Mortgage finance is loans that are given to bank customers to allow them purchase homes. Mortgage finance may include loans to purchase land to build a home.
Mortgage finance business and commercial banks
For a long time, commercial Banks shied away from Mortgage financing. They argued that it was such a long term financing and most of them were not ready to tie down their customers deposits for such a long extended period. They preferred lending for medium term (that is three to five years) and short term (that is two years and below). Mortgage financing was therefore left to institutions which were specialized mortgage financing institutions, for example, Housing Finance Corporation of Kenya (HFCK).
However, with increased demand in the market in recent years for property ownership and competition in the banking industry, the Commercial Banks have had to re-evaluate their previous position on mortgage financing. With so many Banks penetrating the market, banks have had to think outside the box to enable them survive in banking industry.
Strategies in use by commercial banks to enter mortgage finance platform
Unfamiliar territories come with great challenges, which if not tackled well will result in huge failures. Some of the commercial Banks have decided to build synergies with already existing mortgage financing institutions by purchasing shares in these institutions. The main advantage of this is that they obtain human expertise. The banks provide capital financing.
Other commercial banks have opted for the option of creating mortgage finance departments. these option comes with challenges for the new enttrants into mortgage finance.
Challenges faced by banks as new entrants to mortgage finance.
- Lack of knowledge and experience-Most new mortgage finance banks have little understanding about the property market and end up dealing with un-scrupulous property developers who overvalue the properties. These properties are over-valued because of the demand which is not marched to the supply.
- Staff de-motivation due to lack of expertise by the employees on the concept of mortgage finance. This has resulted in frustration for both the employees and their customers.
- Raising capital by the commercial banks to accommodate mortgage finance. the banks have to explain to existing and potential shareholders the importance of venturing into this new line of financing and this is not easy. Shareholders must be convinced and give consent for such large capital outlays.
- Identifying the right property developers to work with and who will not take advantage of the banks customers in terms of the property value and even reliability.
- Time constraints while balancing the expectations of the shareholders in terms of immediate returns verses the reality that the benefits from mortgage finance will not be released immediately. Closing a deal on mortgage finance would not be as fast and the returns are realized after a long time.
However, the commercial banks are in the right track as this is the current growth area to be tapped in order to survive the market. Diversification is the key to survival for banks in highly competitive markets and Commercial banks must get into mortgage finance business to reap the benefits.