The regulatory experience of Colombia after the mortgage crisis Mauricio Cárdenas Director, Fundación para la Educación Superior y el Desarrollo (Fedesarrollo),

The regulatory experience of Colombia after the mortgage

crisis

Mauricio Cárdenas

Director, Fundación para la Educación Superior y el Desarrollo (Fedesarrollo),

Colombia

Housing Finance Systems in Emerging Economies

Session 6 Regulations and EducationWorld Bank Group Conference, March 15-17,

2006

Outline

1. The Colombian housing finance crisis2. Immediate response: Law 546 of

19993. Increase in minimum capital

requirements: Laws 510/1999 and 795/2003

4. Upgrading risk management standards

5. Foreclosures6. Results and challenges

Outline

1. The Colombian housing finance crisis

2. Immediate response: Law 546 of 19993. Increase in minimum capital


4. Upgrading risk management standards5. Foreclosures6. Results and challenges

UPAC (indexation unit) and CPICumulative growth rates

Source: Banco de la República and DANE.

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

IPC

UPAC (indexation unit) / Housing prices

- Annual change -

-10%

-5%

0%

5%

10%

15%

20%

25%

En

e-95

Mar

-95

May

-95

Jul-9

5S

ep-

95N

ov-9

5E

ne-

96M

ar-9

6M

ay-9

6Ju

l-96

Se

p-96

Nov

-96

En

e-97

Mar

-97

May

-97

Jul-9

7S

ep-

97N

ov-9

7E

ne-

98M

ar-9

8M

ay-9

8Ju

l-98

Se

p-98

Nov

-98

En

e-99

Mar

-99

May

-99

Jul-9

9S

ep-

99N

ov-9

9

Average (Weighted) IPV for Bogotá. Source: DNP and Banco de la República

Source: ICAV. Calculations made by Fedesarrollo.

0

5

10

15

20

25

30

Mar

-85

Dec-

85Se

p-86

Jun-

87M

ar-8

8De

c-88

Sep-

89Ju

n-90

Mar

-91

Dec-

91Se

p-92

Jun-

93M

ar-9

4De

c-94

Sep-

95Ju

n-96

Mar

-97

Dec-

97Se

p-98

Jun-

99M

ar-0

0De

c-00

Sep-

01Ju

n-02

Mar

-03

Dec-

03Se

p-04

Jun-

05

%Real interest rate on mortgages

MORTGAGE CRISIS

Source: Superintendencia Bancaria.

NPLs / Total outstanding mortgages

Including securitizations

0,0%

5,0%

10,0%

15,0%

20,0%

25,0%

30,0%

Dic

-95

Dic

-96

Dic

-97

Dic

-98

Dic

-99

Dic

-00

Dic

-01

Dic

-02

Dic

-03

Dic

-04

Dic

-05

Foreclosures as % of total bank assets

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

3,0%19

95

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Source: Superfinanciera, November annual data

Total capitalizations made by Fogafín (1998-2004)

Millons of pesos and %

Source: Fogafin

TOTAL % of total

Total non- mortgage public financial sector

3,509,631 36.7

Total mortgage 2,547,785 26.6

- Public financial sector 1,740,881 18.2

- Private financial sector

806,904 8.4

Total non-mortgage private financial sector

956,747 10.0

TOTAL 9,561,948 100

Outline

1. The Colombian housing finance crisis2. Immediate response: Law 546 of 19993. Increase in minimum capital


4. Upgrading risk management standards• Credit risk• Market risk


Law 546 of 1999

• Change in the system of indexation

• Transformation of S&Ls into banks• Cap on real interest rates on

mortgages • Securitization• New arrangements to deal with

mismatches

Conversion of S&Ls into banks

Share in Bank-CAV system

assets

Share in Bank-CAV system mortgage

loans

Share of mortgage

loans in total loans

Year of Conversion

Share in Bank system assets

Share in Bank system

mortgage loans

Share of mortgage

loans in total loans

Private institutions Private institutions

Davivienda 6.2 16.3 86.5 1999Davivienda + Bansuperior*

7.3 17.0 27.5

Red Multibanca 4.1 8.8 68.2 1998Red Multibanca

Colpatria3.6 9.2 23.1

Ahorramás 2.0 4.8 71.5

Las Villas-AV Villas 3.2 9.0 84.8 2002 AV Villas 3.2 12.2 45.8

Colmena 3.8 12.2 92.0 2000 BCSC 4.0 11.3 28.9

Conavi 5.2 14.3 82.2 2001 Bancolombia 20.0 20.7 10.9

BBVA+Granahorrar* 11.1 21.5 21.6

Public institutions Public institutions

Granahorrar 3.3 10.2 92.5 2000

BCH 5.0 10.2 80.2

* At that time the merger had been announced

(Closed)

