Públicos, S.N.C. Ejército Nacional No. 180, Piso 11. Palacio Nacional Constituyentes 1001, Edif. A, Piso 4

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized The World Bank Banco Mundial Insurgentes Sur 1605 piso 24 Tel (525) INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT San Jose Insurgentes Fax (525) INTERNATIONAL DEVELOPMENT ASSOCIATION México, D.F December 17, 2002 Mr. Tomás Ruiz González Dr. Guillermo Babatz Torres Director General Director General Banco Nacional de Obras y Servicios Sociedad Hipotecaria Federal Públicos, S.N.C. Ejército Nacional No. 180, Piso 11 Tecoyotitla 100 Col. Anzures Colonia Florida México, D.F. México, D.F Mr. Alonso García Tamés Lic. Claudia Bazúa Witte Director General de Crédito Público Tesorera de la Federación Secretaría de Hacienda y Crédito Público Secretaría de Hacienda y Crédito Público Palacio Nacional Constituyentes 1001, Edif. A, Piso 4 Patio Central, Piso 3, Oficina 3010 Col. Belén de las Flores Col. Centro México, D.F. México, D.F. Dear Sirs; Re: (Loan No ME) FOVI Restructuring Project Amendments to the Loan, Project and Guarantee Agreements and the Supplemental Letter Please refer to the Loan Agreement between Banco Nacional de Obras y Servicios Públicos, S.N.C. (the Borrower) and the International Bank for Reconstruction and Development (the Bank) (the Loan Agreement), the Guarantee Agreement between United Mexican States (the Guarantor) and the Bank (the Guarantee Agreement), the Project Agreement between Banco de México as Trustee for Fondo de Operación y Financiamiento Bancario a la Vivienda (FOVI) and the Bank (the Project Agreement) and the Supplemental Letter between the Borrower and the Bank, all dated May 11, 1999, as amended. We are pleased to inform you that pursuant to (i) the provisions of the legal opinion issued by the Guarantor s federal attorney (Luis Urritia Corral, Procuradoría Fiscar de la Nación) dated June 19, 2002 (No. 529-IV-21173), (ii) the provisions of the legal opinion furnished by Banco de México to the Borrower on August 7, 2002 (Ref.S12/SION/ ), (iii) the legal opinion issued by Sociedad Hipotecaria Federal, S.N.C. (SHF) dated September 4, 2002 (DGAJF-DJ-SIDL) sent to us in support of your request, dated November 9, 2001 and (iv) further discussions held between the Borrower, the Guarantor, FOVI and the Bank, on July 23, D:\Adobe\Acrobat 4.0\PDF Output\L44430ame.doc

2 , the Bank hereby agrees to amend the Loan, Project and Guarantee Agreements and the Supplemental Letter as detailed in Annexes I, II, III and IV, attached hereto. Please confirm your agreement with the foregoing amendments by signing and dating the four originals of this letter in the spaces provided below, and returning to us one original of this letter signed by each one of the signatories. The provisions set forth in this amendment letter shall enter into effect upon receipt by the Bank of documentary evidence confirming that (a) the contractual arrangements referred to in Section 3.01 (a) (ii) of the Loan Agreement, as amended, have been executed on behalf of the Guarantor and SHF for the onlending of the Loan proceeds to SHF, under terms acceptable to the Bank; and (b) a legal opinion, satisfactory to the Bank, has been issued by SHF and furnished to the Bank confirming that the Project Agreement, as amended, has been duly authorized or ratified by, and executed on behalf of, SHF and is legally binding upon SHF in accordance with its terms. Very truly yours, INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT By /s/ Isabel M. Guerrero Country Director Country Management Unit Colombia, Mexico & Venezuela Latin America and the Caribbean Region AGREED: BANCO NACIONAL DE OBRAS Y SERVICIOS, S.N.C. By: /s/ Tomás Ruíz González Authorized Representative AGREED: SOCIEDAD HIPOTECARIA FEDERAL, S.N.C. By: /s/ Guillermo Babatz Torres Authorized Representative Date: January 16, 2003 Date: January 22, 2003 AGREED: UNITED MEXICAN STATES By: /s/ Alonso García Tamés Authorized Representative AGREED: UNITED MEXICAN STATES By: /s/ Claudia Maria Bazúa Witte Authorized Representative Date: January 24, 2003 Date: February 17, 2003

3 -3- cc: Lic. Angel Palomino Director General de Intermediarios Financieros de Fomento Banco de México Av. 5 de Mayo No. 2 Piso 6 Col. Centro México, D.F.

