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Lat Am Housing Finance Feb 09


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Some Latin American capital markets remain open in spite of the crisis. A history of local reforms has been negated in many cases by an externally driven funding crisis.

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Lat Am Housing Finance Feb 09

  1. 1. 1<br />Funding for Housing Finance – LACBritt GwinnerPrincipal Housing Finance Specialist, LACFPD ForumFebruary, 2008<br />
  2. 2. 2<br />Contents<br />Overall Issues <br />Latin American macro policies and financial systems are much stronger than in the past<br />Evidence of a credit crunch is building<br />Colombia<br />Domestic capital market persists <br />Limited public sector involvement<br />Peru<br />Domestic capital market persists <br />Conclusions<br />2<br />
  3. 3. 3<br />Section 1 Overall Issues<br />3<br />
  4. 4. 4<br />Macro Stability Much Improved<br />Source: Economist Intelligence Unit<br />4<br />
  5. 5. 5<br />Many Major Countries are Structurally Sound<br />Macro stability and financial policy framework improved in many cases…<br />Recent inflation spike likely to subside with commodity prices<br />Mexico – Post-’96 crisis structural shift and private sector development, inflation down since ’98, mortgage securitization since ’02, current U.S. crisis stopped demand for MBS, commercial paper<br />Brazil – Inflation moderated since 1998, limited ABS/MBS activity, reforms to legal framework for structured finance<br />Colombia – Post-’98 crisis structural shift, reduced inflation since ’00, continued domestic MBS demand from private pension managers<br />Peru – Relatively low inflation since ’00, ABS markets sustains limited activity, potential MBS issue 2009, persistent demand for MBS from private pension managers<br />Chile – Inflation low since 1980s, private pension funds and insurers as bond buyers, securitization long-established, active bond market, slowdown in mortgage securitization since 2002<br />…and worsened in some <br />Argentina – securitization grew until ’02 crisis, now stopped, problems with currency devaluation, rising inflation, inflation measure, seizure of private pensions<br />Venezuela – Rising inflation, government price setting in financial sector<br />5<br />
  6. 6. 6<br />LAC - Housing Shortages Persist<br />Formal sector housing production has rarely matched the rate of household formation<br />For example in Mexico, production approximated demand for the first time in 2006 (600k mortgages issued), probably will fall short in 2009<br />From the 1950s to the 2000s, formal sector housing production was inadequate to meet demand<br />Affordable housing production often linked to slow-moving or small subsidy programs <br />30% or more of the housing stock is substandard in most Latin American countries<br />Without mortgage financing or access to titled land, people frequently self-build houses on squatted land <br />Result: missing connections to sewage or water, built of inadequate materials, stuctures inadequate to withstand earthquakes<br />Inadequate housing compounds the cycle of poverty – health, social investment, wealth-building<br />6<br />
  7. 7. 7<br />LAC – Emerging Credit Crunch<br />Consumer lending fell 3.8% in 4Q08 in Mexico, rate of growth much reduced in Brazil (1.2%), Chile (0.4%)<br />Lending spreads rising 4Q08 <br />Private lending replaced by public <br />Brazil private bank lending growth rate fell by 20% 4Q08 while public bank lending growth rate rose by 5%<br />BNDES more active lending to large entities like Petrobras at expense of SMEs<br />Mexico – capital market funding of Sofol mortgage lending replaced by public bank SHF<br />Banking systems in many countries well-capitalized (notably Mexico, Brazil, Peru, Colombia, Chile) but will come unders strain<br />What will happen to external corporate funding? Est. USD 61.6 billion to be refinanced in Brazil in ’09<br />7<br />
  8. 8. 8<br />LAC – Emerging Credit Crunch, Underdeveloped Markets<br />Consumer lending fell 3.8% in 4Q08 in Mexico, rate of growth much reduced in Brazil (1.2%), Chile (0.4%)<br />Lending spreads rising 4Q08 <br />Private lending replaced by public – Brazil private bank lending growth rate fell by 20% 4Q08 while public bank lending growth rate rose by 5%<br />Retail access to finance is limited, ranging between the upper 30% to 50% of the population<br />Broadly, banks don’t like to reach down market<br />Capital markets are underdeveloped<br />Corporate bond markets are small in relation to banking systems<br />Yield curves lack liquidity in mid to long maturities<br />Where private pensions exist, they tend to be invested at shorter durations than liabilities<br />8<br />
