Global Housing Finance Conference after the crisis SHF s actions as a market developer May 26 th, PDF Free Download

Global Housing Finance Conference after the crisis SHF s actions as a market developer May 26 th, 2010

Index I. Economics of the Mexican Housing Market II. SHF s Role in the housing market a. Liquidity Provider b. Products for Construction Loans c. Attending the underserved population d. Developing the MBS market III. Final Remarks 2

I. Economics of the Mexican Housing Market: Housing deficit. The Mexican population includes 26.7 million families 17.8 million already own a proper house. 8.9 million represents the housing deficit of the population, either because they do not have a house or that do not have a adequate house. 0.6 3.6 1.1 1.7 5.3 7.2 8.9* Overcrowding Deterioration Basic Deficit Houses with precarius materials Extended Defict Source: SHF based on Populationaand Houses Census 2000, CONAVI and ENIGH. Yearly 530,000 new households are formed of which around 60% are able to demand a loan. 3

I. Economics of Mexican Housing III. Market RESULTADOS SHF House Price Index In 2009 SHF published SHF House Price Index (HPI), which confirm the lack of a bubble in prices in the Mexican market. The total nominal appreciation between 2005.I and 2010.I was 33.04%, equivalent to a 1.4% quarterly increase. Quarterly Publication: 68 records for the 2005.I 2010.I period for national level, 32 states and 35 counties. Growth 2005.I 2009.IV III (%) Increments by segment: Houses 26.8% Condos 23.6% Apartments 43.8 % House Prices show different appreciation rates between the states 1 1

I. Economics of the Mexican Hosuing Market: Evolution of mortgage financial products. Macroeconomic stability and competition in the financial system has improved the affordability through: Interest Rate (%) 45 40 35 30 25 20 15 10 5 Lower fix rates that reduce the payment and give certainty to families. Longer terms of loans: 25 years in pesos. Even though rates increased recently due to the liquidity restrictions, they are at the level of 2005/2006. 25 15.37 20 Average Mortgage Loan denominated in Mexican Pesos 15 10.76 10.05 14 13.5 12.5 9.02 9.5 9.48 Average Interest Rate for a Mortgage denominated in Pesos M10 - Government Benchmark 12.5 11.8 8.38 7.78 8.36 12.3 12.8 8.75 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: SHF. 5

I. Economics of the Mexican Housing Market During the period 2001-2008, the largest volume of houses was built and financed in Mexico s history: 181% growth in units 374% growth in investment (this is in part due to the return of the banks in 2005 in residential houses). 900,000 Mortgage Loans $25,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 $20,000 $15,000 $10,000 $5,000 Source: SHF - 2001 2002 2003 2004 2005 2006 2007 2008 Houses 295,811 359,785 452,907 494,124 592,287 777,751 785,953 832,842 USD million $4,426 $5,529 $7,608 $9,289 $11,789 $16,561 $18,901 $20,991 Houses USD million More than 80% of the housing production was social, economic and medium-low. This production was financed by Sofoles and Sofomes Hipotecarias (SSH)* (including Hipotecaria Nacional, which is the largest Sofol owned by a bank). Since 2003 these institutions were funded completely through private sources. * Sofoles and Sofomes Hipotecarias: non bank-banks that specializes in mortgage and construction loans. Exchange rate: 12.80 MXP /USD $- 6

II. SHF s role in the housing sector SHF: Mandate, Activities, Mission and Vision SHF is a Second Tier Bank that operates directly with financial institutions, providing funding and guarantees. Financial Intermediaries are responsible for the direct operation with final borrowers (both for construction and mortgage loans). SHF s OBJECTIVE: To develop the primary and secondary housing markets by providing mortgage funding and guarantees focused in the construction, acquisition and improvement of housing. 8

II. SHF s role in the housing sector a. Actions to provide liquidity. In 2008 Mexican Congress lifted SHF s restriction to finance Mortgage Sofoles and Sofomes (SSH) (Mexican Mortgage non Bank Banks) up to 2009, in anticipation to the liquidity needs and to the need to cover market failures for the underserved sector. SHF became a key instrument for the Governmental programs to address these needs and to mobilize around USD $4,600 million for three objectives: 1) Provide enough liquidity to the sector, particularly Sofoles and Sofomes. 2) To have enough funding to maintain housing production, specially low income homes, considering the existent demand and the population that still needs proper housing. 3) To address the deficit in housing to the underserved sectors. 9

