1

Colombia: Rule of Law, Creditor Rights and the

Crisis of Housing Finance

Mauricio Cárdenas

Alejandro Badel

2

Outline

1. Macroeconomic relevance2. Overview of the mortgage sector3. Perils of indexation4. Other causes (and consequences) of

the crisis5. Creditor rights6. Econometric analysis7. Fiscal costs

3

Macro relevance

4

Cyclical Components of Mortgage Disbursements, Construction GDP and Total GDP

-100%

-75%

-50%

-25%

0%

25%

50%

75%

100%

1977

:1

1979

:1

1981

:1

1983

:1

1985

:1

1987

:1

1989

:1

1991

:1

1993

:1

1995

:1

1997

:1

1999

:1

2001

:1

-5%-4%-3%-2%-1%0%1%2%3%4%5%

Disbursements of Mortgage Loan

Total GDP

-100%

-75%

-50%

-25%

0%

25%

50%

75%

100%

-40%

-30%

-20%

-10%

0%

10%

20%

30%Disbursements of Mortgage Loan

Construction GDP

5

Granger Causality between GDP and mortgage origination

Lags Sample Statistic F Probability

GDP Cycle Causes Construction GDP Cycle 2 1977:1 2002:2 3,583 0,032Construction GDP Cycle Causes GDP Cycle 0,976 0,381

GDP Cycle Causes Disbursements of Mortgage Loans Cycle 2 1977:1 - 2002:2 0,859 0,427Disbursements of Mortgage Loans Cycle Causes GDP Cycle

2,474 0,090

GDP Construction Cycle Causes Disbursements of Mortgage Loans Cycle 2 1977:1 - 2002:2 3,701 0,028Disbursements of Mortgage Loans Cycle Causes GDP Construction Cycle 3,654 0,030

GDP Cycle Causes GDP Construction Cycle 1 1990:1 - 2002:2 0,050 0,824GDP Construction Cycle Causes GDP Cycle 4,418 0,041

GDP Cycle Causes Disbursements of Mortgage Loans Cycle 2 1990:1 - 2002:2 0,008 0,992Disbursements of Mortgage Loans Cycle Causes GDP Cycle 3,222 0,049

GDP Construction Cycle Causes Disbursements of Mortgage Loans Cycle 2 1990:1 - 2002:2 3,405 0,042Disbursements of Mortgage Loans Cycle Causes GDP Construction Cycle 16,979 0,000

Causality

6

Granger Causality between Cyclical Components (1977-2002)

Construction GDPDisbursements of Mortgage Loans

Construction GDP Total GDP

Total GDPDisbursements of Mortgage Loans

(all but the 90s)

(Only the 90s)

7

Correlation with the Disbursements of Mortgage Loans

Cycle

Correlation between Total GDP and Construction

GDP Cycles

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Co

rrel

atio

n c

oef

fici

ent*

Construction GDP Cycle

Total GDP Cycle

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

1986

:4

1987

:4

1988

:4

1989

:4

1990

:4

1991

:4

1992

:4

1993

:4

1994

:4

1995

:4

1996

:4

1997

:4

1998

:4

1999

:4

2000

:4

2001

:4

Co

rrel

atio

n c

oef

fici

ent*

*"Rolling Correlation" using a 10 year window of data

Rolling Correlation

8

OVERVIEW OF THE

MORTGAGE SECTOR

9

Mortgage Banks in 2002

48%

12%

59%

35%

53%

43%

57%

-

100

200

300

400

500

600

700

800

900

AV VILLAS BANCAFE COLMENA COLPATRIA CONAVI DAVIVIENDA GRANAH

US

$ M

Mortgage Loans % Total assets

10

0

50

100

150

200

250

300

350

400

450M

ar-7

3M

ar-7

4M

ar-7

5M

ar-7

6M

ar-7

7M

ar-7

8M

ar-7

9M

ar-8

0M

ar-8

1M

ar-8

2M

ar-8

3M

ar-8

4M

ar-8

5M

ar-8

6M

ar-8

7M

ar-8

8M

ar-8

9M

ar-9

0M

ar-9

1M

ar-9

2M

ar-9

3M

ar-9

4M

ar-9

5M

ar-9

6M

ar-9

7M

ar-9

8M

ar-9

9M

ar-0

0M

ar-0

1

Disbursements of Mortgage Loans B

illi

on

s o

f 19

98 p

eso

s

11

Outstanding mortgage loans(1998 pesos, % of GPD, and % of total credit)