  9. 9. 9<br />Mortgage Funding – Many Experiments, Deposits Prevail<br />History of failed public housing banks in many countries (e.g., Chile, Colombia, Uruguay)<br />Banking-based with limited capital markets:<br />Mexico – government-sponsored housing/pension fund; mortgage default insurance and NBFIs since mid-1990s; NBFIs funded by government development bank, then capital markets; recent move to private MI<br />Colombia – dedicated mortgage Savings and Loan system from 1970s until crisis of 1998; government MI for social interest mortgages<br />Peru – Banks, ABS markets sustain limited activity, single MBS issue ’07, maybe another ‘09, persistent demand for MBS expressed by private pension managers<br />Chile – Banks, mortgage bonds and securitization long-established, active bond market, private pensions and insurers, slowdown in mortgage securitization since 2002<br />Argentina –public-private mortgage bank, securitization from late-1990s until ‘02, problems with inflation measure, macro environment, seizure of private pensions<br />Brazil – Banks, plus mortgage market dominated by a single tax-advantaged lender, limited securitization by developers<br />Central America – Aside from Panama, no capital markets <br />Caribbean – Small banking markets, limited critical mass<br />9<br />
  10. 10. 10<br />Section 2 Mexico<br />10<br />
  11. 11. 11<br />Mexico – Public lenders, NBFIs, Banks, Capital Markets<br />Persistent demographic housing demand – average 775k new households per year 2000-2030, 31% of existing stock is substandard<br />House prices down 1% through 2Q08, inventories have declined in low cost segments<br />Annual demand estimated at 1.3 million units, at moderate cost, would be a total annual market of USD 45.5 billion<br />Private sector mortgages up 13.5% yoy to MXP 407 bill. (USD 38.7 bill.) outstanding as of 6/08, of which 67% at banks, 22% at Sofols, 11% securitized <br />Infonavit (public housing/pension fund) up 7.8% at 6/08, to MXP 570.2 billion (USD 27.6 bill.)<br />Leadership, funding role for private sector by Sociedad Hipotecaria Federal (SHF), public second tier development bank – lines of credit, mortgage default insurance, support of securitization<br />Public sector funding for Sofols will continue – SHF, Infonavit, Fovissste intend to finance 700k+ units/year, Hipotecaria Total shows signs of revival – government sees housing as major delivery channel for fiscal stimulus<br />Sofols remain the most important private sector lenders to moderate income households<br />Mexico needs access to capital markets - Public funding and domestic savings are inadequate to eliminate substandard units and meet new demand <br />11<br />
  12. 12. 12<br />’07-’08 Borrowing Costs Rise, Home Sales Fall<br />Profit margins at stronger Sofols have been hit much harder by rising borrowing costs than by rising credit reserves (e.g., 87% of Su Casita’s 3Q08 drop in financial margin was from rising interest charges, versus 13% from rising credit reserves)<br />Some Sofols were excessively leveraged with commercial paper, were more vulnerable to market slowdown (notably Metrofinanciera)<br />The international credit crunch stopped commercial bank warehouse and construction finance lines, commercial paper issuance, securitization of mortgage and construction credits<br /><ul><li>Slowing GDP hit Sofol clients hardest, reduced home sales
  13. 13. Going forward, slowing GDP (zero growth) is not likely to completely counter rapid household formation or recreate the Tequila crisis </li></ul>12<br />
  14. 14. 13<br />Defaults Rise More at Sofols than at Other Lenders<br /><ul><li>Defaults reflect both relative effects of the market slowdown…
  15. 15. Bank originations grew more in 2008 than Sofols, so the denominator for the bank NPL ratio grew, making the outcome look better,
  16. 16. But commercial bank delinquencies have risen somewhat, no public detailed data
  17. 17. …and self-inflicted problems</li></ul>Problems with large developer-linked originations (25% of total Sofol/SHF originations ’03-’07, Sofols have been tightening), some weak collections <br />Consumer overleveraging (a bank and Sofol problem, banks are now reducing credit card offerings), <br />Regional effects – e.g., link to auto part plants in the North<br />Project-specific issues – a few contractors failed to deliver<br />13<br />
  18. 18. 14<br />Mexico RMBS Issuance 2008<br />RMBS issuance has slowed in 2008 as the public market remains dormant for Sofoles<br />Overall public issuance expected to drop in 2008 compared to 2007<br />Year end issuances (BBVA, Infonavit) supported by SHF purchases<br />Where Sofols need to securitize, banks can wait<br />Note: In millions USD. Graph taken from FitchRatings Mexican RMBS Performance, November 10, 2008. Includes Fitch rated transactions only<br />14<br />
  19. 19. 15<br />Mexico RMBS Performance through 2008 Cumulative Delinquencies by Issuance Year<br />Summary of 56 Mexico RMBS transactions by year of issuance<br />Loans in the 2006 issuances are performing worse than 2004 and 2005 most likely due to relaxed underwriting criteria including higher LTVs<br />
  20. 20. 16<br />Mexico - Housing Expectations for 2009 (1)<br />Not the Tequila Crisis - Mortgage sector is young, but underwriting and documentation practices are much stronger and standardized now, MI indemnifies losses, foreclosure was reformed, macroeconomic management is stronger, banks are well-capitalized<br />16<br />
