Presentaci

1
Mortgage Market in Mexico
2
Contents

• Introduction
• Demographic Dynamics, Housing Demand and
  Financing Needs
• The Mexican Mortgage Market including FOVI/ SHF
  role
• Securitization Model for Mexico and Current
  Strategy
• Pension Funds BORHIS
• Low-Income Mortgage Alternatives
• Challenges ahead in Housing Finance

3
SHF Mandate activities, Mission Vision

• SHF was created in 2001 as a government
  financial institution oriented to foster the
  development of the primary and secondary mortgage
  markets.
• As a Mortgage bank SHF grants long term
  financing to financial intermediaries and covers
  their interest rate risk. SHF does not lend
  directly to individuals.
• As a Guarantor SHF offers products like
  mortgage insurance and financial guaranties.
• Until 2013, SHF will have the 100 guarantee
  from the Federal Government. After 2009 SHF will
  not be able to grant finance, hence, it is
  necessary to develop alternative mechanisms of
  housing financing.
• SHF considers the securitization of mortgages as
  the most efficient mechanism of housing financing.

Mission Lead the development of a competitive
market in order to allow all Mexicans be able to
acquire a residence.
Vision To be an innovative institution in
solutions to develop social housing.
4
Contents

• Introduction
• Demographic Dynamics, Housing Demand and
  Financing Needs
• The Mexican Mortgage Market including FOVI/ SHF
  role
• Securitization Model for Mexico and Current
  Strategy
• Pension Funds BORHIS
• Low-Income Mortgage Alternatives
• Challenges ahead in Housing Finance

5
Over the next 25 years, the number of households
will grow at an annual rate of 2 and the year of
2012 will have the larger number of household
formation.

• From 2000 to 2030 the number of households in
  Mexico will grow 83. These favorable population
  dynamics is coupled with an annual per capita
  income of approximately USD 9,500

• According to official estimates, 672,018 new
  households were formed during 2005 throughout the
  country. This figure will rise up until 2012,
  when 691,242 new households will be formed.

Number of Households in Mexico
Population by Age Groups in 2004
Million Households
Source CONAPO
Source CONAPO
/ PPP Methodology
6
Housing Demand

• In Mexico, there are 26.7 million families of
  which
• 17.2 million already have an adequate house.
• 9.4 million families do not have an adequate
  house and havent been attended yet.
• Annually, around 500,000 new families are
  generated, of which approximately 60 are in
  conditions of demanding a mortgage loan.
• In addition to the families that do not have an
  adequate house, there are 4 components that
  together generate the annual housing demand.

Source INEGI.
7
Housing Demand Strengthening of the Middle Class
DISTRIBUTION OF FAMILIES ACCORDING TO THEIR
INCOME ()

• A gradual increase of the middle class is
  expected. This will allow a strengthening of the
  housing demand from financially healthy families.
• Between the year 2000 and 2006, the percentage of
  families that received more than 12.9 dollars a
  day increased from 72.8 to 80.2.
• The low income sectors are the ones that have
  experienced greater increases in their income per
  family between the years 2000 and 2006.

In 2006, 80.2 of the families received more than
12.9 dollars a day
Dollars Earned per Day
STRENGTHENING OF THE PURCHASING POWER OF THE LOW
AND MIDDLE CLASSES
Quarterly Income per Family (Dollars)
Source INEGI.
8
Demographic dynamics a challenge and opportunity
in the mortgage market

• Even under very conservative assumptions, SHF
  estimates that the residential mortgage portfolio
  will grow from USD 80,724 millions in 2007 to
  USD 338,300 millions 2020.
• The flow of financial savings available in the
  country will not be sufficient to finance the
  growth of mortgage portfolios. The sale of
  mortgage portfolios to domestic institutional
  investors as well as foreign investors is an
  absolute must to maintain the growth of the
  mortgage sector.