December-99 January-06

(Acquired by Las Villas)

(Acquired by BBVA)

Real interest rates on mortgage loans (points over UVR)

8

9

10

11

12

13

14

01/0

5/20

02

01/0

8/20

02

01/1

1/20

02

01/0

2/20

03

01/0

5/20

03

01/0

8/20

03

01/1

1/20

03

01/0

2/20

04

01/0

5/20

04

01/0

8/20

04

01/1

1/20

04

01/0

2/20

05

01/0

5/20

05

01/0

8/20

05

Source: Superintendencia Bancaria

VIS

Non VIS

Maximum Non VIS (13.9p)

Maximum VIS (11p)

Securitization

Government guarantee RMBS (Social Housing Law)

Housing LaHousing Law w

(Law 546 1999)(Law 546 1999)

Additional tax exemptions: stamp tax, tax on financial transactions

Minimum capital requirements (US $20million)

Corporate Governance (Disclosure rules)

Mortgage loans assignment rules

RMBS issuances: Particular rules

Creation of a New SPV

Capital Adequacy

Securitization Securitization companiescompanies-- RulesRules

Tax Exemption for RMBS (Income tax)Tax issuesTax issues

Securitization companies: exclusive corporate purposeMain aspectsIssues addressed

Government guarantee RMBS (Social Housing Law)

Housing LaHousing Law w

(Law 546 1999)(Law 546 1999)

Additional tax exemptions: stamp tax, tax on financial transactions

Minimum capital requirements (US $20million)

Corporate Governance (Disclosure rules)

Mortgage loans assignment rules

RMBS issuances: Particular rules

Creation of a New SPV

Capital Adequacy

Securitization Securitization companiescompanies-- RulesRules

Tax Exemption for RMBS (Income tax)Tax issuesTax issues

Securitization companies: exclusive corporate purposeMain aspectsIssues addressed

• True Sale of mortgage loans. • Mortgage loans legally separated and

isolated from the equity of the issuer and the originators.

• No legal possibility for issuers or mortgage originators´ creditors to claim rights on the mortgage loans even in case of bankruptcy or liquidation.

• Complete bankruptcy remote instrument.• Independent accounting information.• No intermediaries between the underlying

assets and the bondholders• Bondholders´ rights and obligations are

determined exclusively by the rules of issuance.

Universalidad: SPV created by Law 546

Credit Enhancements (Law 546 of 1999)

• Government guarantee on MBS– Revolving facility– Complete principal and interest guarantee– Restricted to MBS backed exclusively by social

housing loans– Premium paid by the SPV

Outline






Minimum Capital Requirements

0

10,000

20,000

30,000

40,000

50,000

60,000

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

$ M

illi

on

s

Bancos

CAV

CF

CFC

3 years for adjustment

Outline

1. The Colombian housing finance crisis2. Immediate response: Law 546 of 19993. Increase in minimum capital



• Credit risk• Market risk


Upgrading risk management standards• Prior to the crisis, financial institutions had

weaknesses managing and administrating risk.• Under the new framework financial institutions

should do their own risk evaluation.• Self-determination of provisions and equity. • Implementation of a new system (SARC) to evaluate

and administer credit risk. • Determination of the value of the exposure to

market risk (interest rate, exchange rate, inflation, etc.). This value should be considered for complying with the solvency ratio (i.e. value at risk consumes capital)

Credit risk, SARC, and individual provisions

• Credit risk emerges from the possibility of losses from delinquent loans.

• The regulation established that financial institutions should develop internal models (SARC) to classify, evaluate, and cope with credit risk.

• In the future, provisions should be based on these models, which should also be used for credit analysis

• This is in a transitional phase. The models are ready for commercial loans. In the case of housing loans the system is still in its development stage.

Provisions

According to the regulation, provisions should be made according to:

1. Internal models approved by the Superfinanciera.

2. Benchmark model developed by Superfinanciera (available only for commercial loans, pending for the rest).

3. Alternatively, provisions can be made according to the regulations set by Superfinanciera.

Current Individual Provisions

• Loan classification by destination: commercial, consumption, housing and microcredit

• Categories: A, B, C, D y E , depending on the quality or the delinquency time.– Class A normal risk– Class B tolerable risk but above normal– Class C considerable risk– Class D significant risk– Class E nonperformance risk

Housing Portfolio Provisioning Regulation

(C.E. 052 of 2004 y C.E. 006 of 2006)category # of delinquency

monthsProvision

percentage over

guaranteed portion

Provision percentage over non-guaranteed

portion

A 1% 1%

B Between 2 and 5 3.2% 100%

C Between 5 and 12 10% 100%

D Between 12 and 18 20% 100%

E More than 18 30% (60% for two additional years) (100%

for any additional year

100%

Provisions

• The regulators required in 1999 credit institutions to keep a general provision of 1% of their gross portfolio.

