Download Low Income Housing in Latin America

Housing Microfinance in
Latin America
Opportunities in Mexico
May 1, 2008
UCLA – School of Public Affairs
Christopher Elias & Travis Ritchie
This report was prepared in partial fulfillment of the requirements for the Master in Public
Policy degree in the Department of Public Policy at the University of California, Los Angeles. It
was prepared at the direction of the Department and of Housing MicroFinance, LLC as a policy
client. The views expressed herein are those of the authors and not necessarily those of the
Department, the UCLA School of Public Affairs, UCLA as a whole, or Housing MicroFinance, LLC.
ii
Contents
Glossary ...................................................................................................................................... iv
Executive Summary .................................................................................................................... v
Introduction ............................................................................................................................... 1
Our Client ........................................................................................................................... 1
Policy Analysis .................................................................................................................... 2
Policy Importance ............................................................................................................... 3
Methodology & Criteria...................................................................................................... 3
Background ................................................................................................................................ 5
Housing Microfinance ........................................................................................................ 5
Table 1 – Housing Microfinance Universe.................................................................... 5
Mexican Housing Demand.................................................................................................. 6
Table 2 – Housing Demand in Mexico, by Income Bracket .......................................... 6
Mexican Housing Finance System ...................................................................................... 7
Table 3 – INFONAVIT Loans by Income Bracket, 2007 ................................................. 7
Housing Microfinance Providers ...................................................................................... 10
Analysis .................................................................................................................................... 15
Criteria 1: Market Presence.............................................................................................. 16
Table 4 – Lending Institutions and Performance Criteria........................................... 17
Criteria 2: Business Capacity ............................................................................................ 19
Criteria 3: Profitability ...................................................................................................... 21
Table 5 – Impact of HMF LLC Bonds on SOFOLES v. MFIs .......................................... 22
Criteria 4: Competiveness of Funding .............................................................................. 24
Criteria 5: Security against Underlying Portfolio .............................................................. 26
Recommendations ................................................................................................................... 27
References................................................................................................................................ 31
iii
APPENDECIES
APPENDIX A: Comparison of Housing Microfinance to Mortgage Lending and
Microenterprise Lending ........................................................................................... 33
APPENDIX B: Mexican Home Loan Providers – Annual Credit Generation ............... 34
APPENDIX C: Affordability Analysis ........................................................................... 35
APPENDIX D: Esta Es Tu Casa Participants ................................................................ 36
APPENDIX E: SOFOLES Hipotecaria............................................................................ 37
APPENDIX F: Mexican MFIs Listed in MIX Market ..................................................... 38
APPENDIX G: Mexican Foreclosure and Titling System ............................................. 39
iv
Glossary
The Bonds
Refers to the loans made by HMF, LLC to the Lenders. Characteristics
include 8-9% real interest rates, 10 year term, local currency, and
technical assistance.
FI
“Financiera Independencia” – A Mexican MFI. Previously organized as
a SOFOL, but now a SOFOM
Flexiplus
Credit product offered by Su Casita that allows informal sector
workers to qualify for mortgages with a 6 month savings plans.
Hipotecaria
“Mortgage”
HMF, LLC
“Housing MicroFinance, LLC” – U.S. corporation raising $100 million to
invest LAC housing microfinance and our client.
INFONAVIT
Quasi-governmental organization that administers national private
employee workers’ pension fund in Mexico. Also originates home
loans for participants.
LAC
“Latin America and the Caribbean”
The Lenders
Potential lenders who could borrow from, or issue bonds to HMF, LLC.
These lenders would use this HMF, LLC-provided capital to originate
housing microfinance loans in Mexico
MFI
“Micro Finance Institution” – Financial institution offering micro credit
loans in any sector.
Pagos Fijos
“Fixed Payments” – Home Depot’s In-store customer credit program
that allows customers to make installment payments on purchases.
SHF
“Sociedad Hipotecaria Federal” – Mexican federal housing
development agency.