The projections of the mortgage portfolio are
based on potential estimated demand assuming an
3 annual growth rate for GDP and the same
levels for mortgage rates than those of 2006.
To attend the growing demand of mortgage loans in
the following years, it was necessary to develop
a Residential Mortgage Backed Securities market.
9
Contents

• Introduction
• Demographic Dynamics, Housing Demand and
  Financing Needs
• The Mexican Mortgage Market including FOVI/ SHF
  role
• Securitization Model for Mexico and Current
  Strategy
• Pension Funds BORHIS
• Low-Income Mortgage Alternatives
• Challenges ahead in Housing Finance

10
The industry is still dominated by the two
Federal Housing Funds, INFONAVIT and FOVISSSTE.

• About ¾ of loan originations still do not
  involve a private intermediary undertaking at
  least part of the risk inherent to the
  transaction. FOVI/SHF has greatly diminished its
  importance as the funding source for mortgages
  originated by private intermediaries thanks to
  the development of the market.

Mortgages by Financing Source
2002
2006
Total 341,939 Loans
Total 675,041 Loans
11
INFONAVIT

• The board of directors is represented by workers,
  employers and the Federal Government.
• INFONAVIT receives on a monthly basis, 5 of the
  formal private sector workers payroll, and
  credits to personal accounts.
• INFONAVIT loans, interest rates and payments are
  indexed to the minimum wage (MW).
• INFONAVIT interest rates are not market rates,
  there is an implicit interest rate subsidy on all
  its lending.
• INFONAVIT relies on payroll deduction for its
  collections when borrowers are employed by firms
  in the private sector. Collection mechanisms for
  unemployed borrowers or those migrating to the
  public or the informal sectors still need to
  improve.
• Average dollar amount of their loans 22,000

MW usd 148.4 per month
12
FOVISSSTE

• Similar to the objective and sources of funding
  from INFONAVIT, FOVISSSTE is a wage-based housing
  fund for federal employees, and is the
  institution in charge of providing housing
  financing to over two million of federal
  government employees.
• The board of directors is represented by
  different government agencies and by ISSSTE (the
  public pension fund for federal employees).
• FOVISSSTE receives on a monthly basis, 5 of the
  federal employees payroll, and also collects
  through a pay-roll deduction mechanism.
• FOVISSSTE loans, like those of INFONAVIT, are
  indexed to the minimum wage and pay lower than
  market interest rates however to a greater
  extent.
• FOVISSSTE lags behind INFONAVIT on revamping its
  operating procedures, particularly regarding the
  servicing of the loan portfolio.

13
BANKS

• Until 1994, banks were the only private
  intermediaries doing mortgages in Mexico.
• In 1995, the Tequila Crisis bankrupted the
  Mexican banking system and private banks
  abandoned the mortgage market. Past-due loans
  became rampant, specially in the mortgage
  portfolio of banks. Banks did not have efficient
  collection mechanisms or foreclosure procedures.
• By 2004 it became clear to banks they had been
  out of a profitable market, and they entered back
  aggressively by
• Undercutting Sofoles in price
• Buying up the largest Sofoles
• Banks originated approximately USD 7,300
  millions of loans in 2007.

14
SOFOLES

• Sofoles were created in 1994 as a result of
  NAFTA. They are Non-bank banks similar to
  mortgage banks in US.
• They have two basic characteristics
• Cannot take deposits from the public.
• Can only lend to a specific sector housing,
  automobiles, education, etc.
• Since then, Sofoles have successfully been
  originating and servicing loans under FOVI SHF
  programs
• Relatively homogeneous originating and servicing
  standards, as well as standardized loan product.
• Sofoles will originate approximately USD 2,200
  million of loans in 2007.