2%

7%

12%

17%

22%

27%

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

%

0

2

4

6

8

10

12

14

16

18

bill

ion

s o

f 19

98 p

eso

s

% of GDP

% of Total credit

Constant pesos

12

Non-performing mortgage loans(as % of total mortgage loans)

0

5

10

15

20

25D

ic-9

4

Jun

-95

Dic

-95

Jun

-96

Dic

-96

Jun

-97

Dic

-97

Jun

-98

Dic

-98

Jun

-99

Dic

-99

Jun

-00

Dic

-00

Jun

-01

Dic

-01

Jun

-02

% Debt restructuring

13

Mortgage Banks Composition of Assets

0%

20%

40%

60%

80%

100%

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Ag-

02

Mortgage Loans Other Loans Portfolio Investments Other assets

14

0%

20%

40%

60%

80%

100%

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Ag

-02

Indexed Liabilities Peso liabilities Other liabilities

Mortgage BanksComposition of Liabilities

15

Mortgage BanksComposition of Deposits

0%

20%

40%

60%

80%

100%19

85

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Savings and current account Less than one year More than one year

16

Summary

1) Disbursements currently at their historically lowest point.

2) 21.5% of the mortgage portfolio was delinquent by February 2003.

3) Interest rate and maturity mismatch.

17

The perils of indexation

18

Yearly Growth Rates: UPAC and CPI

8%

13%

18%

23%

28%

33%

38%

Oct

-73

Oct

-74

Oct

-75

Oct

-76

Oct

-77

Oct

-78

Oct

-79

Oct

-80

Oct

-81

Oct

-82

Oct

-83

Oct

-84

Oct

-85

Oct

-86

Oct

-87

Oct

-88

Oct

-89

Oct

-90

Oct

-91

Oct

-92

Oct

-93

Oct

-94

Oct

-95

Oct

-96

Oct

-97

Oct

-98

Oct

-99

UPAC

CPI

19

Real UPAC (UPAC / CPI)

50

60

70

80

90

100

Se

p-7

2S

ep

-73

Se

p-7

4S

ep

-75

Se

p-7

6S

ep

-77

Se

p-7

8S

ep

-79

Se

p-8

0S

ep

-81

Se

p-8

2S

ep

-83

Se

p-8

4S

ep

-85

Se

p-8

6S

ep

-87

Se

p-8

8S

ep

-89

Se

p-9

0S

ep

-91

Se

p-9

2S

ep

-93

Se

p-9

4S

ep

-95

Se

p-9

6S

ep

-97

Se

p-9

8S

ep

-99

Se

p.

19

72

= 1

00

Real UPAC

New UPAC for “restructured” loans

20

UPAC, UVR and CPI: Monthly percent changes

-1%

0%

1%

2%

3%

4%

5%

6%

7%

Oct

-72

Oct

-73

Oct

-74

Oct

-75

Oct

-76

Oct

-77

Oct

-78

Oct

-79

Oct

-80

Oct

-81

Oct

-82

Oct

-83

Oct

-84

Oct

-85

Oct

-86

Oct

-87

Oct

-88

Oct

-89

Oct

-90

Oct

-91

Oct

-92

Oct

-93

Oct

-94

Oct

-95

Oct

-96

Oct

-97

Oct

-98

Oct

-99

Oct

-00

Oct

-01

% UPAC - UVR% CPI

21

OTHER CAUSES

(AND CONSEQUENCES)

