Relationship between the type of mortgage and the level of non-performing loan portfolio in the mortgage companies in Kenya

Abstract

The need for decent housing is fundamental to human survival. To satisfy this need, individuals seek to invest in home ownership. Often this is the single most significant investment in a lifetime. These home investments are financed through mortgage arrangements. Mortgages are long term loans primarily financing home acquisition or development. The primary risk that the mortgage company faces in advancing mortgage is that of default. Due to the prevalence of the default risk, mortgage companies will have stringent criteria for all mortgage applicants .The property financed will further be pledged as collateral for the loan. This, alongside other mitigation's of risk, ensures that the impact of mortgage defaults on the mortgage company's profitability is minimized. In spite of these factors, the non-performing loans in mortgage companies continue to pose a major challenge to the industry. This study focused on non-performing loan stocks in mortgage companies in Kenya. In particular, the project studies the relationship between the type of mortgage offered and the level of non-performing loan stock. The study relied on secondary data obtained from the industry regulators for the period 1999 to 2005 .The studies identifies the categories of mortgage as fixed rate mortgages, adjustable rate mortgages, income property mortgages. capital repayments mortgages interest only mortgages and capped rate mortgages. It explores the sources of risk in mortgage financing and identified the key ones as the interest rate, inflation, defaults, business, financial, liquidity, management, legislation and Environmental regulations .The study identifies factors determining mort~ge pricing as anticipated inflation. default risk premium and the real rate of interest. The findings of the study reveal that a positive relationship exists between the type of mortgage offered and the level of non-performing mortgage portfolio.