mortgage servicing transactions will lead to a better performance of Housing Finance.

8.2 Recommendation

In close relation to the research findings the following recommendations are suggested to firms in the banking industry in Ghana and any other related ones:

i)          Housing Finance Bank mortgage department should train its loan officers so as to ensure that they attain skills to enable they process the mortgage transactions in time to meet the client needs.

ii)         The Company should implement friendly policies for the clients who fail at servicing their mortgage transactions so as to avoid a negative corporate image with the public. Handling the clients who are unable to fulfill their part of the mortgage deal roughly would discourage other potential clients.

iii)        To have adequate knowledge of clients’ views on their mortgage transactions, the mortgage department should conduct a market survey so that it can get the actual views of the clients.

iv)       Due to the varying capabilities of clients in servicing their mortgage transactions, Housing Finance should allocate mortgages to clients all the while allowing\ them to have an input on the interest rates to be charged.

v)         The Mortgage Department needs to come up with various work-out options for clients as a measure of effective customer administration and management of defaults.

vi)        The servicing function to be out sourced as an alternative to other companies that are professionally competent in that area. This will enhance the bank’s performance and corporate image.

vii)       Housing Finance Bank should take advantage of technology and innovatively introduce electronic products and processes that will ease the servicing function roles, increase efficiency, increase the market potential, and increase customer satisfaction and profitability.

viii)      New products and more innovative ways in terms of the interest rate to be charged should be introduced and adopted. For example Housing Finance Bank should segment the market in terms of earning capacity and introduce the graduated payment mortgage, where the interest rate is gradually increased with the level of income for a defined period. This will increase the number of borrowers especially from the untapped market and effectively control the number of defaults especially for the business community whose incomes usually fluctuate.

ix)        A more proactive approach to enhance\ the performance of the servicing function would be to separate it from the other section of the mortgage department under a specialized manager with a well remunerated workforce with measurable performance measures.

x)         Housing Finance Bank should institutionalize a customer management system so that customized communication is channeled to clients individually. This will introduce a people friendly approach especially when dealing with defaulters and also establishing reasons for default individually.

REFERENCES

ü  The housing market in ghanaprepared byresearch departmentbank of Ghana November 2007.

ü  Ghana Home Loans Limited link;

ü  Social Security and National Insurance Trust (SSNIT) Interview with Head ofdevelopment, Social Security and National insurance Trust Mr. Sam Twum, August, 2007

ü  ISADA Homes, Interview with ISADA Homes Ltd proprietor, Mrs V ivian Poku, August 2007.  

ü  Ghana Real Estate Developers Association (GREDA 2007) – Interview with President of  GREDA, August 2007.

ü  Karley, N K and S Akomea (2007) An overview of the Real Estate Market in Ghana, Paper presented at the 12th asres

APPENDIX

Appendix 1.   Research Questionnaire

INSTITUTE OF PROFESSIONAL STUDIES (IPS), LEGON

DEPARMENT OF ACCOUNTING AND FINANNCE

Dear respondent,

Hello, we would be grateful if you can spend some minutes answering these questions. Please be assured that this is purely an academic exercise and all responses will be considered with utmost confidentiality.

Topic: EVALUATING THE PERFORMANCE OF MORTGAGE LOAN IN GHANA?

SECTION A: BACKGROUND INFORMATION

1. Gender                    Male    [     ]                 Female            [    ]

2. Age of respondent in years

Tick under one of the options	18 - 30	31 – 40	41 – 50	Over 50

3. Highest level of education

Qualification	Ordinary level	Advance level	Diploma	Degree	Post Graduate	Other (Specify)

