Hipotecaria Su Casita Case Study of primary Mortgage Lending in Mexico The World Bank Housing Finance in Emerging Markets March 10-13, 2003 Washington,

Hipotecaria Su CasitaHipotecaria Su Casita

Case Study of primary Mortgage Lending Case Study of primary Mortgage Lending in Mexicoin Mexico

The World BankThe World Bank

Housing Finance in Emerging MarketsHousing Finance in Emerging Markets

March 10-13, 2003 Washington, D.C.March 10-13, 2003 Washington, D.C.

Manuel CamposManuel Campos

[email protected]@sucasita.com.mx

2Housing Finance in Emerging Markets. Case Study in primary mortgage lending Su Casita

Hipotecaria Su Casita in the beginningHipotecaria Su Casita in the beginning• In 1994 , seven Sofoles (Limited Scope Financial In 1994 , seven Sofoles (Limited Scope Financial

Institutions) were authorized to act as financial Institutions) were authorized to act as financial intermediaries.intermediaries.

• HIPOTECARIA SU CASITA began operations with the HIPOTECARIA SU CASITA began operations with the following numbers:following numbers:– Capital:Capital: US$3 MM.US$3 MM.– Assets: Assets: $3 MM$3 MM– Credit Portfolio:Credit Portfolio: $2MM$2MM– No. of Loans: No. of Loans: 4545– Employees: Employees: Two Two – Offices: Offices: oneone– Funding: equity and a possibility of FOVI funding.Funding: equity and a possibility of FOVI funding.

• December 1994 the Mexican crisis starts:December 1994 the Mexican crisis starts:– Rates increased by 10 foldRates increased by 10 fold– Increase in delinquencyIncrease in delinquency– Bank withdraw from the “lending business”Bank withdraw from the “lending business”


Hipotecaria Su Casita todayHipotecaria Su Casita today8 years later ….8 years later ….• SU CASITA is one of fifteen of 15 mortgage Sofoles SU CASITA is one of fifteen of 15 mortgage Sofoles

with the following numbers:with the following numbers:– Capital: Capital: US$93MMUS$93MM– Assets:Assets: $1,300 MM $1,300 MM– Portfolio of Portfolio of $1,200 MM$1,200 MM– Loans: Loans: 65,00065,000– Employees: Employees: 672 672 – Offices:Offices: 104 104 in 67 cities.in 67 cities.– Funding: SHF (previously FOVI) funding (79%), Funding: SHF (previously FOVI) funding (79%),

Debentures and Debt Securities (11%), Financial Debentures and Debt Securities (11%), Financial Institution funding (10%).Institution funding (10%).

– Corporate credit rating: BBB+ from S&P, A3.mx from Corporate credit rating: BBB+ from S&P, A3.mx from Moody’s and from BBB Fitch.Moody’s and from BBB Fitch.

– Servicing rating: Above average from all three rating Servicing rating: Above average from all three rating agenciesagencies

– Su Casita has the FOURTH largest private mortgage Su Casita has the FOURTH largest private mortgage portfolio in Mexico.portfolio in Mexico.


Sustained growthSustained growth

• Su Casita’s growth has been Su Casita’s growth has been sustained by the following:sustained by the following:– High demand and growth of High demand and growth of

housinghousing: Gross annual : Gross annual household formation over 750 household formation over 750 thousand production of homes thousand production of homes has doubled.has doubled.

– Availability of fundingAvailability of funding: : • Governmental monies Governmental monies

available (FOVI-SHF, available (FOVI-SHF, Infonavit & FOVISSTE)Infonavit & FOVISSTE)

• Development of debt capital Development of debt capital marketsmarkets

– Favorable competitive environmentFavorable competitive environment. . In 1995 banks withdrew from the In 1995 banks withdrew from the housing mortgage markethousing mortgage market

– Business ModelBusiness Model.. Specialized Specialized financial institution.financial institution.