4 -4- Attachments Annex 1 - Amendments to the Loan Agreement Annex 2 - Amendments to the Project Agreement Annex 3 - Amendments to the Guarantee Agreement Annex 4 - Amendments to the Supplemental Letter

5 -5- Annex I Amendments to the Loan Agreement 1. Whereas (D) is hereby amended by replacing all references to Banco de Mexico and Banxico by Sociedad Hipotecaria Federal, S.N.C. and SHF respectively. 2. Whereas (E) is hereby amended by replacing the term Banxico by SHF. 3. Section 1.02 (l) is hereby amended by replacing the term FOVI Subloans by Subloans. 4. Section 1.02 (m) is hereby amended by replacing the term FOVI Subloan by Subloan. 5. Section 1.02 (o) is hereby amended by replacing the term FOVI Regulations by FOVI or SHF Regulations, and the term FOVI Subloans by Subloans. 6. Section 1.02 (s) is hereby amended and replaced in its entirety by the following: (s) "FOVI Subloan" means a loan made, or proposed to be made on or before February 26, 2002, by a Financial Intermediary, with the proceeds of an Intermediary Loan (as defined hereinafter), to an Eligible Purchaser;. 7. Section 1.02 (t) is hereby amended and replaced in its entirety by the following: (t) FOVI Trust Agreement means the agreement between the Guarantor and Banxico dated April 10, 1963, as amended to the date of this amendment;. 8. A new definition is inserted as Section 1.02 (u) as follows: (u) FOVI Trustee Substitution Agreement means Convenio Modificatorio de Sustitución Fiduciaria del Fideicomiso denominado Fondo de Operación y Financiamiento Bancario a la Vivienda, the agreement between Banxico and SHF dated February 26, 2002, whereby Banxico is substituted as trustee of FOVI by SHF, as hereinafter defined;. 9. Section 1.02 (u) is hereby renumbered as Section 1.02 (v) and amended and replaced in its entirety by the following: (v) "Intermediary Loan" means a loan made, or proposed to be made, by FOVI on or before February 26, 2002, or by SHF after February 26, 2002, to a Financial Intermediary with the proceeds of the Loan;.

6 Section 1.02 (w) is hereby renumbered as Section 1.02 (x) and amended and replaced in its entirety by the following: (x) Monitoring Indicators means the indicators set forth in Part A of the Supplemental Letter, as amended;. 11. Section 1.02 (z) is hereby renumbered as 1.02 (aa) and replaced in its entirety as follows: (aa) Participation Agreement means an agreement for an Intermediary Loan entered into, or to be entered into, between SHF and a Financial Intermediary in accordance with the provision of Section 2.03 of the Project Agreement, as amended;. 12. A new definition is inserted as Section 1.02 (gg) as follows: (ff) SHF means Sociedad Hipotecaria Federal, S.N.C., the federal mortgage bank of the Guarantor, established and operating pursuant to the provisions of the SHF Organic Law (as hereinafter defined), published in the Guarantor s Official Gazette (Diario Oficial de la Federación) dated October 11, 2001 and such term includes: (i) all references to SHF acting in its own capacity as an independent legal entity; and (ii) all references to SHF as the successor of Banco de México, in its former capacity of fiduciary manager of FOVI, pursuant to the provisions of the FOVI Trustee Substitution Agreement;. 13. A new definition is inserted as Section 1.02 (hh) as follows: (hh) SHF Subloan means a loan made, or proposed to be made after February 26, 2002, by a Financial Intermediary, with the proceeds of an Intermediary Loan (as defined hereinafter), to an Eligible Purchaser;. 14. A new definition is inserted as Section 1.02 (ii) as follows: (gg) SHF Organic Law means Ley Orgánica de Sociedad Hipotecaria Federal, S.N.C., the Guarantor s Law dated October 9, 2001, published in the Guarantor s Official Gazette (Diario Oficial de la Federación) on October 11, 2001;. 15. A new definition is inserted as Section 1.02 (jj) as follows: (hh) SHF Regulations means Reglamento Orgánico de Sociedad Hipotecaria Federal, S.N.C, the regulations governing SHF s organizational, structural and functional responsibilities dated April 8, 2002, published in the Guarantor s Official Gazette (Diario Oficial de la Federación) dated April 9, 2002;. 16. A new definition is inserted as Section 1.02 (qq) as follows: (ll) Subloans means FOVI Subloans or SHF Subloans.