  21. 21. 17<br />Mexico - Housing Expectations for 2009 (2)<br />Demand persists – demographically-driven housing and mortgage demand constrained somewhat by zero GDP growth, lower employment<br />Sofol defaults continue at recent rates, worsen if employment collapses<br />Public Funding Redux<br />Infonavit and Fovissste loan production continues, funded by 5% payroll tax, limited private placement of Cedevis with SHF <br />Infonavit goal for ’08 was 500k units, Fovissste 114k - expected same for ‘09<br />SHF funds construction lines, mortgages via Sofols – World Bank provided USD 1 billion in long term financing 11/08, disbursements 12/08, 3/09, IADB providing USD 2.5 billion<br />SHF goal for ’08 was 108k units, expected same ‘09<br />Conservative developers build to Infonavit/Fovissste specifications, only start construction as sales are completed and financed<br />Ratings-driven capital markets - many investors had bought MBS without understanding, now are waiting for resolution of U.S. crisis to buy MBS again. <br />17<br />
  22. 22. 18<br />What Next for NBFIs/Sofols and MI?<br />As foreseen in the original industry strategy, many Sofols moved away from SHF funding over the past five years with securitization, bank lines of credit, commercial paper; now unavailable mostly because of factors beyond their control<br />Larger Sofols may merge with depository institutions to survive periodic capital markets crises, resulting withdrawal of commercial bank and capital market funding (e.g., Hipotecaria Nacional and Bancomer, Su Casita’s attempt to sell itself to Caja de Madrid)<br />Public funding will be present at some level for the foreseeable future – but SHF expresses an intention to move down market with its direct funding<br />Private mortgage default insurance (MI) requires U.S. participants (no interest from Mexican insurers), but parents are troubled (Genworth stopped new underwriting, AIG in runoff, PMI stopped new market development)<br />18<br />
  23. 23. 19<br />Section 3 Colombia<br />19<br />
  24. 24. 20<br />Banks, Capital Markets, Limited Public Lending<br /><ul><li>Persistent demographic housing demand – 3.8 million substandard units, or 36% of existing stock
  25. 25. House price growth 10.9% since 2003, moderate recovery from 1990s boom and 1998 meltdown
  26. 26. Banks dominate the financial system - no NBFIs for mortgages, BBVA, Bancolombia responsible for 55.5% of new lending 11/08
  27. 27. Titularizadora Colombiana (TC) – Bank-owned securitization company, brought USD 3.2 billion to market since 2001
  28. 28. Resurgence of public sector - Fondo Nacional de Ahorro (FNA) – public retail mortgage lender for state employees, now permitted to serve informal, independent workers with contractual savings program
  29. 29. Mortgage disbursements up 18% through 11/08, but the reach down market is limited</li></ul>20<br />
  30. 30. 21<br />Mortgage Lending Slows, NPLs Rise Moderately<br />Source: Superfinanciera<br />21<br />
  31. 31. 22<br />Securitization Steady as Portion of Total Lending<br />Source: Titularizadora Colombiana<br />22<br />
  32. 32. 23<br />Credit Performance has Improved<br />Source: Titularizadora Colombiana<br />23<br />
  33. 33. 24<br />Colombian Domestic Capital Markets Open for Business in 2008<br />Banks employ mixed funding model, 75% with deposits, 25% securitized (versus historically about half and half in the U.S.)<br />Like Mexico, moving to fixed rate peso lending from inflation-adjusted<br />Five TIPS issues in 2008, one UVR, four pesos<br />TIPS E-9 Dec ’09, COP 400.6 billion (USD 156.3 million)<br />42% purchased by domestic pension funds, 42% by banks<br />Since TC’s creation in 2001, a total of COP 8.26 trillion securitized (USD 3.2 billion), 28% of mortgage portfolio<br />24<br />
  34. 34. 25<br />Section 4 Conclusions<br />25<br />
  35. 35. 26<br />No Good Deed Goes Unpunished<br />Economic and financial reforms in many countries have been negated by an externally-driven funding crisis<br />Funding costs rose, external funding dried up, liquidity flowed back to financial centers<br />Reduced demand for commodities, other LAC exports will reduce economic growth<br />Growth of nascent domestic capital markets has slowed<br />LAC housing finance markets are not subprime – stronger underwriting, fundamental lack of housing supply – no overbuilding in moderate cost segments<br />But, some Mexican lenders chased growth and let standards slip – but this hasn’t affected many MBS issues<br />Mexican, other investors are wary of MBS as a result of U.S. market, not performance of emerging market MBS<br />26<br />
  36. 36. 27<br />More Work is Needed<br />Importance of domestic fixed income markets is clear – depends on a range of policy efforts – private pensions, public debt yield curve, bankruptcy remote vehicles, covered bond legislation, disclosure requirements, etc.<br />Flexible funding models – NBFI provide a demonstration effect, niche strategy, but are vulnerable when capital markets shut down<br />27<br />