inter-american development bank … - palestra_daniela... · housing demand shaped by patterns of...
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November 2 0 0 7
INTER-AMERICAN DEVELOPMENT BANK
Housing Finance in Latin AmericaDaniela Carrera Marquis
STRUCTURED AND CORPORATE FINANCE DEPARTMENT
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Agenda
I. The Housing Gap in Latin America
II. The Role of Housing Finance
III. Basic Layout for Success
IV. Country Highlights –Chile, Peru, Ecuador
V. IDB and Housing Finance in the Region
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I. Housing Gap
The housing deficit in Latin America is estimated at 54 million units (UN 2004):
Ecuador ~1.5mn, Brazil ~9mn, Mexico ~4.3mn, Peru ~2mn.
Housing demand shaped by patterns of population migrations and employment levels.
Important structural differences across the region, still overall relatively low levels of mortgage financing:
Outstanding mortgages as percentage of GDP:
Chile ~12%; Colombia ~5%; Brazil ~2%, Ecuador ~2.7%, Peru ~3%.
Outstanding mortgages as percentage of total loan portfolio:
Chile ~18%, Colombia ~20%, Peru ~9%, Mexico ~13%, Ecuador ~7%.
Macroeconomic stability to foster the development of housing finance.
Growth, Interest rate and unemployment levels
Systemic risk and macroeconomic shocks
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Source: IUHF 2001
Asia$1,989
North America$6,087
(US 80% GDP)
Europe$3,012
(41% GDP)
Latin America$132
(Avg 5% GDP)
Africa$50
US$ Billion
I. Mortgage Market Size
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II. The Role of Securitization in Housing Finance in the Region
Enables originators support growth and depth in primary origination.
Diversifies sources of long-term funding for originators.
Lengthen the maturity of loans improving affordability and reduce spreads.
Creates a new asset classes independent of originator risk.
Creates a bridge between domestic savings and the financing requirements of housing finance lenders.
Fosters asset diversification of investment portfolios of institutional investors and pension funds by providing additional long-term investment instruments.
Attracts private sector actors to an area where governments have traditionally played the key role in closing the finance gap.
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II. Development of Viable Housing Markets in the Region
RMBS represents over one quarter of the structured finance deals in the region.
One of the fastest growing asset class in the local capital markets.
The region has witness important breakthroughs:
From the stability of the Chilean market to product driven volatility
The development of the Mexican market
From securitization of bridge loans to RMBS & cross border MBS
Structured deals to support important market challenges
NPLs issuances in Colombia
The pillars to create liquidity in the mortgage industry
CRIs, securitization companies and mortgage banks
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III. Foundations of an Efficient Mortgage Market
A. Adequate Legal Framework
B. Role of Government
C. Data Availability
D. Product Structure
i. Credit Enhancements
ii. Pricing Considerations
E. Mortgage Origination and Warehouse Facilities
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A. Adequate Legal Framework
Importance of a comprehensive, strong and tested regulatory framework
Well defined and protected property rights.
Foreclosure and repossession processes must be transparent, relatively costless and friendly to lenders.
Property appraisal and insurance regulation should prevent moral hazard.
True sale of assets recognition in RMBS operations versus on balance(secured interest on-balance sheet).
Bankruptcy remote SPE creation.
Securitization laws.
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A. Adequate Legal Framework – Comparison
Country Main Features
Brazil Off-Balance sheet through FIDC and Securitization Companies. MBS (CRIs). Mortgage foreclosure and Alienação FiduciáriaLeverage constraints of FIDC
Chile Off-balance sheet through Patrimonios SeparadosMortgages and Housing Leasing.
Mexico Well-established, true sale mechanism for transfer to Issuing Trusts (fideicomisos) that issue MBS.Foreclosure process to vary from state to state
Peru On balance sheet Mortgage bonds and off-balance sheet (fideicomisos).Relatively lengthy foreclosure processes.
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B. Role of Government
Enabling Role of the State – it should be less of a direct lender, rather the State should build a conducive market environment and play a catalytic role to expand accessibility.
Creator of a conductive legal and regulatory framework
Stable macro-economic environment to attract investors
Promoter of secondary mortgage agencies (SMAs)
From Fovi to SHF in Mexico
Mi Vivienda Program in Peru
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C. Data Availability
Industry agency/repository of asset performance statistics.
Information pooling and standardization of data definitions.
Existence of reliable payment history data (delinquencies, defaults, market value decline, costs of foreclosure and sale.
Existence of reliable data on repayment behavior (including rules at the product level).
Existence of recovery data (foreclosure and property title legislation).
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C. Data Availability – ComparisonCountry Main Features
Brazil Market data is not available at an agency level solely at company level. No significant number of rated CRI issuances to have important information base at the level of rating agencies.