7 A new definition is inserted as Section 1.02 (uu) as follows: (oo) Trustee means SHF, pursuant to the provisions of the FOVI Trustee Substitution Agreement;. 18. The definitions in Section 1.02 (v), (x), (y), (aa), (bb), (cc), (dd) and (ee) ; are hereby renumbered as Section 1.02 (w), (y), (z), (bb), (cc), (dd), (ee) and (ff). 19. The definitions in Section 1.02 (ff), (gg), (hh), (ii), (jj), and (kk), are renumbered as Section 1.02 (kk), (ll), (mm), (nn), (oo) and (pp). 20. The definitions in Section 1.02 (ll), (mm) and (nn) are renumbered as Section 1.02 (rr) (ss) and (tt). 21. Section 2.02 (b) is hereby amended by replacing the term FOVI by the term FOVI or SHF. 22. Section is hereby replaced in its entirety as follows: Section The Closing Date shall be June 30, 2005, or such later date as the Bank shall establish. The Bank shall promptly notify the Borrower and the Guarantor of such later date Section 3.01 (a) (ii) is hereby amended by replacing the term Banxico by SHF. 24. Section 3.01 (a) (iii) is hereby amended by replacing all references to Banxico by the term SHF. 25. Section 5.01 is hereby amended by replacing all references to FOVI by the term SHF. 26. The table set forth in paragraph A (1) of Schedule 1 to the Loan Agreement is amended and replaced in its entirety as detailed in Annex I.A to this letter. 27. Section 5.01 (f) is hereby amended by replacing FOVI Regulations by SHF Regulations. 28. Schedule 2 to the Loan Agreement is amended as follows: (a) The first paragraph of Schedule 2 describing the Project objectives is amended by replacing the term Social Interest Housing Sector by the term Mexico s housing and housing finance system.

8 -8- (b) All references to FOVI throughout Schedule 2 are hereby replaced by the term FOVI and SHF. (c) Part A.2 (b) of the Project is hereby amended and replaced in its entirety to read as follows: Carrying out of an evaluation of the effectiveness of PROSAVI s credit and housing subsidies program and preparation of proposals aimed at improving the attractiveness, portability and targeting efficiency of such program.. (d) Part A.3 (a) of the Project is hereby amended by replacing the term rating by pre-rating.. (e) A new Part A.6 of the Project is inserted as follows: 6. Carrying out of two technical studies to review options for improving the effectiveness of the Guarantor s low income housing finance programs, including, inter alia: (a) the review of the issues, options and operational recommendations for improving the targeting of low income housing subsidies and harmonizing them across the various existing Guarantor s housing programs and entities, without causing significant distortions in the operation of the mortgage finance markets; and (b) the review of issues and options for institutional reform and restructuring of the existing large housing finance systems making use of earmarked funds from the pension systems.. (f) Part B of the Project is amended to replace all references to FOVI Subloans by the term FOVI and SHF Subloans. (g) The Project completion date December 31, 2002 is hereby amended and replaced by December 31, 2004.

9 -9- Annex I.A SCHEDULE 1 A. General 1. The table below sets forth the Categories of items to be financed out of the proceeds of the Loan, the allocation of the amounts of the Loan to each Category and the percentage of expenditures for items so to be financed in each Category: Amount of the % of Loan Allocated Expenditures (Expressed in to be Category US Dollars) Financed (1) Goods for Part A 10,300, % of foreign of the Project expenditures; 90% of local expenditures (2) Consultants 12,700, % Services for Part A of the Project (3) Subloans made: (a) by not later than 150,000,000 40% of amounts December 31, 2001 disbursed by a Financial Intermediary (b) by not later than 82,500,000 40% of amounts December 31, 2002 disbursed by a Financial Intermediary (c) by not later than 82,500,000 40% of amounts December 31, 2003 disbursed by a Financial Intermediary (d) by not later than 162,000,000 40% of amounts December 31, 2004 disbursed by a Financial Intermediary (4) Fee 5,050,000 Amount due under Section 2.04 of this Agreement TOTAL 505,050,000