4.         How would you rank your position at Housing Finance

Tick under one of the options	Top Management	Middle Management	Lower Management

5. How long have you been working with Housing Finance

Tick under one of the option	0-2 years	3-5 years	Over 5 years

No.	SECTION B: BANK PERFORMANCEF or this section, please indicate your level of agreement to the statements byticking	Strongly Disagree	Disagree	Not sure	Agree	Strongly Agree
	• Profitability
1	Housing Finance’s profitability has been growing for the past 5 years
2	Housing Finance’s NPL position has been declining for the past 5 years,
3	Housing Finance’s provisions for non performance has been declining
	• Market Share
1	Housing Finance introduced several new products in the past five years
2	Housing Finance constantly devises means and strategies of reaching out to its clients.
3	Housing Finance’s loan portfolio has been growing.
4	Housing Finance’s share of total loans has been increasing in the banking industry
5	Housing Finance is favorably competing with other institutions in the industry
6	Customer confidence in Housing Finance has improved.
7	Our clientele is growing.

SECTION C:

Please tick, circle or write where appropriate

1.      What type of services do the Ghana home loans provide?

…………………………………………………………………………………………………………………………………………………………………………………..

2.      What are some of the benefits enjoyed by your clients?

……………………………………………………………………………………………………………………………………………………………………………………

3.      How many divisions and branches have the firm?

(i)                 Division ………………………………………………

(ii)               Branches ……………………………………………...

4.            Does the firm face any administrative problems?

           Yes                          No                

            If yes, state some …………………………………………………………………………………………

……………………………………………………………………………………………………………………………………………………………………………………….

5.            Do Ghana home loans face any competitions?           

           If yes, name some of the competitors …………………………………………………………………………………………………………………………………………………………………………………………………………

6.      How does your organization finance mortgage loans and invest funds in high yielding area to ensure growth in the economy?

…………………………………………………………………………………………

…………………………………………………………………………………………….……………………………………………………………………………………

7.      Types of mortgage facility you have in your organization?

First Time Purchase   [   ]              Refinance                  [   ]                  Equity Release                               [   ]             Buy To let                       [   ]        

Home Completion    [   ]

8.      Into what purpose do you grant loans?

……………………………………………………………………………………………………………………………………………………………………………………

9.      What is the mode of application for a mortgage loan in your company?

……………………………………………………………………………………………………………………………………………………………………………………

10.  What is the repayment period of tour mortgage facilities?

……………………………………………………………………………………………………………………………………………………………………………………

11.  What type of currencies those the company applies on mortgage loans?

Ghana new cedi    [  ]            US dollar      [  ]               Euro   [  ]            Pounds    [  ]

12.  What are the strategies Ghana home loans adopt when there is high inflation and high interest rate in the country?

…………………………………………………………………………………………….……………………………………………………………………………………

13.  What is your opinion about the improvement in the housing market of the economy?

……………………………………………………………………………………………………………………………………………………………………………………

14.  What kind of contribution does your organization make to improve the economy?

……………………………………………………………………………………………………………………………………………………………………………………

9.      What are some of the forms of motivation given to the workers/others to increase their output?

……………………………………………………………………………………………………………………………………………………………………………………

10.  What are your mortgage endowment policies?

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………..

11.  What kind of mortgage products do Ghana home loans have in stock for their clients?

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

12.  What is the size of mortgage loan and method of repayment?

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

13.  What are the terms of initial payment and how payment is effected?

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

14.  Which companies are Ghana home loans presently partnering with?

……………………………………………………………………………………………………………………………………………………………………………………

…………………………………………………………………………………………

15.  Who qualifies for a mortgage loan?

……………………………………………………………………………………………………………………………………………………………………………………

16.  How has mortgage loan helped to improve the life of beneficiaries?

……………………………………………………………………………………………………………………………………………………………………………………

17.  What is your assessment as to the performance of mortgage loan in Ghana and how has it benefited the populace as a whole?

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………..

18.  What are your main challenges concerning mortgage loans?

…………………………………………………………………………………………………………………………………………………………………………………………………

19.  How has the populace responded to mortgage loan sensitization in Ghana?

…………………………………………………………………………………………………………………………………………………………………………………………………

20.  What will be your general assessment in respect of mortgage in Ghana?

…………………………………………………………………………………………………………………………………………………………………………………....

Thank you very much for your time

Personal signature__________­­­_____