II. SHF s role in the housing market a. Actions to provide liquidity. In September, 2008 the international crisis became more relevant affecting the renewals of unsecured debt of SSH. The short term nature of this CP and the long term assets of these intermediaries generated a liquidity problem. The unsecure characteristic of these funds affected the quality of their collateral and reduce the possibility to attract future secured funding. To deal with this situation and avoid a potential default from these intermediaries, SHF and the commercial banks instrumented a couple of programs to reduce the amount outstanding and restructure this market. Through these programs the liquidity concern was address and today the balance outstanding has been reduce and renewals are being transform into long term bonds. Once the liquidity problem was addressed, efforts have been made to recover the securitization market in order to attract institutional investors and fulfill long term funding needs to reduce the housing deficit in the country. 10

II. SHF s role in the housing sector b. Products for Construction loans From 2003 to 2008 construction loans were totally funded by private sources, these type of funding were completely closed by the second part of 2008. In 2008 SHF restored construction loans, since then US$1.1 billion have been authorized out of which US$416 million have been disbursed. These low demand and disposal is mainly due to Structural problem: the main SSH were being sold or in the process of resolution or some of them had restrictions to operate with SHF. These SSH represented 87% of the market. Some of these SSH have already resume their activities and other are expected to restart during the first semester of 2010. New SSH had been created and it s expected that they will have a relevant participation in the market. In order to restore the financing for construction loans, SHF has designed a new product. 12

II. SHF s actions to consolidate the housing sector c. Attending the underserved population. The 8.9 million households that conform the extended housing deficit are distributed: Extended Housing Deficit* Economically Active SHF will focus it s strategy on economically active workers, wage earners, non-affiliated to social security which represents 45.8%; and economically active workers, non wage earners, non-affiliated which represents18.8% of extended housing deficit. This represents a potential market of more than 1,675,000 households that belong to the unattended segment. Figures in Million Households Affiliated 2.25 6.35 25.4% 71.4% Non- Affiliated 4.10 8.08 46.0% 90.8% Affiliated 0.05 1.73 0.4% 19.4% Non- Affiliated 1.69 8.9 19.0% 100% Affiliated 0.00 Economically Inactive Wage earner Non-wage earner Wage earner 0.01 0.0% 0.1% Non- Affiliated 0.01 0.87 0.1% 9.7% Affiliated 0.01 Non-wage earner 0.86 0.1% 9.6% Non- Affiliated 0.85 9.5% 14

II. SHF s actions to consolidate the housing sector c. Attending the underserved population - SHF Products In order to promote a general housing access, SHF will focus on funding and guarantees of the following products, through Financial Cooperatives, Microfinance Institutions and others. TYPES OF PRODUCT OBJECTIVE Credit Lines Mortgage loans Funding Short Term Mid Term Long Term Housing Improvement / Enlargment Assisted Self-construction Housing Acquisition New or Used Mainly Addressed to the unattended market: Low Income and without social. Construction Finance to housing production Loans Developers Guarantees Mortgage Insurance Partial Credit Guarantee Credit risk transfer Credit enhancements to obtain private funding. Financial Intermediaries 15

II. SHF s actions to consolidate the housing sector c. Attending the underserved population For the acquisition of a house with a long term mortgage, SHF has created different products as proof of income and as a way to generate a down payment : 1. Non-affiliated to social security Savings Program. Leasing with the Option to Buy 2. State or municipal workers that do not count with FOVISSSTE nor INFONAVIT. Pay roll through a bank account. 3. Independent workers Through fees receipt. 4. Entrepreneurs Through tax payments For the low income segment SHF is promoting two different housing solutions. the offer of housing microfinance (HMF) for improvement and enlargement of houses and Assisted Self-production housing.. 16