10 -10- Annex II Amendments to the Project Agreement 1. SHF, in its capacity of Trustee for FOVI, pursuant to the provisions of the FOVI Trustee Substitution Agreement, hereby assumes fully and unconditionally all obligations undertaken by Banco de México under the Project Agreement entered into between Banco de México (as former trustee of FOVI) and the Bank, dated May 11, Section 2.09 (b) is hereby amended to read as follows: No later than December 31, 2002, SHF shall provide to the Bank evidence satisfactory to the Bank that:. 3. Section 2.09 (b) (ii) is replaced in its entirety to read as follows: FOVI s financial statements following US GAAP certified by an independent and qualified auditor. 4. Section 2.09 (b) (iii) is replaced in its entirety as follows: FOVI s eligibility criteria for property appraisal standards have been issued. 5. Section 2.09 (c) is hereby amended to read as follows: No later than December 31, 2003, SHF shall provide to the Bank evidence satisfactory to the Bank that:. 6. Section 2.09 (c) (i) is replaced in its entirety as follows: SHF has approved the comprehensive strategic business action plan for the implementation of FOVI s corporate reorganization, including the transfer of certain functions of FOVI to SHF, pursuant to the provisions of paragraph 1 of Part B of the Supplemental Letter.. 7. Section 2.09 (c) (ii) is hereby deleted and Section 2.09 (c) (iii) is renumbered as 2.09 (c) (ii). 8. Section 2.09 (c) (v) is hereby renumbered as 2.09 (c) (iii) to read as follows: FOVI shall have begun implementation of a time-bound action plan based on the results of the evaluation referred to in Part A.2 (b) of the Project.. 9. Section 2.09 (c) (v) is amended by inserting a new item to read as follows:

11 -11- The pilot testing of FOVI s new product to promote timely guarantee payment has been completed pursuant to the provisions of paragraph 2 of Part B of the Supplemental Letter, as amended A new item (d) is inserted in Section 2.09 to read as follows: (d) No later than December 31, 2004, SHF shall provide to the Bank evidence satisfactory to the Bank that: (i) the activities corresponding to the first phase of the comprehensive strategic and business action plan have been completed pursuant to the provisions of paragraph 3 of Part B of the Supplemental Letter, as amended; (ii) the pre-rating referred in Part A.3 (a) of the Project has been obtained pursuant to the provisions of paragraph 4 of Part B of the Supplemental Letter, as amended; (iii) FOVI s new insurance product has been redesigned and launched pursuant to the provisions of paragraph 5 of Part B of the Supplemental Letter, as amended; and (iv) the studies referred to in Part A.6 of the Project have been completed pursuant to the provisions of paragraph 6 of Part B of the Supplemental Letter, as amended Schedule 1 to the Project Agreement is hereby amended by replacing, all throughout the Schedule: (a) all references to Banxico by the term SHF ; (b) all references to FOVI Subloans by the term Subloans and (c) all references to FOVI Regulations by the term FOVI Regulations or SHF Regulations, as applicable..

12 -12- Annex III Amendments to the Guarantee Agreement 1. Whereas (D) is hereby amended by replacing the term Banco de México by Sociedad Hipotecaria Federal, S.N.C., and the term Banxico by SHF. 2. All references to Banxico, all throughout the Guarantee Agreement, are hereby replaced by the term SHF. 3. All references to FOVI, all throughout the Guarantee Agreement, are hereby replaced by the term FOVI or SHF.