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

1996 1997 1998 1999 2000 2001 2002

Assets

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

1996 1997 1998 1999 2000 2001 2002

Loans in portfolio

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1996 1997 1998 1999 2000 2001 2002

Delinquency (US GAAP)

Su Casita’s Business ModelSu Casita’s Business Model

What are we doing right?What are we doing right?


Structure of the Mexican Housing Structure of the Mexican Housing MarketMarket• 20% of loans are 20% of loans are

originated and originated and serviced by private serviced by private playersplayers

GovermentDevelopers

INFONAVITINFONAVITFOVISSSTEFOVISSSTE

FOVI/SHFFOVI/SHF

BankBank

SU CASITASU CASITA

Sales force

Home BuyerHome Buyer

HousingDevelopers

Land Developers

Buiklds

$

5% de Payroll

$

Mortgage

Home

Land

Construction Finance

World bank

Federal budget

Debt market

Home


Su Casita’s functionSu Casita’s function• Main business lines:Main business lines:

– Construction lending (20%)Construction lending (20%).. Housing construction Housing construction financing with the take-out financing also provided financing with the take-out financing also provided by SU CASITA through individual mortgage by SU CASITA through individual mortgage underwriting. underwriting.

Housing developers are our main distribution Housing developers are our main distribution channelchannel

– Individual mortgages (80%):Individual mortgages (80%):• OriginationOrigination: Underwriting of new loans.: Underwriting of new loans.• ServicingServicing: Collection and foreclosure of mortgages : Collection and foreclosure of mortgages

originated by SU CASITA.originated by SU CASITA.• HoldingHolding: Loans originated are in our balance sheet, : Loans originated are in our balance sheet,

our capital supports the credit risk.our capital supports the credit risk.• SU CASITA sustains both credit and operational riskSU CASITA sustains both credit and operational risk. There . There

is no interest, term or prepayment risk. Assets mirror is no interest, term or prepayment risk. Assets mirror liabilities … PERFECT MATCHliabilities … PERFECT MATCH


Su Casita’s foundationsSu Casita’s foundations

• With the crisis of 1995 the With the crisis of 1995 the Mexican financial authorities Mexican financial authorities had to develop new ways to finance low income housing in had to develop new ways to finance low income housing in MexicoMexico..

• The Sofoles had been born by accident (NAFTA). We The Sofoles had been born by accident (NAFTA). We were in the right place at the wrong time for were in the right place at the wrong time for everybody else.everybody else.

• We We had to originate and service low income mortgageshad to originate and service low income mortgages {The only game in town}{The only game in town}

• From the beginning our main source of funds (FOVI) From the beginning our main source of funds (FOVI) did not want to work with us. Policies and incentives did not want to work with us. Policies and incentives were set in place so that: were set in place so that: – Develop efficient servicing model. With the margin Develop efficient servicing model. With the margin

we had.we had.– Could access the debt market (Diversify founding)Could access the debt market (Diversify founding)

• Could only focus on mortgages and construction Could only focus on mortgages and construction lending of one type of homes. {Specialization}lending of one type of homes. {Specialization}


ServicingServicing

• Average loan size is US$22,000Average loan size is US$22,000• Servicing income is US$250 per year/per loanServicing income is US$250 per year/per loan• We had to develop a low cost servicing model that We had to develop a low cost servicing model that

handled the credit risk and eventually allowed us to handled the credit risk and eventually allowed us to access debt market {World class servicer}.access debt market {World class servicer}.

Improved Servicing

Improved Risk

High volume (Loans and concentration) √On site collection √ √Standarization √ √Sound process and Automatization √ √Usage of exisiting infraestructure √Loss mittigation √Internal Audit √ √


Volume

• There are There are

significant significant

economies of scaleeconomies of scale

in servicing, so a in servicing, so a

high volume results in high volume results in

a more efficienta more efficient

operationoperation..

• Economies of scaleEconomies of scale

are better are better

exploited when loans have a geographic exploited when loans have a geographic concentration, loans use the same infrastructure.concentration, loans use the same infrastructure.

• Volume Volume facilitates access to capital marketsfacilitates access to capital markets (Size (Size matters).matters).

