Hipotecaria Su Casita

1
Hipotecaria Su Casita

• Case Study of primary Mortgage Lending in Mexico
• The World Bank
• Housing Finance in Emerging Markets
• March 10-13, 2003 Washington, D.C.
• Manuel Campos
• mcampos_at_sucasita.com.mx

2
Hipotecaria Su Casita in the beginning

• In 1994 , seven Sofoles (Limited Scope Financial
  Institutions) were authorized to act as financial
  intermediaries.
• HIPOTECARIA SU CASITA began operations with the
  following numbers
• Capital US3 MM.
• Assets 3 MM
• Credit Portfolio 2MM
• No. of Loans 45
• Employees Two
• Offices one
• Funding equity and a possibility of FOVI
  funding.
• December 1994 the Mexican crisis starts
• Rates increased by 10 fold
• Increase in delinquency
• Bank withdraw from the lending business

3
Hipotecaria Su Casita today

• 8 years later .
• SU CASITA is one of fifteen of 15 mortgage
  Sofoles with the following numbers
• Capital US93MM
• Assets 1,300 MM
• Portfolio of 1,200 MM
• Loans 65,000
• Employees 672
• Offices 104 in 67 cities.
• Funding SHF (previously FOVI) funding (79),
  Debentures and Debt Securities (11), Financial
  Institution funding (10).
• Corporate credit rating BBB from SP, A3.mx
  from Moodys and from BBB Fitch.
• Servicing rating Above average from all three
  rating agencies
• Su Casita has the FOURTH largest private mortgage
  portfolio in Mexico.

4
Sustained growth

• Su Casitas growth has been sustained by the
  following
• High demand and growth of housing Gross annual
  household formation over 750 thousand production
  of homes has doubled.
• Availability of funding
• Governmental monies available (FOVI-SHF,
  Infonavit FOVISSTE)
• Development of debt capital markets
• Favorable competitive environment. In 1995 banks
  withdrew from the housing mortgage market
• Business Model. Specialized financial institution.

5
Su Casitas Business Model

• What are we doing right?

6
Structure of the Mexican Housing Market

• 20 of loans are originated and serviced by
  private players

7
Su Casitas function

• Main business lines
• Construction lending (20). Housing construction
  financing with the take-out financing also
  provided by SU CASITA through individual mortgage
  underwriting.
• Housing developers are our main distribution
  channel
• Individual mortgages (80)
• Origination Underwriting of new loans.
• Servicing Collection and foreclosure of
  mortgages originated by SU CASITA.
• Holding Loans originated are in our balance
  sheet, our capital supports the credit risk.
• SU CASITA sustains both credit and operational
  risk. There is no interest, term or prepayment
  risk. Assets mirror liabilities PERFECT MATCH

8
Su Casitas foundations

• With the crisis of 1995 the Mexican financial
  authorities had to develop new ways to finance
  low income housing in Mexico.
• The Sofoles had been born by accident (NAFTA).
  We were in the right place at the wrong time for
  everybody else.
• We had to originate and service low income
  mortgages The only game in town
• From the beginning our main source of funds
  (FOVI) did not want to work with us. Policies
  and incentives were set in place so that
• Develop efficient servicing model. With the
  margin we had.
• Could access the debt market (Diversify founding)
• Could only focus on mortgages and construction
  lending of one type of homes. Specialization

9
Servicing

• Average loan size is US22,000
• Servicing income is US250 per year/per loan
• We had to develop a low cost servicing model that
  handled the credit risk and eventually allowed us
  to access debt market World class servicer.

10
Volume

• There are
• significant
• economies of scale
• in servicing, so a
• high volume results in
• a more efficient
• operation.
• Economies of scale
• are better
• exploited when loans have a geographic
  concentration, loans use the same infrastructure.
• Volume facilitates access to capital markets
  (Size matters).