II. SHF s actions to consolidate the housing sector d. Developing the RMBS Market. Over the past years, a market of Residential Mortgage Backed Securities (RMBS) was developed in Mexico. SHF acts as a market maker, issues best practices for the market and takes positions in primary issues. The dynamism of this market has been an alternative source of private funds for different intermediaries and public institutions, as shown in the following chart: RMBSs Issued and Outstanding Balance (USD million) Year BORHIs BonHiTos Other issuances CEDEVI s TFOVI s Total Accumulated 2003 $48 - - - - $48 $48 2004 $220 - - $157 - $377 $424 2005 $229 - - $262 - $491 $915 2006 $1,000 - - $480 - $1,480 $2,395 2007 $1,794 $1 $305 $817 - $2,916 $5,310 2008 $1,276 $5 $386 $1,155 - $2,823 $8,134 2009 $473 $565 - $906 $1,000 $2,944 $11,078 2010 - $200 - $394 $360 $954 $12,032 Total $5,039 $771 $691 $4,171 $1,360 $12,032 Outstanding Balance 1 $3,845 $748 $366 $3,759 $1,305 $10,022 1/ Nominal v alue 4.4577 *Data as of April, 21st 2010 Ex change rate = 12.5 MXP/USD 12.5 18

II. SHF s actions to consolidate the housing sector d. Developing the RMBS Market. 2010 Issuances: INFONAVIT issued Cedevis for $394 USD million. Issuances of FOVISSSTE for $360 USD million. Total RMBS Issuance by type (USD million) $3,500 $3,000 $2,500 TFOVIs CEDEVIs Other issuances BonHiTos BORHIs $2,000 $1,500 $1,000 $500 $0 2003 2004 2005 2006 2007 2008 2009 2010 Besides BORHIS (RMBSs), there is a proposed framework to regulate and count with Covered Bonds in the near future. 19

II. SHF s actions to consolidate the housing sector d. Developing the RMBS Market. Measures to consolidatethe securitization market 1. Redefine the investment regimes of pension funds and insurance companies to widen the proportion they can invest in attractive products such as RMBS. 2. Equity retention from originators of securitized loans to align the incentives for all participants of these transactions. 3. Additions to CNBV s regulation regarding Issuers of Securities: 4. Minimum criteria for substitute servicers. 5. Requirement to have a Master Servicer to provide information to the market. 20

II. SHF s actions to consolidate the housing sector d. SHF s BORHIS Watch System VIGÍA-SHF is the only publicly available tool that provides up to date information on collateral and bond performance of all outstanding Borhis and MacroCredHiTo issuances. The system tracks and aggregates all publicly available information and places it under one user-friendly platform, in both English and Spanish. With this system SHF validates that data remains consistent month to month. FEATURES: For 75% of the issuances VIGIA contains loan by loan information VIGIA includes historical databases and processed information in graphs All data and graphs can be exported VIGIA includes estimates of risk variables such as default and prepayment rates, which can be plugged into SHF s cash flow engine (also available) 21 21

II. SHF s actions to consolidate the housing sector d. SHF s BORHIS Cash Flow Engine As a complement to VIGÍA and as part of its market development efforts, SHF developed a BORHIs cash-flow engine for public use. SHF s cash flow engine will provide investors with a user-friendly valuation tool for all outstanding BORHIS with a certified cash flow methodology. This calculator together with the VIGÍA-SHF tool will constitute SHF s Borhis Analytics and Valuation package, which will allow for user-defined analyses and will promote further price discovery in these markets. FEATURES: SHF s CFE will provide the main characteristics of each issuance It will contain historical and 12- month averages for prepayment and default rates for the Market, the issuer and the issuance. It will show the historical OC movements Determines yield and price for a given valuation date. It will provide cash flows that can be exported 22 22

Final Remarks 1. The housing market in Mexico relies on solid foundations. 2. Improve the performance of the mortgage portfolio and the capitalization of the Sofoles. 3. Provide traditional liquidity and contribute to the dynamism of the housing market. Restore housing production funding. Attend the underserved market. Restore the private funding to the sector: making more efficient and standardized the RMBs market. 3. Redefine SSH role in a more regulated environment. 4. A consolidation process is happening in the housing sector, especially in the SSH, which also should move into a more regulated environment. 24

Global Housing Finance Conference after the crisis SHF s actions as a market developer May 26 th, 2010