15
FOVI, which was manage by the Central Bank until
the creation of SHF, started funding SOFOLES in
1995.
Construction loans for homebuilders and mortgages
for individuals
Sofoles
Fovis funding to Sofoles was long term, fully
matched and indexed to minimum wage inflation.
Under the macroeconomic
environment after de Tequila Crisis this was
the only source of long term funding for
mortgages.
16
SHF started operations in 2002, overtaking the
activities of FOVI but with a new capacity to get
funding from the capital markets.
MI is offered to prepare loans for securitization
SHF hedges market and prepayment risk through
debt and derivatives markets
Local capital and international derivatives
markets
Mortgage Insurance
MORTGAGE LENDING
Central Bank loans
SOFOLES
World Bank IADB
SHF funds SOFOLES on a matched funds basis,
absorbing market and prepayment risk
17
Contents

• Introduction
• Demographic Dynamics, Housing Demand and
  Financing Needs
• The Mexican Mortgage Market including FOVI/ SHF
  role
• Securitization Model for Mexico and Current
  Strategy
• Pension Funds BORHIS
• Low-Income Mortgage Alternatives
• Challenges ahead in Housing Finance

18
Participation of SHF in the securitization model
SHF does not perform the same activities that
Fannie Mae or Freddie Mac it neither purchases
loan portfolios nor does it issue MBSs with its
own Guarantee attached. Instead

• SHF offers Mortgage Insurance covering the first
  loss of up to 35 of loans, whether they are part
  of a pool of an MBS (BORHIS) or not.
• SHF offers Partial Financial Guarantees to
  structures that meet certain requirements. These
  usually do not cover more than 15 of MBS
  (BORHIS) outstanding balance.
• SHF supports the liquidity of the MBS (BORHIS) by
  continuously quoting bid-ask prices (with tight
  bid-ask spreads) for every issue in the market.
  All this activity is channelled through one of
  the eleven BORHIS Market Makers.

However, the goal of SHF is similar that of the
GSEs to foster the liquidity to the mortgage
markets as a means to promote the affordability
of mortgages.
19
How is the market organized to issue MBS
(BORHIS)?
Depends on the preferences of the issuer, but
Mortgage Insurance is necessary unless a 100
Financial Guarantee Insurance on the MBS exists.

Mortgage Insurance Companies
Financial Guarantee Insurance Company/Mezzanine
Mortgage Insurance (First loss up to 30)
Total or Partial Financial Guarantee Insurance
and Mezzanine
PREMIUM
PREMIUM
Loan Mtg.Insurance
Debt Markets
SPV (funded and administered by private entities)
AAAmx rated MBS (BORHIS)
SOFOL or BANK



Mortgage
SPV acquires mortgage portfolios, structures and
issues MBS (BORHIS)
BORROWER
20
The securitization Model
May be partially substituted by a Mezzanine Bond
21
SHF has been actively seeking the entrance of
private providers of guarantees. The end-game is
a market based system relying on private
providers of financial solutions.
Investor and market maker in initial and
secondary markets
SPV
L O A N S
MBS
Mortgage Portfolios

• Financial Intermediaries
• Banks
• Sofoles

Capital Markets

MBS

Financial Guarantee Insurance
K
Mortgage Insurance
22
The number of participants in securitization has
steadily increased, first Sofoles, then banks by
2006 started to have an important participation
Scotiabank

• The number of intermediaries participating in
  securitizations is also higher every year.
• In 2007, 3 banks have already securitized their
  mortgages, and we expect this number to keep
  growing.

Bancomer
Bancomer
HSBC
HSBC
Banorte CyC Patrimonio ING FINCASA
Banorte CyC Patrimonio ING FINCASA
Banorte CyC Patrimonio ING FINCASA
GMAC (Patrimonio) GMAC (CyC)
GMAC Patrimonio) GMAC (CyC)
GMAC Patrimonio) GMAC (CyC)
GMAC Patrimonio) GMAC (CyC)
Metrofinanciera GMAC (HIPNAL)
Metrofinanciera GMAC (HIPNAL)
Metrofinanciera GMAC (HIPNAL)
Metrofinanciera GMAC (HIPNAL)
Metrofinanciera GMAC (HIPNAL)
GMAC Su Casita
GMAC Su Casita
GMAC Su Casita
GMAC Su Casita
GMAC Su Casita
2004
2005
2006
2007
2008
23
Securitizing mortgages has proven to be a
successful mechanism to originate mortgages
recurrently and at competitive rates

• Through 2007, we have witnessed important
  progress on the issuance of mortgage backed
  securities
• On 2007, 2,352 million USD were securitized,
  representing an increase of 107 of the amount
  observed in 2006.
• And also on 2006, banks started working towards
  securitizing their mortgage portfolios, managing
  to account for 33 of the issuance of BORHIs in
  2007.