13 -13- Annex IV Amendments to the Supplemental Letter The Supplemental Letter is hereby amended and replaced in its entirety by (a) replacing the Annex entitled Monitoring Indicators by Part A of the Supplemental Letter and (b) inserting a new Part B of the Supplemental Letter entitled Section 2.09 of the Project Agreement as follows: Part A: Monitoring Indicators By December 31, 2001: 1. Market based mortgage interest rates are implemented on PROSAVI and the A and B Loans. 2. PROSAVI subsidies are made and maintained upfront and transparent. By June 30, 2003: 1. A lender eligibility program, underwriting standards and a marketing program are implemented. 2. Information systems improved to support the primary and secondary market operations of FOVI and SHF. 3. A review of existing insurance products of FOVI and SHF and their pricing is completed. By December 31, 2004: 1. FOVI and SHF fund a total of at least 300,000 mortgage credits between 1998 and FOVI and SHF have completed the design of a new insurance product taking into account the results of the insurance product review and have launched the new product. 3. FOVI and SHF have issued in the market a total of, at least $30,000,000 (thirty million Dollars) of mortgage backed securities (MBS). 4. FOVI and SHF have completed the first stage of implementation of a comprehensive strategic business action plan, detailed in Part B of this Letter, including: (a) the recruitment of qualified staff to fill its senior management positions; (b) putting in place improved risk management systems appropriate for its operations and market position; (c) establishment of adequate capacity and systems for policy planning, credit and funding management.

14 -14- Annex 2 Part B: Section 2.09 of the Project Agreement The implementation of the actions detailed in Section 2.09 of the Project Agreement, as amended, shall be reviewed jointly with the Bank, throughout Project implementation, pursuant to the following provisions: 1. The comprehensive strategic business action plan referred to in Section 2.09(c)(i) of the Project Agreement shall include, inter alia, the carrying out of the following: (a) corporate reorganization and proposed new organizational structure of FOVI and SHF, including, inter alia, the functions and responsibilities of its various departments and sections; (b) definition of the product line to be offered by FOVI and SHF, the corresponding product pricing and product promotion strategies and distribution channels; (c) funding strategy including the strategy to mobilize resources from the capital markets; (d) proposal to strengthen FOVI s and SHF's overall risk management strategy covering market, credit and interest rate risks assumed by FOVI and SHF; (e) strategy to strengthen information systems to support FOVI s and SHF's operations in the primary and secondary financial markets; and (f) appointment of executives and senior staff with adequate qualifications to undertake principal responsibilities for the areas of business development, market and credit risk management, product development and promotion, and mobilization of resources from the capital markets. 2. The pilot testing referred to in Section 2.09(c)(v) of the Project Agreement shall include the design and testing, on a limited pilot basis, of a new product guaranteeing the timely service payments related to the mortgage-backed securities to be issued by a primary lender. 3. For the purposes of Section 2.09(d)(i) of the Project Agreement, the first phase of the comprehensive strategic and business action plan shall include, inter alia: (a) appointment of qualified staff to fill the key executive and senior management positions referred to in Part B.1 (f) above; (b) implementation of satisfactory risk management systems, adequate information systems to support the conduct of FOVI s and SHF's activities in the primary and secondary mortgage markets, adequate norms governing FOVI s and SHF's product line, product pricing and credit and funding operations; and (c) issuance and sale of securities for a total of, at least $30,000,000 (thirty million Dollars) and an additional $30,000,000 (thirty million Dollars) in mortgage-backed securities in the capital markets. 4. The term "pre-rating" referred to in Section 2.09(d)(ii) of the Project Agreement means an external rating of SHF's financial condition and financial strength, or of their market issues of financial instruments, excluding the ultimate financial guarantee provided by the Guarantor to SHF's financial obligations. 5. With reference to Sections 2.09 (c)(v) and (d)(iii) of the Project Agreement, completion of the design and launching of the new insurance product shall include: (a) the carrying out of an in-depth review of the eligibility criteria, record of timeliness in payment of claims and associated risks, servicing standards, required reserves, regulatory framework,

15 -15- feasibility of private partnerships and/or reinsurance scheme, procedures and available technology, and (b) the incorporation of the results from such review in the design of the default and timely payment components of a new insurance product. 6. (a) In carrying out the study referred to in Part A.6 (a) of the Project, SHF shall take into account the results of the PROSAVI study and other analytical work completed on the effectiveness of alternative methods to channel subsidies for low income housing and relevant international experience thereof. (b) In carrying out the study referred to in Part A.6 (b) of the Project, SHF shall review the role, products, activities and financial results of the institutions referred to therein, and based on the recommendations of such review, propose options to put into effect an efficient and harmonized national system of low income housing finance which does not significantly distort the operation of mortgage finance markets. The two studies referred to above shall be carried out by SHF within the overall strategic framework and policy for the housing and housing finance sector set by the Guarantor s national housing commission (Comisión Nacional de Vivienda).