Chile Data is available through company level -securitization companies web site and ratings agencies on all active MBS issues. Limited access to market aggregate delinquency and pre-payment historic data.
Mexico Amsofol, industry association, keeps performance statistics on Sofoles portfolios under administration. SHF monitors performance and statistics relating to all MBS issues using SHF products. Rating agencies also have information on all MBS issues to date. However, limited access to aggregate delinquency and pre-payment historic data.
Peru Data is available at Mi Vivienda but limited public access. Data available at a company level. No significant number of mortgage bond issuances to have important information base at rating agencies.No MBS
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D. Credit Enhancements
Credit enhancement through investors segmentation (Tranching): Senior, Mezzanine and Junior
Mortgage Insurance
Pool Insurance
Bond Insurance
Financial Guarantee: Partial Credit Guarantee and Full Wrap.
Political Guarantees: cross-border issuances
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D. Role of Credit Enhancers
Provide interest rate and exchange rate swaps
Take prepayment risks
Provide credit enhancement (credit, liquidity, maturity enhancements)
Support the entrance of monoliners in the market
Attract foreign investors
Support mortgage agencies (titularizadoras and government mortgage agencies)
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D. Role of Credit Enhancers
Country Main Features
Brazil Market has limited value perception of bond’s guarantees. Standard product has no mortgage insurance.Existence of certain regulatory for FIDCs.
Chile
Mexico Pool and bond insurancePlayers in credit enhancement market (SHF, Multilaterals, Development Banks, Monoliners).Standard product has mortgage insurance.
Peru Untested market.Standard product has no mortgage insurance.
Mortgage, pool and bond insurance.Credit enhancers.
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D. Pricing
Existence of a domestic yield curve.
Liquidity of secondary market for private instruments.
Product penetration among investors:
premium requirement.
valuation of collateral.
valuing pre-payment risk.
valuing rated and non-rated servicers.
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D. Pricing
Country Main Features
Brazil Limited number of long-term private domestic fixed income instruments. Limited depth of secondary market. Buy and hold.Pension Funds have limited exposure to CRIs. Primarily commercial/industrial CRIs, less so of residential CRIs.
Chile Domestic yield curve up to 25 years. Pension funds have exposure to MBS issuances. Exposure affected by the 2004 “pre-payment crisis”. Active life insurance companies compete with securitization companies on EMCs and HLCs markets.Relatively deeper secondary market.
Mexico Domestic yield curve exists up to 25 years. Over $1bn in MBS issuances since 2003 mostly held by institutional investors.Relatively limited secondary market. Buy and hold.
Peru No MBS issuances. Institutional investors hold mortgage bonds issued by the largest financial institutions.Relatively limited secondary market. Buy and hold.
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III. Overall Comparison.
Country Main Features
Brazil True -sale structures –CRIs -Non recourse to originatorsNon rated servicers; few and new market players.Risk tranching: senior, mezzanine and subordinated.CRIs up to 20 years. Prepayment risk passed through to investors.Very limited standardization of mortgage loans.
Chile On balance sheet and true-sale structures.-Non-recourse to originatorsRated ServicersRisk tranching: senior, mezzanine and subordinated.Credit enhancements: partial credit guarantees and full wraps.MBS up to 30 years on EMCs and 20 years on HLCs Standardization of mortgage loans.
Mexico Non-recourse to originators. Major Sofoles have servicer ratings. SHF Standardization.Risk tranching: senior, mezzanine and subordinated.Credit enhancements: partial credit guarantees and full wraps.MBS with legal tenor up to 25 years. Prepayment risk passed to investors
Peru On balance sheet structures. Existing framework for true-sale structures.Recourse to originatorsServicing activities performed by same financial institutions that are rated on a corporate basis, but not specifically as servicers.Mortgage bonds up to 10 years. Prepayment risk absorbed by issuer.Limited standardization of mortgage loans.
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E. Mortgage Origination and Warehouse Facilities
Accumulation of critical mass of collateral to place RMBS/CMBS amongst investors.
Revolving process results in high impact in capital markets and housing financing.
Isolation of the collateral through an SPV.
Independent agents to service and to oversee collateralization levels and cash flows.
Purchase of mortgages from based on standards of eligibility criteria
Access to funding of Warehouse facilities.
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E. Key Warehouse Risks
Interest Rate Risk: –liquidity of derivative markets. Mitigating basis risk.
Market Value Risk: –mark-to-market collateral value vs cash-flow basis.
Liquidity Risk: –refinancing risk –ABCP.
Take-out Risk: -collateral liquidity.
Foreign Exchange Risk: –liquidity of derivatives markets.
Bankruptcy Risk: -potential impact of bankruptcy of the originator.
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E. Key Warehouse Risks -Comparison
Country Main Features
Brazil Deep derivatives market.No mark-to market of mortgage assets.No clear mitigants for take out risk. Financial institutions potential buyers of mortgage portfolios.