22

Housing Price Index (HPI)Deflated by CPI

60

70

80

90

100

110

120

130

140no

v-86

nov-

87

nov-

88

nov-

89

nov-

90

nov-

91

nov-

92

nov-

93

nov-

94

nov-

95

nov-

96

nov-

97

nov-

98

nov-

99

nov-

00

nov-

01

nov-

02

Ap

ril 1

998=

100

HPI DNP BOGOTA HPI DNP MEDELLIN HPI DANE HPI Camacol

23

17,8%16,6%

18,0%

5%

10%

15%

20%

Mar

-90

Mar

-91

Mar

-92

Mar

-93

Mar

-94

Mar

-95

Mar

-96

Mar

-97

Mar

-98

Mar

-99

Mar

-00

Mar

-01

Mar

-02

Unemployment (keeping the December 1997 construction employment constant)

Unemployment (keeping the September 95)

Observed unemployment rate

Unemployment rate (observed and simulated)

*Unemployment rate in 13 metropolitan areas (Jan 00 – Jun-02) applying growth to seven areas (Mar 90 – Dec 99)

80.000 employees

196.000 employees

24

The role of creditor protection

25

Foreclosure Proceedings

LAWSUIT

Due Notified to the defendant (20 days)

Presentation of the defendants pleadings (10 days)

Request of embargo and sequestration of

assets

Non acceptance

(30 days)

Correction (5 days)

Non corrections

Rejection(Delay 2 months)

ESTIMATE OF ASSETS

PRICE

Liquidation of credits and expenses by the plaintiff

(10 days and 3 of notice for the defendant)

SENTENCE:-Orders to continue the proceedings of the lawsuit.-Orders to estimate the price and the sale by auction of the assets under embargo-Orders to liquidate the credit.

Order of sale by auction (No dateline) (Embargo, sequestration

and estimated)PUBLICATION OF ADS (5 days before the auction)

Sale by auction (1 day)

(BID, AWARD, NO DATELINES FOR

BIDDERS)

LEGALIZATION AND DELIVER OF THE ASSET SOLD

BY AUCTION

Approved by the Judge

Liquidation of credit and expenses by the

defendant if is not done by the plaintiff (10 days and 3 of notice for the

plaintiff)

Definitive Liquidation by the court (It has no

dateline)

No presentation of the defendants pleadings

Acceptance (30 days)

Order of embargo (30 d) and sequestration (90d)

26

Average Time of Foreclosure

CEJ (1998)

CSJ (1998)

Normative time

ICAV (2002)

0 200 400 600 800 1000 1200 1400 1600# of calendar days

27

Foreclosure proceedings

114.766

124.116

128.316

4.831.195

5.119.104

5.252.000

105.000

110.000

115.000

120.000

125.000

130.000

Dic-01 Mar-02 Jun-02

Nu

mb

er

4.600.000

4.700.000

4.800.000

4.900.000

5.000.000

5.100.000

5.200.000

5.300.000

Mill

ion

s o

f P

eso

s

Number Balance

28

Probability of property being foreclosed

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0 10 20 30 40 50 60 70 80 90 100 110 120

Months in delinquency

Cu

mu

lati

ve p

rob

abili

ty

Bank 1

Bank 3Bank 2

29

ECONOMETRIC ANALYSIS

30

Data

Aggregation Level: Individual Loans.

Number of banks: 2.

Scope: Approx. 30% of housing credit.

Sample: January 1994 - June 2002.

Size: 240,350 loans, with an outstanding balance of 2.3 billions pesos (June 2002) and an original balance of 8.8 billions pesos.