SOFOLES
“Sociedades de Objecto Limitado” – Legal organization of Mexican
credit lender. May only offer products in a single sector, such as
housing. SOFOLES Hipotecaria are mortgage SOFOLES
SOFOMES
“Sociedades Financiera de Objecto Múltiple” – Recently created legal
organization of Mexican credit lender. May offer credit products in
multiple sectors.
Su Casita
Hipotecaria Su Casita, S.A. de C.V., one of the largest SOFOLES
Hipotecaria.
v
Executive Summary
Unmet housing demand in Latin America and the Caribbean is estimated at 30 million units. In
Mexico specifically, 4.3 million households are underhoused and an additional 1.2 million
households add to the demand for housing solutions every year. Poor access to finance for low
income households contributes meaningfully to this deficit. Up to 40% of Mexican households
have no access to the main providers of housing finance in the country
Housing Microfinance, LLC (HMF, LLC) has raised $100 million to support housing microfinance
products in an effort to address this problem across Latin America. Despite the demographic
need for housing microfinance in Mexico, the absence of technical expertise in providing
housing finance to low income households limits the number of Mexican lending institutions
that might serve as intermediaries for these funds.
This paper assesses the opportunity to deploy the capital raised by HMF, LLC in Mexico. We
considered three different types of institutions as potential intermediaries: (1) SOFOLES, (2)
Microfinance Institutions (“MFIs”), and (3) construction and materials vendors offering
consumer loans, and evaluated them against the following criteria:
•
•
•
•
•
Market Presence – Do they serve the target market?
Business Capacity – Can they execute and grow a housing microfinance business?
Profitability – What impact would introducing a housing microfinance product have
on the financial performance of the business?
Competitiveness of the Bond – Is the HMF bond a competitive source of funding?
2nd Tier Security – Will each institution type allow HMF to secure the Bonds against
the Lenders’ underlying portfolios?
Because each lender type is likely to serve different parts of the housing microfinance market,
and no one lender type clearly outperformed the others against these criteria, we made
recommendations for each as follows:
•
SOFOLES: Target SOFOLES that will convert to SOFOMES, and focus technical assistance
around underwriting loans to informal economy borrowers.
•
MFIs: (1) Target MFIs with commercially viable microenterprise businesses and provide
technical assistance for home lending practices and administering ‘Esta es tu Casa’
grants; (2) Explore relationship with Financiera Independencia.
•
Materials Vendors: Establish joint ventures between MFIs or SOFOMES and retailer, and
provide technical assistance in accordance with the type of financial service provider.
We also made the following recommendations with respect to the broader transaction:
•
Consider narrowing the range of housing microfinance products HMF, LLC plans to
support to maximize the utility of the technical assistance program.
•
Consider selling technical assistance services, specifically underwriting and servicing IT
systems, through a standalone business.
1
Introduction
Housing is expensive. The cost of purchasing a home, or even improving a dwelling so that it
meets the basic needs of its occupants, exceeds the current income of most households. As a
result, financial institutions of many varieties in nearly every country in the world exist to help
households borrow against future earnings to acquire adequate housing in the present. This
type of borrowing often requires long payback periods, and capital markets have been
instrumental in making this type of financing available to households worldwide.
In Latin America, long term mortgage finance supported by capital markets is available to upper
and middle class households. But for many households, the housing solutions supported by
traditional mortgage finance are not appropriate. The absence of proper title to a home or proof
of stable income may make some households ineligible for mortgage loans. Alternatively, they
may not be able to afford the homes for which mortgage finance is available, preferring instead
to build their homes progressively. In either case, these households need access to finance of a
longer term and on a greater scale than is available from the financial institutions that serve
them. Lack of access to this type of borrowing is one of many factors that contribute to unmet
housing demand of 30 million units in Latin America.1 Our client believes that a new approach to
home lending – housing microfinance – can help fill this gap.
