Mortgage Risk and Market Returns of Public Mortgage Originators Listed at Nairobi Securities Exchange; Kenya

Abstract

Since the year 2010, there have been fluctuations with reference to the market returns of publicly listed mortgage originators in Kenya. This is despite the fact that Kenya’s mortgage market is underdeveloped and therefore has the potential and opportunity for growth. Kenya’s mortgage debt to GDP ratio is low when compared to other developing countries like South Africa and Namibia. Despite this challenge, existing literature is inconclusive with reference to the relationship between mortgage risk and market returns of publicly listed mortgage originators in Kenya. It is for this reason that the overall objective of this study was to determine the effect of mortgage risk on market returns of public mortgage originators in Kenya. The specific objectives of this study were to determine the effect of residential mortgage fallout risk, mismatch risk, default risk, price risk on market returns of Kenyan publicly listed mortgage originators; and to find out the moderating effect of firm market risk on the effect of mortgage risk on market returns of Kenyan public mortgage originators. The theoretical model of the study was based on six theories namely modern portfolio theory, the loanable funds theory of interest, title and lien theory, liquidity preference theory, efficient market hypothesis, and the random walk theory. The six theories postulated risk mitigation measures that can be utilized by mortgage originators to positively enhance their market returns. Descriptive research design was used. The study furthermore utilized quantitative research approach. A census of all the 11 publicly listed mortgage originators in Kenya was utilized. The study sourced for secondary data from the following sources: Central Bank of Kenya (CBK), Nairobi Securities Exchange (NSE), and financial statements of the 11 publicly listed mortgage originators. Annual secondary data was sourced from the year 2009 to 2019, the study period. A panel data regression model was used to determine the relationship between the study’s independent and dependent variables. In addition, descriptive and inferential statistics were utilized to draw inference from the data collected. The study made use of the following descriptive statistical tools: mean, standard deviation, skewness and kurtosis. For inferential statistics, the following measures were utilized: correlation coefficient, z-tests, chi-square tests, and R square statistic. The findings revealed that residential mortgage fallout risk has a positive effect on the market returns of publicly listed mortgage originators. In addition, residential mortgage mismatch risk had a positive influence on the market return rate for publicly listed mortgage originators. Findings further revealed that residential mortgage default risk has a negative effect on the market returns of public mortgage originators. In addition, residential mortgage price risk has a significant negative effect on the market returns of public mortgage originators. The findings further revealed that firm market risk had a significant moderating effect on the effect of mortgage risk on the market returns of publicly listed mortgage originators in Kenya. It is recommended that mortgage originators: source for cheaper sources of long-term capital funds in order to mitigate mismatch risk; develop effective strategies of reducing their non-performing loans; use derivative instruments and competitive interest rates in order to hedge against fluctuations in interest rates. The limitation of the study was that it only focused on public mortgage originators as its study population. However, there are other firms which originate mortgages which were not included in the study sample.