31

Mortgage Loans by Origination Year

Año de Originación

% Saldo Inicial*

% Número de Créditos**

%Créditos en dación de

pago

Plazo Original*** (meses) % Tasa***

% LTV Original***

Altura de Mora***

antes de 1980 0,0 0,0 4,5 176,9 8,3 0,24 158,8

1980 - 1984 2,2 1,9 0,4 179,5 6,8 0,38 2,7

1985 - 1989 8,6 10,3 0,4 177,1 6,8 0,48 1,8

1990 - 1992 6,2 5,8 0,6 178,1 9,0 0,45 1,6

1993 - 1994 13,2 13,0 1,1 177,8 9,7 0,53 1,5

1995 - 1996 20,7 16,3 4,4 179,3 12,4 0,51 2,1

1997 - 1998 29,3 26,4 5,2 175,5 13,0 0,52 2,3

1999 - 2000 17,0 21,2 3,1 172,6 12,1 0,55 1,7

2001 - 2002 1,9 3,2 0,0 162,3 11,9 0,52 0,3

2002 0,9 1,8 0,0 163,6 11,9 0,55 0,0

Total 100,0 100,0 3,0 176,1 11,3 0,52 1,9

34

Mortgage Loans by Rate Range

Rango de Tasa % Tasa***% Saldo Inicial*

% Número de

Créditos**

%Créditos en dación en pago

Plazo Original***

(meses)% LTV

Original***

Altura de mora*** (meses)

Menos del 1% 0,0 0,0 0,1 4,3 119 54,7 2,41% - 2% 2,0 0,0 0,0 - 171 53,7 0,92% - 3% 3,0 0,1 0,1 2,5 177 57,8 0,53% - 4% 4,0 0,0 0,0 - 145 50,8 2,14% - 5% 5,0 6,3 12,3 1,1 178 63,3 1,95% - 6% 5,4 0,6 0,8 0,2 171 40,0 1,26% - 7% 6,7 7,3 7,1 0,5 174 46,0 2,07% - 8% 7,8 3,3 4,0 1,6 165 50,4 1,38% - 9% 8,6 4,7 4,2 0,8 176 51,1 1,59% - 10% 9,8 4,3 4,2 1,7 175 48,4 2,010% - 11% 11,0 18,3 28,7 1,7 177 57,5 1,511% - 12% 12,0 9,8 7,4 3,8 185 48,1 1,612% - 13% 13,0 7,1 4,8 3,7 177 46,1 1,313% - 14% 13,9 38,1 26,4 6,4 174 50,7 2,5Total 11,3 100,0 100,0 3,0 176 51,7 1,9

35

Origination Rate for VIS and Non VIS Mortgage loans*

*Origination Rate = Value of Originated Loans in t / Value of Outstanding loans in t-1.

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%F

eb-9

4

Ago-9

4

Feb-9

5

Ago-9

5

Feb-9

6

Ago-9

6

Feb-9

7

Ago-9

7

Feb-9

8

Ago-9

8

Feb-9

9

Ago-9

9

Feb-0

0

Ago-0

0

Feb-0

1

Ago-0

1

Feb-0

2

Non VIS

VIS

36

Determinants of the Origination RateVariable Dependiente LOG(ORIGTOT) LOG(ORIGVIS) LOG(ORIGNOVIS)Procedimiento OLS OLS OLS

Constante -3,75 1,91 1,89Estadístico t -2,31 0,95 0,96Probabilidad 0,02 0,34 0,34

DUM99-01 -0,55 -0,33 -0,42Estadístico t -4,45 -2,50 -3,10Probabilidad 0,00 0,01 0,00

LOG(Variable Dependiente (-1)) 0,29 0,60 0,27Estadístico t 3,08 7,60 2,80Probabilidad 0,00 0,00 0,01

LOG(VENCIDA(-1)) -0,28 0,03 -0,34Estadístico t -2,65 0,27 -2,56Probabilidad 0,01 0,79 0,01

LOG(CUBRIMIENTO(-1)) -0,55 -0,29 -0,95Estadístico t -5,25 -2,80 -6,10Probabilidad 0,00 0,01 0,00

LOG(LIQUIDEZ(-1)) -0,18 -0,31 -0,10Estadístico t -1,07 -1,50 -0,49Probabilidad 0,29 0,14 0,63

LOG(SOLVENCIA(-1)) 1,93 1,13 1,88Estadístico t 4,46 2,31 3,84Probabilidad 0,00 0,02 0,00

LOG(TASA(-1)) -1,65 -1,16 -2,38Estadístico t -3,07 -1,88 -3,46Probabilidad 0,00 0,06 0,00

R2 ajustado 0,94 0,83 0,94Log verosimilitud -2,26 -17,23 -21,20Durbin Watson 2,08 2,36 2,11Número Observaciones 87 87 87