• In 2004 regulators exempted entities with adequate SARC models from constituting the general provision.

Source: Superfinanciera.

BECH: Provisions/NPL

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dec

-94

Jun-

95

Dec

-95

Jun-

96

Dec

-96

Jun-

97

Dec

-97

Jun-

98

Dec

-98

Jun-

99

Dec

-99

Jun-

00

Dec

-00

Jun-

01

Dec

-01

Jun-

02

Dec

-02

Jun-

03

Dec

-03

Jun-

04

Dec

-04

Jun-

05

Dec

-05

More progress ..

• Precise definition of housing loans• Update of the guarantee value. For new

loans internal valuation methodologies approved by the SF. If the entity does not its own internal methodology, the value of the guarantee will be adjusted using the housing price index (IPV) calculated by the DNP.

• The Superfinanciera and the Central Bank (BR) are working on bringing up to date the indicators that value guarantees.

Market Risk

• Solvency ratio (technical equity / assets weighted by risk) equal to 9%

• Financial institutions should measure the value of the portfolio exposed to market risks.

• They can use their own methodologies or the benchmark model developed by the Superfinanciera

• Greater risk exposure requires more capital.

Source: Superfinanciera.

Solvency ratio (includes market risk)

8

9

10

11

12

13

14

15

16

17

Jan-

00Ju

l-00

Jan-

01Ju

l-01

Jan-

02Ju

l-02

Jan-

03Ju

l-03

Jan-

04Ju

l-04

Jan-

05Ju

l-05

Jan-

06

%

Commercial Banks

Bech

Minimum required

Outline






Before After

Due notification to the defendant, through the Notifications Office (323

days)

Notification through certificate mail send by the Bank (116 days)

The sentence could be appeal if the defendant was

represented by a public attorney (273 days)

The appeal of the sentence was eliminated (63 days)

Assets appraisal carry out by experts appointed by the

court (111 days)

Bank presents assets appraisal (commercial value or value set by

the local tax authorities) (46 days) Foreclosure carry out solely

at court rooms (143 days)Foreclosure carry out by

commissioner (most used, auction in Chamber of Commerce and courts (second most used) (113

days)

Foreclosure Proceedings: Law 794 of 2003

Lawsuit (8 days)

Notice to the borrower

Preparation of documents

Sequestration(160 days)

Asset appraisal

(111 days)

Debt liquidation(Including legal

fees) (46 days)

Judgment(273 days)

Property assignment(58 days)

Property delivery

(138 days)

Judicial Payment Order

(46 days)

Garnishment (41 days)

Judicial foreclosure sale

(143 days)

Total time period of judicial foreclosure

(1.187 Working days)

JUDICIAL FORECLOSURE PROCESS JUDICIAL FORECLOSURE PROCESS BEFORE BEFORE C.P.CC.P.C. REFORM. REFORM

Rejection

Admitted

Not admitted

amended

Not Amended

Lawsuit response

No lawsuit response

Borrower's Pleadings - Information to the bank

Settlement meeting

Presentation of evidence

Closing arguments

323 days

Lawsuit(8 days)

Notice to the borrower

Preparation of documents

Sequestration(160 days)

Asset Appraisal (46 days)

Debt liquidation (including legal

fees)(46 days)

Judgment(63 days)

Property assignment(58 days)

Property delivery

(138 days)

Judicial Payment Order

(46 days)

Garnishment (41 days)

Judicial foreclosure sale

(113 days)

Total time period of judicial

foreclosure(675 working days)

JUDICIAL FORECLOSURE PROCESS AFTER JUDICIAL FORECLOSURE PROCESS AFTER C.P.CC.P.C. . REFORMREFORM

..

Rejection

Admitted

Not admitted

Amended

Not Amended

Lawsuit response

No lawsuit response

Borrower's Pleadings - Information to the bank

Presentation of evidence

Closing arguments

323 days

Outline






ROE (%)

-30

-20

-10

0

10

20

30

40

Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05

Commercial Banks

CAV-BECH

Source: Calculations Fedesarrollo

*Commercial Banks do not include public banks

*

0

200

400

600

800

1000

1200

1400

1600

1800

2000D

ic-8

4

Dic

-85

Dic

-86

Dic

-87

Dic

-88

Dic

-89

Dic

-90

Dic

-91

Dic

-92

Dic

-93

Dic

-94

Dic

-95

Dic

-96

Dic

-97

Dic

-98

Dic

-99

Dic

-00

Dic

-01

Dic

-02

Dic

-03

Dic

-04

Dic

-05

Mile

s d

e m

illo

ne

s d

e p

eso

s d

e 2

00

5

Source: ICAV, Banco de la República. Calculations made by Fedesarrollo.