Chile Deep derivative markets.No mark-to market of mortgage assetsNo clear mitigants for takeout risk, although life insurance companies could be buyers of mortgage loan portfolio
Mexico Deep derivatives market.No mark-to-market of mortgage assetsNo clear mitigants for takeout risk. SHF may be backup taker.
Peru Relatively illiquid derivatives market. No mark-to market of mortgage assets.No clear mitigants for take out risk. Financial institutions potential buyers of mortgage portfolios.
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IV. Housing Finance in the Region – Highlights on Chile
Main Instruments:
Mortgage bonds (letras hipotecarias)
Endorsable mortgage contracts (EMCs)
Non-endorsable mortgage contracts (NEMCs)
Housing leasing contracts (HLCs).
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IV. Housing Finance in the Region – Highlights on Chile
Letras EMCs NEMCs HLCs
Term > 1 yr (usually 8~20 yrs)
1~30 yrs (usually 12~20 yrs)
Conditions adjustable according to free negotiations between borrowers and lenders
up to 20yrs
Maximum amount
75% 80% 95%
Target Houses <$100,000 and DTI < 25%
No restrictions(usually LTV<80% and DTI<25%)
Houses <$50,000
Interest Fixed or variable Fixed
Insurance Mandatory fire & desgravamen Madatory fire &desgravamen
Pre-payment No restrictions >$ 150,000 or LTV<25% need consent from creditor<$150,000 no restrictions
No restrictions
Securitization No Yes Yes Yes
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IV. Housing Finance in the Region- Highlights on Peru
Mortgage market growing at 20% annual basis.
Low delinquency ratios (~1%).
Two main mortgage products: Mi Vivienda and Traditional
Modifications of the Mi Vivienda program: from lender to guarantor.
Banks have incentives to keep assets in the balance sheet.
Limited of standardization of mortgage instruments.
Sound securitization framework.
High dollarization of existing mortgage portfolios.
On balance sheet funding –Mortgage bonds.
Ongoing securitization efforts.
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VI. Housing Finance in the Region- Highlights on Peru
Market primarily composed of two basic types of mortgage loans:
The traditional mortgage targeted to A-B segments of the population and primarily originated by large financial institutions under their individual underwriting criteria, and
Standardization of the Mi Vivienda product targeted to B-C segments.
Mechanism to provide a financial incentive for timely payments, the Good Payer Refund -Bono al Buen Pagador (“PBP”)[1]- that provides an incentive for timely payments by deducting 15% of the monthly quota.
Risk coverage -Cobertura de Riesgo de Credito (“CRC”)- similar to a mortgage insurance for 1/3 of the total loss[2].
Recent product developments include variable and fixed rated mortgage loans in local currency.
[1] Mi Vivienda (December 2005): 99.5% of borrowers benefited from the Bono al Buen Pagador.
[2] Mi Vivienda would cover 1/3 of the loss, if any once foreclosure proceedings, recovery and sale of the real estate asset has occurred.
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V. IDB and Housing Finance in the Region
Commitment to the closing of the housing gap of the region:
Supports policies and sustainable programs & projects to improve housing conditions for low-income households.
Supports improvement of public sector effectiveness both as a facilitator of private sector initiatives and in the management of public resources allocated to the sector.
Promotes sector-wide efficiency of housing markets and related markets such as land, financing and construction materials and services.
Commitment to the consolidation of domestic long-term private capital markets to provide stability in private funding to housing finance.
To foster the private sector to evolve as the natural source for housing finance.
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V. IDB and Housing Finance in the Region- Objectives
Diversification of funding sources and establishment of local capital markets as the primary source of funding for housing.
Reduction of the dependency on public funding
Contribution to improve the terms of mortgage financing: lower costs at longer tenors.
Support the development of primary and secondary mortgage markets.
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V. Advantages of working with IDB
IDB enjoys certain privileges in its member countries
de jure: exemption from withholding taxes
de facto: preferred creditor status
Extended tenor consistent with assets life
Pursuit of innovation
AAA rating/Competitive market pricing
The Bank’s participation helps mitigate political risks:
Oldest and largest multilateral lender to Latin America and the Caribbean: US$ 6-7 billion annually
Deep appreciation of LAC markets- long-term relationship with member countries
Risk sharing partnership
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V. IDB -Financial Instruments
Partial Credit Guarantees
Instruments that provide credit enhancement to debt issues
Credit enhancements are tailored for each transaction
Improve placement with investors & achieve better terms for issuers
IDB will cover a share of credit risk as needed to:
Access private long-term capital for local borrowers and to promote local capital markets
Reduce need to fund in foreign exchange for domestic-revenue based borrowers (reduce asset liability mismatch)
Up to 50% of total project cost/bond issuance to a maximum of US$200 million.
Financial wraps together with Monoline Insurers and other co-guarantees.