24
On 2007, the average size of issuances also
increased, making BORHIs a more appropriate
instrument for institutional investors

• Issuances increased their individual volume,
  averaging around 131 million USD in 2007.

25
BORHIS offer very attractive yields to Foreign
Investors
YTM BORHIS vs. Mexican Government Real Rate
Benchmark, TIPs EMBI, TIPs (Dic-2003
YTD)

• By the end of 2007, Borhis mantained the same
  YTM in average.

Weighted Average YTM (calculated, at each time,
with the outstanding amount of each issue).
Source VALMER Mexican Price Vendor.
Government Real Rate Benchmark (with similar
duration to that of the BORHIS).
TIPs Treasury Inflation Protected Bonds EMBI
Emerging Markets Bond Index (Mexico).
26
Today there are 11 Market Makers participating in
SHFs program to foster the liquidity of BORHIS
in the secondary market.

• SHF acts through these institutions, and quotes
  prices both ways on every security at very tight
  margins throughout the day.

27
There is a lot of room for efficiencies being
translated into more affordable mortgages.

• FIXED RATE PESO POOL OF MORTGAGES SECURITIZATION

25 First Loss Mortgage Insurance
Average rate on mortgage portfolio

14.00
-
Servicing Fee
1.25
87 Senior security
Mortgage Portfolio
MI
-
0.85
PC and Life insurance structuring and
securitization costs
-
1.10
-
Mezzanine
0.17
10 Mezzanine Piece
-
Funding rate for MBS
8.34
3 Subordinated Security

Excess Spread
2.29
28
The BORHIs market is still on its early stages,
so it is important to correct and adjust some
aspects in order to improve its efficiency

• Some aspects must be strengthened to continue
  providing this market with dynamism, sustained
  growth and security for the investor.
• Homologation and standardization of the periodic
  information reported by servicers and trustees,
  aiming to add transparency to the analysis and
  monitoring of the structures.
• Value the bonds in terms of prices instead of
  rates to provide simplicity to their valuation.
• Establish a standardized public calculator to
  price the structures.
• Make structures homogeneous.
• Adjust the rules that define the characteristics
  of BORHIs to line up the incentives and
  distribution of risks between participants.
• Adjust the operation rules of market makers.

29
In order to satisfy the demand of institutional
investors and widen the range of BORHIs
available, different types of issuances have been
promoted

• We have worked to generate a great variety of
  types of BORHIs with the objective of attracting
  different investors through diverse tranches.
• Likewise, SHF participated in the creation of
  Hipotecaria Total (HiTo), a company that allows
  the securitization of mortgages at real time, in
  a similar way as the Danish model.
• We are supporting Covered Bonds as another
  securitization option.
• These schemes offer different options for both,
  investors and issuers.

30
Contents

• Introduction
• Demographic Dynamics, Housing Demand and
  Financing Needs
• The Mexican Mortgage Market including FOVI/ SHF
  role
• Securitization Model for Mexico and Current
  Strategy
• Pension Funds BORHIS
• Low-Income Mortgage Alternatives
• Challenges ahead in Housing Finance

31
Mexico Pension Funds System
Individual Pension Fund Account
PRIVATE EMPOYER
AFORES
Pension administrator
PUBLIC EMPOYER


SIEFORES
Pension Investment Fund
Mexican pension funds have an investment
portfolio of around 79,000 Million USD (8.21 of
the GDP in Mexico)