Origination of mortgages

20

120

220

320

420

520

620

720

820

920

Mar-

85

Dic-

85

Sep-

86

Jun-

87

Mar-

88

Dic-

88

Sep-

89

Jun-

90

Mar-

91

Dic-

91

Sep-

92

Jun-

93

Mar-

94

Dic-

94

Sep-

95

Jun-

96

Mar-

97

Dic-

97

Sep-

98

Jun-

99

Mar-

00

Dic-

00

Sep-

01

Jun-

02

Mar-

03

Dic-

03

Sep-

04

Jun-

05

Source: ICAV, DANE. Calculations made by Fedesarrollo.

Disbursements per squared meter licensed

Mortgage Portfolio as % of GDP in Colombia1976 – 2004 (FALTARÍA ACTUALIZAR)

Source: Clavijo, Janna, Múñoz (2005) . Revista Desarrollo y Sociedad, First Semester.

0%

2%

4%

6%

8%

10%

12%

dic

-76

dic

-77

dic

-78

dic

-79

dic

-80

dic

-81

dic

-82

dic

-83

dic

-84

dic

-85

dic

-86

dic

-87

dic

-88

dic

-89

dic

-90

dic

-91

dic

-92

dic

-93

dic

-94

dic

-95

dic

-96

dic

-97

dic

-98

dic

-99

dic

-00

dic

-01

dic

-02

dic

-03

dic

-04

ma

r-0

5

Take-off Stagnation Boom Untwist

3,7

Historic Average

2,9

With securitization

With out securitization

Relative size of the mortgage industry

Source: Superintendencia Bancaria.

0%

5%

10%

15%

20%

25%

30%

35%

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Housing loan porfolio/total loan portfolio

Mortgage loan porfolio/GDP

Challenges ahead

• Prudential regulations has moved forward, but more progress is needed in other areas.

• Legal stability is key.• Mixed results in the mortgage industry:

– Greater competition, lower interest rates– Large number of financial mergers– Active development of a peso

denominated fixed-rate primary mortgage market

– Slow recovery of the mortgage origination – More progress is needed in the social

housing sector

Appendixes: additional information

Not to be presented

Securitization - Regulatory Framework1. Law 546 of 1999 (Housing Law-TIPS Tax Exemption)

2. Law 633 of 2000 ( Tax Reform – Stamp tax - Other Exemptions (GMF)

3. Decree 1719 of 2001 – Ministry of Finance (Securitization companies exclusive corporate purpose)

4. Decree 2782 of 2001(Fogafin Guarantee)- Decree 576 of 2004 (guarantee term extension)

5. Decree 304 of 2004 - Ministry of Finance (Resecuritization-TIPS Tax Exemption)

6. Resolution 117 of 2001 – Superintendency of Securities (Minimum capital requirements for securitization companies)

7. Resolution 775 of 2001 and 223 of 2002– Superintendency of Securities (MBS Rules- Universalidad-Applicable rules for Titularizadora)

8. Resolution 275 of 2001 – Superintendency of Securities (Corporate Governance)

9. Resolution 690 of August 12, 2004 (Capital Adequacy)

Provisions: recent changes

• Circular 20, 2005– Establishes the Benchmark Model for Commercial

Loan Portfolio, and the provision tables determined by the delinquency time are changed for statistical provisions based on countercyclical criteria.

– Banks are allowed to present Internal Models for their Commercial Loan Portfolio.

• Circular 4, 2006 – Establishes a change in the provision tables by

delinquency time – Establishes individual provisions for class A and B

loan portfolio

• The Superfinanciera is planning on having Benchmark Models for consumption and housing loans during the year 2006.

Provisions• Circular 88 de 2000 Determines the minimum

qualitative requirements for the management of market risk in trading

• Circular 42 del 2001 Establishes Benchmark Models and allows the use of Internal Models for the calculation of VaR, given the previous authorization of the Superbancaria.

• Circular 31 del 2004 Updates the Benchmark Models. Establece un consumo de capital regulatorio mínimo por riesgo de mercado para las Entidades Vigiladas.

Provisions: main standards and regulations

• External Notification 039 of 1999 (partially modified by the notifications 044 and 046 of the same year)

• External Notification 011 of 2002• External Notification 052 of 2004

(partially modifies by E.N 004 of 2006)

Documents

The regulatory experience of Colombia after the mortgage crisis Mauricio Cárdenas Director, Fundación para la Educación Superior y el Desarrollo (Fedesarrollo),