The Mexican low income housing finance crisis and policy actions for recovery. World Bank Housing Finance Seminar May 30th, 2012

Transcription

1 The Mexican low income housing finance crisis and policy actions for recovery World Bank Housing Finance Seminar May 30th,

2 Mexican Context GDP GDP Total (real variation) 5.40% 3.80% Construction sector / total GDP 6.80% Loan origination ,000 Housing loans $ 15,862 Million USD $ USD average loan Housing credits balance / GDP % % HOUSING DEMAND (number of homes) Type Employment Formal Informal Total Rural 112, , ,567 Urban 283, , ,674 Total 395, ,502 1,071,241 Construction sector employees Employees 1,150,000 Total formal private employees 15,000, % 2

3 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Mexican Housing Market Total loan portfolio has grown at a yearly constant rate of 12.5% Housing finance represents 48% of total loan portfolio. Government agencies (Infonavit / Fovissste) add up to 75% of total mortgage portfolio. bmxp 3,500 Total Loan Portfolio bmxp 1,800 Mortgage Portfolio 2 3,000 2,500 2,000 1,500 1, % 15% 55% 30% 19% 51% 30% 21% 49% 32% 21% 46% 35% 19% 46% 36% 16% 49% 35% 15% 50% 36% 16% 48% 1,600 1,400 1,200 1, Corporate, Goverment and Financial entities Consumer Mortgage Non-Bank Banks Commercial Banks Infonavit Fovissste 3

4 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Mexican Housing Market Securitization transactions reached a peak in 2009 and no private sector player has issued since then. The market is now shared by two government sector entities (FOVISSSTE and INFONAVIT). Mmdp Billion MXN MBS by Credit Granting Sector (Amount issued) Mar-12 Non-Bank Sofol / Banks Sofom Commercial Banco Infonavit Banks Infonavit Fovissste Fovissste bmxp MBS by Credit Granting Sector (Portfolio balance) Non-Bank Banks Commercial Banks Infonavit Fovissste 4

5 Mexican mortgage market turmoil During the first weeks of October 2008, several public issuers made public significant losses related to the use of complex derivative instruments. These events: Came as a surprise for all market participants Damaged investors confidence concerning local issuers credit quality Caused difficulties for issuers seeking to refinance their debt, even for those firms that hadn t been involved in the derivatives scandals and had showed proper risk and financial management. Confidence in corporate credit quality (including housing finance intermediaries) crumbled during the first weeks of October Illiquidity extended to mutual funds and the interbank market and eventually generated the need for government action (central bank support and government bank guarantees) 5

6 Mortgage banks fragilities Loan origination by low income private housing finance intermediaries (sofoles/sofomes) remained strong during the pre-crisis 2008 period. Several factors affected mortgage credit quality: 1. Loan origination heterogeneized when financed through debt markets (Minimum wage denominated mortgages, longer peso term mortgages, different DTI rules, construction loans) 2. Prime costumers were absorbed by INFONAVIT and lesser quality profile customers (low downpayment capacity or vague proof of income) left to these intermediaries. 3. Large construction companies act as mortgage brokers for financial intermediaries. These conditions generated lesser quality mortgages on Sofoles / Sofomes balance sheets and in a lesser extent in securitisation transactions. 6

7 Reported value Valor Reportado Mortgage bank fragilities Lax standards on appraisals applied to large homebuilder houses proliferated and generated lesser quality mortgages (fictitious LTVs). $750,000 $500,000 $250,000 $0 Formula estimated value Valor Estimado $0 $250,000 $500,000 $750,000 Sin Without Grandes large Constructores companies Grandes Large construction Constructores companies 7 7

8 02/04/08 17/04/08 02/05/08 17/05/08 01/06/08 16/06/08 01/07/08 16/07/08 31/07/08 15/08/08 30/08/08 14/09/08 29/09/08 14/10/08 29/10/08 13/11/08 28/11/08 13/12/08 28/12/08 12/01/09 27/01/09 11/02/09 26/02/09 13/03/09 28/03/09 12/04/09 27/04/09 12/05/09 27/05/09 11/06/09 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 Days % points above TIIE Mortgage bank fragilities Refinancing conditions in debt markets resulted in higher cost of funding and accentuated financial intermediaries balance sheet mismatch. 141 Average term of PLAZO PROMEDIO DE EMISIONES HIPOTECARIAS DE Mortgage bank s debt CORTO PLAZO 6 Short term debt cost of funding CASAMEX CASITA CINMOBI CREYCA FINCASA GMACFIN GMACHIP HICOAM METROFI PATRIMO VERTICE -1 8

9 Securitization market volatility These conditions extended to securitization markets where only government entities participate at present costs. % MB securities issued in udis ± CDVITOT_12U 2.64 % CDVITOT_12U Issuance size: 3,102 millions MXN Time to maturity: 28 years. Fix Interest Rate 4.60% Date of maturity: 2040, march SOFOL/SOFOM* BANKS INFONAVIT ** FOVISSSTE + ± Index unit of funds, used in Mexico, designed to retain its purchasing power and not be subject to inflation. * / Financial companies which carry out many all types of credit operations, including mortgage credit. ** / The National Workers Housing Fund Institute is the major government housing assistance agency. + / Mexican government agency created in 1972 to meet the demand for housing credit for most of the country's public workers. Source: Portfolio of Information at CNBV website: Report 090-2A-R5, (Interest Spread on Securities Issuance in Pesos) y Report 090-2A-R6, (Interest Spread on Securities Issuance in Udis) Interest spreads reported by Mexican price vendors. 9 9

10 Policy actions 10

11 02/04/08 17/04/08 02/05/08 17/05/08 01/06/08 16/06/08 01/07/08 16/07/08 31/07/08 15/08/08 30/08/08 14/09/08 29/09/08 14/10/08 29/10/08 13/11/08 28/11/08 13/12/08 28/12/08 12/01/09 27/01/09 11/02/09 26/02/09 13/03/09 28/03/09 12/04/09 27/04/09 12/05/09 27/05/09 11/06/09 SHF partial guarantee SHF (Gvt Bank) provided partial financial guarantee insurance (65%) to commercial paper issued by Sofol / Sofoms providing considerable reduction on cost of funding. 6 Spread at issuance for short term commercial paper issued by mortgage sofol/sofom CASAMEX CASITA CINMOBI CREYCA FINCASA GMACFIN GMACHIP HICOAM METROFI PATRIMO VERTICE -1 11

12 Policy Actions Covered Bonds: Mexico has drafted changes in the banking law to allow banks to issue covered bonds. Considering liquidity rules proposed by Basel III these instruments gain increased strength. Fiduciary activities reinforcement: more responsibilities to fiduciaries in securitisation transactions, (may subcontract master servicing and reporting but responsibility remains) + more supervisory powers to securities commission. Regulatory base homologation: Strong private versus government sector asymmetries (cost of capital, reserves, prudential regulation). Better provisioning requirements and risk metrics on a forward looking loan by loan basis Enhanced information disclosure with new data requirements to banks and MBS issuers. 12

13 Conclusion Even though financial authorities and development banks have set high the agenda to revamp the housing finance system it becomes clear that low income housing finance may not be sustained in the short term with no government support. Confidence in private secondary mortgage markets has yet to be regained. The new financial order requires intermediaries with stable sources of funding, this contradicts the independence path followed by sofoles previous to the crisis. Sustained SHF support is expected for intermediaries to finance low income housing but in order to scale activities Sofols / Sofoms - which will eventually face regulation- will have to tap other stable sources of funding. 13