Economies of scale

$0

$200

$400

$600

$800

$1,000

$1,200

- 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000

Number of loans in portfolio

Servicing cost per year


On site collectionOn site collection

• Facilitates collection.Facilitates collection.• Better supervision of Better supervision of

asset guarantee.asset guarantee.• Customer service.Customer service.• Lower operation costs Lower operation costs

(i.e. hand deliver of (i.e. hand deliver of monthly statements vs. monthly statements vs. mail delivery).mail delivery).

• Facilitates Facilitates communication with communication with borrower (face to face).borrower (face to face).

• Establishment of Establishment of programs the enforce programs the enforce relationship with relationship with customers (ie Su customers (ie Su Salud).Salud).

• Possible cross sellingPossible cross selling


StandardizationStandardization• Since 1996 the Sofoles have agreed on standardize Since 1996 the Sofoles have agreed on standardize

underwriting forms, facilitating the usage of common underwriting forms, facilitating the usage of common technology.technology.

• Standard electronic files have been developed; this Standard electronic files have been developed; this facilitates the transfer of loans (i.e. purchase of facilitates the transfer of loans (i.e. purchase of Finazte) and the creation of a common data base Finazte) and the creation of a common data base (Done by the SHF) (Done by the SHF) ASSET MANAGEMENT ASSET MANAGEMENT

• Standardization facilitates the understanding of the Standardization facilitates the understanding of the industry by investors industry by investors TRANSPARENCY TRANSPARENCY

• Facilitates the exploitation of shared economies of Facilitates the exploitation of shared economies of scale (i.e.. Reporting of financial statements to scale (i.e.. Reporting of financial statements to investors, regulators and rating agencies).investors, regulators and rating agencies).

• Facilitates the existence of a substitute servicer Facilitates the existence of a substitute servicer which is necessary to access debt markets.which is necessary to access debt markets.


Sound process and automationSound process and automation• Clear processes are necessary to create a world class Clear processes are necessary to create a world class

servicing platform.servicing platform.

• As the portfolio grows, clearly defined processes facilitate As the portfolio grows, clearly defined processes facilitate control and the exploitation of economies of scale.control and the exploitation of economies of scale.

• Well understood processes allow for automation and cost Well understood processes allow for automation and cost reduction.reduction.

• Automation is key in the exploitation of economies of scale Automation is key in the exploitation of economies of scale and disciplined growth.and disciplined growth.

• Sound processes reduce operational risk and facilitate Sound processes reduce operational risk and facilitate control.control.

• Clear and well documented processes facilitate company Clear and well documented processes facilitate company training.training.

• As debt markets are accessed, funding source As debt markets are accessed, funding source diversification is achieved resulting in operation diversification is achieved resulting in operation complexity. This transition is facilitated by the automation complexity. This transition is facilitated by the automation of processes and information systems.of processes and information systems.


Usage of existing infrastructureUsage of existing infrastructure

• Su Casita’s clients can pay in our own locations or in Su Casita’s clients can pay in our own locations or in bank branches (Over 3,000 points of contact through bank branches (Over 3,000 points of contact through out Mexico).out Mexico).

• Shared telecommunication networks, the Fair-Shared telecommunication networks, the Fair-matching technology allows for on-line matching technology allows for on-line communications between offices at a very low price.communications between offices at a very low price.

• Internet, programs allow on-line connection with Internet, programs allow on-line connection with developers, internal branches, SHF, etc. This reduces developers, internal branches, SHF, etc. This reduces servicing and origination costs.servicing and origination costs.


Loss mitigationLoss mitigation

• HSC strategy includes and aggressive approach to HSC strategy includes and aggressive approach to avoid judicial process, which is both costly and avoid judicial process, which is both costly and lengthy.lengthy.

• HSC will sell the house in behalf of the borrower HSC will sell the house in behalf of the borrower when he can not make payment.when he can not make payment.

• Collection is the most important aspect of “Customer Collection is the most important aspect of “Customer Service”. When we can solve the customer’s problem Service”. When we can solve the customer’s problem we will solve ours.we will solve ours.