Our Client
Housing Microfinance LLC (HMF, LLC) is a US corporation that is attempting to execute a
transaction that will provide long term loans (the “Bonds”) to 20-25 institutions in 10 different
countries in Latin America and the Caribbean (“LAC”). These institutions (the “Lenders”) will use
the proceeds of the Bonds to originate housing loans (the “Housing Loans”) to low and
moderate income borrowers (the “Borrowers”) in their communities. The Loans will have a ten
year term and carry an 8-9% real interest rate. Our client anticipates that this will be longer term
capital than is generally available to the Lenders, allowing them to provide long term Housing
Loans to the Borrowers and develop business plans that require stable, long term capital
support.
HMF, LLC is attempting to raise $100 million from institutional investors and foundations
interested in return-based giving to fund the Bonds. The client will use a Collateralized Loan
Obligation (“CLO”) structure to package the Bonds and investors will hold participations in the
CLO. The Lenders will, in turn pay back their debt obligations to the CLO and these cash flows
will pass through the CLO to its investors. HMF, LLC will earn revenues through certain fees
related to arranging the transaction and a direct equity stake in the CLO. Through the current
and subsequent transactions, the client’s long term goal is to support a standardized approach
to housing microfinance in the LAC region that will support broader capital market activity.
In conjunction with the CLO transaction, HMF, LLC will be providing technical assistance to the
Lenders and potentially other housing finance providers in LAC countries. The goal of this
1
HMF September 2007 Presentation, citing IADB.
2
technical assistance program is to enhance and streamline the housing microfinance products
and business models of the Lenders. As our analysis will show, no generally accepted model of
housing microfinance currently exists in Mexico. The absence of this model highlights the
importance of technical assistance as a component of our client’s transaction, but also speaks to
the challenge of designing an advisory program for business practices that are still being
developed.
Policy Analysis
HMF, LLC will provide portfolio capital and technical assistance to the Lenders. It will not
however be in the business of originating or servicing housing microfinance loans. As a result,
our client needs to find institutions in the LAC region that can put its capital to work. On their
behalf, we will investigate the opportunity to deploy this capital in Mexico. In particular, we will
identify those lenders that are best placed to serve households in need of this type of finance.
We will look at three different types of institutions: (1) SOFOLES, (2) Microfinance institutions
(“MFIs”), and (3) construction and materials vendors offering consumer loans.
In recent years, micro-credit lenders have demonstrated the enormous economic potential of
offering small, short-term loans to low and moderate income borrowers. Successes in microenterprise lending have led to increased economic development in developing countries and
were recognized by a Nobel Prize. Microfinance institutions exist in Mexico and offer microcredit products to various businesses. Some of these MFI’s have begun to expand their products
to include housing loans, but housing microfinance remains a small piece of their lending
portfolios.
More formal financial institutions also offer products targeted for low and moderate income
home buyers. These entities include specialized mortgage lenders such as SOFOLES, credit
unions and savings and loans, as well as large multinational institutions that have created special
departments for housing development. For reasons discussed below, we will look primarily at
SOFOLES and to lesser extent commercial banks in this analysis and we will largely ignore credit
unions and savings and loans.
Finally, several materials manufacturers and vendors offer credit-based purchases of their
products to consumers. The Borrowers may purchase basic materials such as cement and paint
so that they can construct their own houses. Some of these materials lenders offer technical
guidance and assistance the borrower may use during construction.
Each of these potential lenders operates under a different set of incentives and constraints. This
paper will evaluate several Mexican institutions in each of these sectors with the goal of helping
our client decide which are best placed to put their capital to work. By expanding the
understanding of low and moderate income housing lending, we hope to stimulate sustainable
investment that will lead to increased home ownership and economic development in emerging
countries.
3
Policy Importance
Our analysis will help the client in three ways. First, it will provide an assessment of the market
for their bonds in Mexico. Our client does not have plans to deploy much, if any, of its bonds in
Mexico, despite the market’s size and demographic appropriateness (as we will describe further
below). Second, interviews conducted with lenders and industry participants should inform the
design of the technical assistance package. Finally, the analytical framework we apply to Mexico
should be useful in assessing other countries in the region.