11
On site collection

• Facilitates collection.
• Better supervision of asset guarantee.
• Customer service.
• Lower operation costs (i.e. hand deliver of
  monthly statements vs. mail delivery).
• Facilitates communication with borrower (face to
  face).
• Establishment of programs the enforce
  relationship with customers (ie Su Salud).
• Possible cross selling

12
Standardization

• Since 1996 the Sofoles have agreed on standardize
  underwriting forms, facilitating the usage of
  common technology.
• Standard electronic files have been developed
  this facilitates the transfer of loans (i.e.
  purchase of Finazte) and the creation of a common
  data base (Done by the SHF) ? ASSET MANAGEMENT
• Standardization facilitates the understanding of
  the industry by investors ? TRANSPARENCY
• Facilitates the exploitation of shared economies
  of scale (i.e.. Reporting of financial statements
  to investors, regulators and rating agencies).
• Facilitates the existence of a substitute
  servicer which is necessary to access debt
  markets.

13
Sound process and automation

• Clear processes are necessary to create a world
  class servicing platform.
• As the portfolio grows, clearly defined processes
  facilitate control and the exploitation of
  economies of scale.
• Well understood processes allow for automation
  and cost reduction.
• Automation is key in the exploitation of
  economies of scale and disciplined growth.
• Sound processes reduce operational risk and
  facilitate control.
• Clear and well documented processes facilitate
  company training.
• As debt markets are accessed, funding source
  diversification is achieved resulting in
  operation complexity. This transition is
  facilitated by the automation of processes and
  information systems.

14
Usage of existing infrastructure

• Su Casitas clients can pay in our own locations
  or in bank branches (Over 3,000 points of contact
  through out Mexico).
• Shared telecommunication networks, the
  Fair-matching technology allows for on-line
  communications between offices at a very low
  price.
• Internet, programs allow on-line connection with
  developers, internal branches, SHF, etc. This
  reduces servicing and origination costs.

15
Loss mitigation

• HSC strategy includes and aggressive approach to
  avoid judicial process, which is both costly and
  lengthy.
• HSC will sell the house in behalf of the borrower
  when he can not make payment.
• Collection is the most important aspect of
  Customer Service. When we can solve the
  customers problem we will solve ours.
• Being close to the borrower allows to anticipate
  losses.
• Credit risk can be reduce by an effective
  negotiation with the borrower. Es mejor un mal
  arreglo que un buen pleito
• Analysis of portfolio is basic to develop credit
  scoring and behavior predicting models.

16
Internal Audit and external controls

• Risk is reduce by creating controls that insure a
  better quality of operations. Su Casita is
  overseen by
• Internal audit department (Operational audit and
  quality control). Through this process the
  compliance of loans in different programs is
  supervised. Also the following of procedures.
• External Audit by recognized firm.
• Rating agencies (Credit rating and servicer
  rating).
• SHF operational and legal audit.
• National Banking and Securities Comision.
• Investment bankers when doing and issuance.
• The Audit process also serves as a tool for
  training and improvement of processes.

17
Access to debt markets

• In 1999 100 of Su Casitas funds were provided
  by the SHF.
• In 2002 86 of Su Casitas funding is not related
  to the SHF. Over 70 of our construction lending
  activity is founded through bank lines, non bank
  financial institutions (ie. FMO GMAC-RFC) and
  bond issuances.
• In order to archive theses a two year effort to
  inform institutional investors was needed, a long
  term relationship has to be established.
• Debt markets have been
• accesses through the
• issuance of commercial
• paper, mid term notes,
• long term notes and the
• securitization of credit
• assets.

18
Example of debt issuance

• In 2000, HSC issued the first mortgage backed
  security for financing of middle and residential
  individual mortgages

Use of Proceeds Mortgage loan financing for
middle
income and residential housing. Rating AA by
Fitch and Aa2 by Moodys Relevant Aspects Over
collateral (75 Su Casita, 25 IFC) Cash
Reserve
Issuance Date 06/21/00 y 07/19/01 Ticker CASITA
00U Amount 60000,000 UDIs Tenor 10
years Interest Rate 8.80
Total Coverage
Cash
Cash
Down payment (B)
Total Guarantee (B)
75
Mortgages (B)
25
Down payment (A)
Total Guarantee (A)
Mortgage (A)
Mortgages funded The bonds proceeds
19
Examples of Houses financed

• Homes under US30,000.

20
Example of houses

• Homes over US 30,000 and 70,000