• Being close to the borrower allows to anticipate Being close to the borrower allows to anticipate losses.losses.

• Credit risk can be reduce by an effective negotiation Credit risk can be reduce by an effective negotiation with the borrower. “Es mejor un mal arreglo que un with the borrower. “Es mejor un mal arreglo que un buen pleito”buen pleito”

• Analysis of portfolio is basic to develop credit scoring Analysis of portfolio is basic to develop credit scoring and behavior predicting models.and behavior predicting models.


Internal Audit and external controlsInternal Audit and external controls

• Risk is reduce by creating controls that insure a Risk is reduce by creating controls that insure a better quality of operations. Su Casita is overseen better quality of operations. Su Casita is overseen by:by:

– Internal audit department (Operational audit and quality Internal audit department (Operational audit and quality control). Through this process the compliance of loans in control). Through this process the compliance of loans in different programs is supervised. Also the following of different programs is supervised. Also the following of procedures.procedures.

– External Audit by recognized firm.External Audit by recognized firm.– Rating agencies (Credit rating and servicer rating).Rating agencies (Credit rating and servicer rating).– SHF operational and legal audit.SHF operational and legal audit.– National Banking and Securities Comision.National Banking and Securities Comision.– Investment bankers when doing and issuance.Investment bankers when doing and issuance.

• The Audit process also serves as a tool for training The Audit process also serves as a tool for training and improvement of processes.and improvement of processes.


Access to debt marketsAccess to debt markets• In 1999 100% of Su Casita’s funds were provided by In 1999 100% of Su Casita’s funds were provided by

the SHF.the SHF.• In 2002 86% of Su Casita’s funding is not related to In 2002 86% of Su Casita’s funding is not related to

the SHF. Over 70% of our construction lending the SHF. Over 70% of our construction lending activity is founded through bank lines, non bank activity is founded through bank lines, non bank financial institutions (ie. FMO & GMAC-RFC) and bond financial institutions (ie. FMO & GMAC-RFC) and bond issuances.issuances.

• In order to archive theses a two year effort to inform In order to archive theses a two year effort to inform institutional investors was needed, a long term institutional investors was needed, a long term relationship has to be established.relationship has to be established.

• Debt markets have been Debt markets have been accesses through the accesses through the issuance of commercial issuance of commercial paper, mid term notes, paper, mid term notes, long term notes and the long term notes and the

securitization of credit securitization of credit assets. assets.

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

1999 2000 2001 2002 2003

Sofoles debt in market

Commercial paper Mid term notes LT debentures LT Certificado bursátil


Example of debt issuanceExample of debt issuance• In 2000, HSC issued the first mortgage backed security for financing of In 2000, HSC issued the first mortgage backed security for financing of

middle and residential individual mortgagesmiddle and residential individual mortgages

Use of Proceeds: Mortgage loan financing for middle

income and residential housing.

Rating: AAAA byby Fitch and Aa2Aa2 by Moody’s

Relevant Aspects: Over collateral (75% Su Casita, 25% IFC)

Cash Reserve

Issuance Date: 06/21/00 y 07/19/01

Ticker: CASITA 00UCASITA 00U

Amount: 60’000,000 UDI’s

Tenor: 10 years

Interest Rate: 8.80%

Total Coverage

Down payment (A)Down payment (A)

Mortgages fundedThe bond’s proceeds

Total Total GuaranteeGuarantee

(A)(A)

Down Down payment (B)payment (B) Total Total

GuaranteeGuarantee

(B)(B)

CashCashCashCash

MortgagesMortgages

(B)(B)

MortgageMortgage

(A)(A)

75%

25%


Examples of Houses financedExamples of Houses financed

• Homes under US$30,000.Homes under US$30,000.


Example of housesExample of houses

• Homes over US $30,000 and $70,000Homes over US $30,000 and $70,000

Documents

Hipotecaria Su Casita Case Study of primary Mortgage Lending in Mexico The World Bank Housing Finance in Emerging Markets March 10-13, 2003 Washington,