37

Origination Rate: Observed, Fitted and Forecasted with and without Legal Instability

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

3,0%

3,5%

1995:05 1995:12 1996:07 1997:02 1997:09 1998:04 1998:11 1999:06 2000:01 2000:08 2001:03 2001:10 2002:05

Observado Fitted Value Proyectado sin IJ Proyectado con IJ

38

Determinants of Delinquency Levels

Regresión 1 2 3 4 5 6

NivelesPrimeras

diferencias § Niveles Niveles NivelesPrimeras

diferencias §

Constante 0.007368*** 0.052294*** 0.007226*** 0.006028*** -0.01189*** 0.00537***Estadístico t      2.97   21,38      2.91   2,43 -13,06 -6,81

log(MORA(-1)) 0.899753*** -0.29727*** 0.899748*** 0.899755*** 0.898645*** -0.29752***Estadístico t   7128.53   -1156,9   7128.57    7128.70 7110,18 -1152,8

AMORT 0.028902*** 0.003827*** 0.028861*** 0.028842*** 0.026253*** 0.005831***Estadístico t     95.56   12,14     95.42   95,36 86,72 19,95

BANCO -0.00944*** -0.0027*** -0.00940*** -0.00944*** -0.00718*** -0.00236***Estadístico t    -43.45   -14,14    -43.26    -43.42   -32,91 -11,48

VIS/NOVIS -0.01787*** 0.000523*** -0.01788*** -0.01781*** -0.01391*** 0.001739***Estadístico t    -65.32   1,11    -65.36     -65.11 -52,85 7,22

SALDOI -0.00811*** -0.00005*** -0.00817*** -0.00811*** -0.00250*** 0.000245**Estadístico t    -49.65   -1,35    -49.99     -49.65   -22,87 2,33

TASA -0.08925** 0.120914*** -0.08814*** -0.07909** 0.030782*** 0.152744***Estadístico t    -17.25   28,67    -17.04     -15.24  6,27 40,7

PLAZO -0.01872*** -0.00962** -0.01884*** -0.01887*** -0.00017*** -7.17E-06**Estadístico t    -40.64   -23,01    -40.91    -40.96 -48,6 -2,12

LTV 0.179184*** 2.875096*** 0.179501*** 0.180415*** 0.147596*** 0.598189***Estadístico t    234.74   366,42 235,11    235.86 259,58 191,25

EDAD 0.025317*** 0.025492*** 0.025621*** 0.000680***Estadístico t    165.28   166,44 166,73 187,8

PRODIND -0.02062*** -0.03091*** -0.02534***Estadístico t -19,28 -27,23 -22,93

WMIN -0.12541*** -0.20100*** -0.15654***Estadístico t -24,69 -37,18 -29,88

DUMMY 1999-2001 0.001573***    0.002487*** 0.001271*** 0.004056*** 0.005438***    0.004602***Estadístico t      7.38         12.38 5,94 17,2 23,33 21,04

R2 ajustado 0,80927 0,09082 0,80911 0,80911 0,80929 0,09082Observaciones Incluídas13885590 13677431 13885590 13885590 13885590 13677431Durbin Watson 2,31 1,87 2,32 2,31 2,31 1,88

39

Months in Delinquency: Observed, Fitted y Forecasted without Legal Instability

0

0,5

1

1,5

2

2,5

3

3,5

4

4,5

5M

ar-9

4

Sep

-94

Mar

-95

Sep

-95

Mar

-96

Sep

-96

Mar

-97

Sep

-97

Mar

-98

Sep

-98

Mar

-99

Sep

-99

Mar

-00

Sep

-00

Mar

-01

Sep

-01

Mar

-02

Altu

ra d

e M

ora

prom

edio

(M

eses

)