• Invests Pension Funds
• Regulated by CONSAR who defines investment
  policies

32
SIEFORES BORHIS matching necessities

• One of the aim objectives of the SIEFORES is to
  invest the income of pension funds in order to
  obtain the best returns with financial
  instruments that comply with the regulator
  investment policies.
• Taking into account that pension funds look for
  a long term basis investment, there is a need for
  long term financial instruments to match the
  necessities of the pension saving accounts.
• The regulator of SIEFORES establishes strict
  conditions for the type of financial instruments
  that could comply with the pension funds
  portfolio.
• BORHIS are an attractive investment option for
  SIEFORES in terms of
• Risk Level
• Term
• Quality of the bond bond underlying
• Timing of the issuances

33
SIEFORES BORHIS matching necessities

• The 70 of BORHIS investors is distributed
  within SIEFORES, Banks and stock exchange
  specialists.
• The participation of BORHIS within the SIEFORES
  portfolio represents the 1.7

• Although the participation of BORHIS in the
  SIEFORES portfolio is important, the of such
  bonds is limited.
• SHF is working together with CONSAR to increase
  the of participation of MBS.

34
Contents

• Introduction
• Demographic Dynamics, Housing Demand and
  Financing Needs
• The Mexican Mortgage Market including FOVI/ SHF
  role
• Securitization Model for Mexico and Current
  Strategy
• Pension Funds BORHIS
• Low-Income Mortgage Alternatives
• Challenges ahead in Housing Finance

35
In order to prevent the low-income population
from living in irregularity or illegality and in
stark conditions, it is necessary to provide it
of housing.
Historical Mortgage Loans1

• The interest rates decrease observed during the
  last years has benefited the mortgage loan
  market.

Housing Demand by Income Level2
Potential Market (Houses)
This has traduced into an increase of the housing
supply and demand, as well as of mortgage loans.
However, the main beneficiaries have been the
formal workers. The housing supply for informal
and/or low-income workers is still too limited.
Familiar Income in Mimimum Wages
New mechanisms should be created in order to
supply housing to this segment of the market,
which represents more than 80 of the population.
To attend the low-income and informal workers,
this market should be provided of attractive
characteristics to constructors.
1 Source Softec, Mexican Housing Overview
2006 2 Source Softec, Mexican Housing Overview
2006 and figures from SHF
36
In spite of the development of the mortgage
market and of the diminish in the interest rates,
the increase in the prices of houses has not
allowed the low-income sector to be benefited.

• The government has established the need to
  generate 6 million mortgage loans during the
  period 2006-2012, which traduces in 339,762 acres
  of urban ground with the required infrastructure
  and equipment.
• In Mexico, many urban development programs have
  been carried out. However, the following is
  necessary to benefit the low-income population
• The State and Municipalities should influence the
  type of housing that the constructors build.
• Alternative financing sources for the development
  of infrastructure should be explored.
• The urbanization process equipment of land,
  construction of housing, and individual sales -
  should be enhanced in order to reduce the cost of
  land and to give access to housing to the
  low-income population.

To give access to quality houses to the
low-income population, the participation of the
States and Municipalities is needed, as well as
the creation of attractive conditions for the
investment of constructors in social housing.
Source Softec, Mexican Housing Overview 2006
37
Participation of Constructors in the Housing
Market
One of the problems regarding the lack of
attention to the low-income market consists in
the fact that the constructors found this segment
less profitable and more risky. The typical cost
structure for constructors according to the
market segment is showed below.
The costs of investing in social and economical
housing are duplicated with respect to the
residential housing costs. The contrary happens
with the profit margin.
with respect to sales
Concept / Housing Type
Social
Economical
Middle
Residential
Plus
Profit Margin (before taxes)
10
10
15
18
20
Unforeseen Expenses
5
5
5
5
5
Financial Costs
8
8
6
4
4
Sales and Merchandising
5
5
5
5
5
Administrative Costs
4
4
4
4
4
Project and Supervision
4
4
4
4
4
Processes and Licenses
2
2
2
2
2
Construction
40
40
39
38
33
Infrastructure
14
12
8
5
3
Ground
8
10
12
15
20
Source Softec, Mexican Housing Overview 2006
38
SHF has, among its objectives, the promotion of
accessibility to housing. As a result, it has
taken an active role in the development of ground
that can be used for the development of social
housing.

• SHF, in coordination with BANOBRAS and several
  Financial Institutions, has defined and
  implemented different projects known as
  Macrodesarrollos. These have the objective of
  creating management and financing methodologies
  for the States and Municipalities in order to
  generate low cost housing in a sustainable
  environment.
• These Macrodesarrollos consider the creation
  of
• A self-sustainable city, adjacent and
  complementary to the already existent one, that
  offer jobs and services to the population
  health, education, diversion, transport, etc.-
  (avoiding to create dorm cities or isolate urban
  developments).
• Spaces that allow housing meant to all social
  classes (providing urbanized and well located
  grounds).
• Public spaces that allow to develop a
  communitarian life centers and sport areas,
  among others-.
• Spaces for the environmental protection and
  enhancement.
• Open spaces for primary activities agriculture
  and farming-.
• Legal and political certainty that will allow to
  offer housing at lower costs.

39
To improve the access to mortgage loans, all
participants and markets developed for the
Residential Mortgage Backed Securities should be
directed to the steps currently unattended and to
the low-income population.

• All the advances achieved in the market and the
  products developed by SHF to promote the
  Residential Mortgage Backed Securities, should be
  used to attend the steps in the chain that are
  actually unattractive.

Sale of Houses
Acquisition of ground
Primary Infrastructure
Mainte- nance
Construction of houses
Sale of Urban Ground
Equipment
Current Cover 6 a- 25 Mimimum Wages
Current Participation of SHF

• Securitization
• Investors
• Mortgage insurers
• Financial guarantors
• Structuring agent

Future Cover 0 - 5 Mimimum Wages
Housing Demand
Future Participation of SHF
40
The advantages of this model can be observed in
three different directions

• States and Municipalities
• Obtain a financing source to promote an ordered
  urban development.
• Line up the constructors interests with the
  urban development planning.
• Stimulate the development of social housing
  projects.
• Is an important instrument to confront the
  illegal development of cities.
• Besides, the States and Municipalities might
  attend the low-income population, subsiding the
  land for social housing through the urbanization
  of ground.
• Low-income population
• Urban developments with adequate equipment,
  services, employment sources, and infrastructure
  linked to public spaces.
• Access to houses with infrastructure, at regular
  prices and with the possibility of obtaining
  credits and subsidies.
• Urban Developers
• The State or Municipality will guarantee the
  legal security of the project, as well as its
  basic infrastructure and urbanization.
• Permissions and licenses are previously granted.
  Urban design and individualization scheme with
  loan products of SHF, INFONAVIT, and other
  entities.
• Obtain financing for business lines that were
  previously unfeasible.

41
Contents

• Introduction
• Demographic Dynamics, Housing Demand and
  Financing Needs
• The Mexican Mortgage Market including FOVI/ SHF
  role
• Securitization Model for Mexico and Current
  Strategy
• Pension Funds BORHIS
• Low-Income Mortgage Alternatives
• Challenges ahead in Housing Finance

42
Challenges ahead in Housing Finance

• To attend the population that has not been
  attended, SHF has the following actions to
  achieve
• Strengthening and consolidating the Residential
  Mortgage Backed Securities Market.
• Promoting the entrance of new specialized
  financial institutions in the unattended sectors
  microfinance institutions, non-bank banks, and
  savings and credit institutions.
• Developing of adequate products for these
  markets savings and leasing.
• In coordination with other housing institutions,
  adjust the Program of Subsidies to extend the
  access to mortgage loans.
• Development of financial markets to attend the
  financing of infrastructure, equipment, and
  maintenance of the production of sustainable
  housing.
• With respect to the previous point, SHF will take
  advantage of its experience in the development of
  securitization markets to securitize the
  franchises and flows of these Macrodesarollos.

43
Contacts Paloma Silva
msilva_at_shf.gob.mx Edith Castro
ecastro_at_shf.gob.mx