Fitted Value Proyectado con IJ Observado

40

Determinants of the Default ProbabilityMétodo: PROBIT BINARIORegresión 1 2C -6,37 -7,87Probabilidad 0,00 0,00Efecto marginal -0,31 -0,35DUM99 1,02Probabilidad 0,00Efecto marginal 0,05DUM00 0,32Probabilidad 0,00Efecto marginal 0,01DUM01 -1,26Probabilidad 0,00Efecto marginal -0,06VIS/NOVIS -0,14 -0,10Probabilidad 0,00 0,00Efecto marginal -0,01 0,00BANCO -0,17 -0,10Probabilidad 0,00 0,00Efecto marginal -0,01 0,00AMORT -0,30 -0,36Probabilidad 0,00 0,00Efecto marginal -0,01 -0,02LOG(PLAZO) 0,43 0,61Probabilidad 0,00 0,00Efecto marginal 0,02 0,03LOG(1+TASA) 4,71 6,17Probabilidad 0,00 0,00Efecto marginal 0,23 0,27LOG(1+SALDOI) 0,25 0,13Probabilidad 0,00 0,00Efecto marginal 0,01 0,01LOG(1+LTVORI) 1,36 1,32Probabilidad 0,00 0,00Efecto marginal 0,07 0,06LOG(1+MORAPROM) 0,64 0,70Probabilidad 0,00 0,00Efecto marginal 0,03 0,03LOG(1+GANCAP) -3,02 -3,47Probabilidad 0,00 0,00Efecto marginal -0,15Observaciones incluidas 161.491 161.491R2 de Mcfadden 0,32 0,40Log verosimilitud -15294 -13436Iteraciones hasta convergencia 7 14

41

Marginal Effect Over the Default Probability

Incondicional 1999 1999 y 2000 1999, 2000 y 2001

VIS/NOVIS 2,1% 0,1% -0,7% -0,7%

BANCO -10,8% -5,7% -6,6% -0,7%

LOG(1+LTVORI) 0,0% 8,0% 10,1% 3,6%

LOG(PLAZO) 1,1% 1,1% 3,0% 0,6%

LOG(1+TASA) 39,0% 15,7% 31,0% 12,4%

LOG(1+SALDOI) 3,0% 1,4% -0,4% 0,4%

LOG(1+GANCAP) 0 -28,5% -28,5% -9,7%

LOG(1+MORAPROM) 4,2% 4,7% 4,3% 2,6%

Vigencia del Crédito

42

Default Probability as a Function of Original LTV

0%

1%

2%

3%

4%

5%

6%

7%

8%

4% 16% 28% 40% 52% 64% 76% 88% 100%LTV Original

Pro

babi

lidad

de

entr

ega

de B

RP

Incondicional

Vigentes en 1999 y 2000

NO VISVIS

43

THE COSTS OF THE CRISIS

44

Financial Sector Bailout Cost

Millions pesos % GDPCapitalización banca pública (Efectivo + Bonos) 6.053.099 3,20%BCH 1.291.788 0,70%Banestado 1.240.121 0,70%Bancafé 1.254.883 0,70%CISA 670.307 0,40%Granahorrar 701.000 0,40%IFI 700.000 0,40%Banco Agrario 150.000 0,10%FES 45.000 0,00%

Liquidación Caja Agraria 1.300.000 0,70%TOTAL CAPITALIZACIÓN BANCA PÚBLICA 7.353.099 3,90%Capitalización banca privada a cargo de accionistas 651.747 0,40%Resolución 06 de 1999 535.658 0,30%Resolución 06 de 2001 116.089 0,10%

Bonos Fogafín corto y largo plazo 1.378.873 0,70%Resolución 06 de 1999 778.962 0,40%Resolución 06 de 2001 599.911 0,30%

TOTAL CAPITALIZACIÓN BANCA PRIVADA 2.030.620 1,10%

TOTAL CAPITALIZACIONES PÚBLICA Y PRIVADA 9.383.719 5,00%

Apoyo a deudores hipotecarios 600.000 0,30%

Subsidios de vivienda de interés social 150.000 0,10%

Subsidio a la opción de readquisición 100.000 0,10%

Capital semilla del FRECH 350.000 0,20%Reliquidación deudas hipotecarias 2.563.602 1,30%

TOTAL APOYO A DEUDORES Y RELIQUIDACIÓN 3.163.602 1,60%

TOTAL 12.547.321 6,60%