Beyond helping our client earn an adequate return on their investments, we believe that the
HMF, LLC transaction and our support of it will serve an important development need in the LAC
region. While subsidies can play an important role in meeting the housing and shelter needs of
low income populations, the scale of unmet housing demand in the region exceeds the
resources of government budgets. Capital market activity has been critical to the expansion of
homeownership in the developed world, which has in turn been instrumental in creating wealth
and an asset base for middle class populations in these countries. Efforts to understand how
elements of this model might apply to developing countries will provide the emerging middle
classes of emerging economies with an important social and economic good.
Methods & Criteria
Our analysis weighs the relative strengths and weaknesses of three types of lenders – SOFOLES,
MFIs and construction material vendors – with respect to their ability to deploy the proceeds of
our client’s bond issue. This analysis requires that we understand the demand for housing
microfinance in Mexico, as well as the business practices of the three institution types.
To measure and describe housing microfinance demand in Mexico, we relied on a literature
review, interviews with government officials and business people, as well as data from the
Mexican government and the World Bank. Information about lender business practices and their
operating environment was gathered through interviews with employees of banks and MFIs,
market research reports, company financial statements and data from the MIX Market, an
online microfinance database service.
We evaluated the three lender types according to the following criteria2:
•
•
•
•
2
Market Presence – Do they serve the target market?
Business Capacity – Can they execute and grow a housing microfinance business?
Profitability – What impact would introducing a housing microfinance product have
on the financial performance of the business?
Competitiveness of the Bond – Is the HMF bond a competitive source of funding?
Several consideration relating to HMF, LLC’s investment decisions will not be addressed in this analysis. Notably, as
our client is a bond investor, we will not specifically assess the credit worthiness of any prospective Lender. We intend
to make recommendation about which types of business are best placed in Mexico to provide housing microfinance
products, a business that with a few exceptions does not yet exist. As a result, it would be difficult to evaluate the
creditworthiness of a particularly Lender in the absence of an imminent transaction and business plan. Examples exist
of credit worthy entities in each category of Lender that we will consider.
4
•
2nd Tier Security – Will each institution type allow HMF to secure the Bonds against
the Lenders’ underlying portfolios?
Our recommendations will reflect the performance of each institution type against these
criteria.
5
Background
Housing Microfinance
Housing microfinance is a somewhat ill defined term that blends the concepts of
microenterprise lending and traditional mortgage finance (ACCION 2007). Appendix A provides
two tables that highlight the differences between housing microfinance and microenterprise
lending and mortgage finance, respectively. Housing microfinance loans are larger and longer
termed than microenterprise loans and used by debtors for home purchase or improvements
rather than business activities that will directly generate cash flow. By contrast, they are smaller
and shorter term than mortgage loans, and they may be used to incrementally improve an
existing home rather than purchase a new one. This definition of housing microfinance
underlies its usefulness for borrowers who, by virtue of their income level, may be overlooked
by traditional providers of housing finance.
Table 1 – Housing Microfinance Universe
Borrower
Circumstances
Can Provide Mortgage
as Collateral
Cannot Provide
Mortgage as Collateral
Can Afford Small Home
Purchase Loan
Can Only Afford Home
Improvement Loan
Providers: Banks (if in formal
economy), MFIs
Banks (if in formal economy),
Retail Credit, MFIs
Borrowers: Under-banked low
and moderate income
Borrowers: Under-banked low and
moderate income
Providers: MFIs, Retail Credit,
Informal Credit, New Channels
Borrowers: Under-banked low
3
and moderate income, BOP
Providers: MFIs, Retail Credit,
Informal Credit, New Channels
Borrowers: BOP
Housing microfinance may also refer to lending methodologies. Capital market support of
housing finance in developed countries has traditionally been based on three pillars: (i) loan
security against real property, (ii) proper appraisal of that property, and (iii) rigorous
documentation of borrower income and assets to support underwriting requirements. In many
developing countries, borrowers who can afford to service a home purchase loan may not be
eligible for a mortgage because their applications are deficient in one of these areas. They may
be ineligible because they don’t have title to their home or because their home may be difficult
to appraise. In other situations, even with titled property, the borrower may work in the
informal economy and therefore not be able to verify his or her income. In these instances, the
underwriting practices that MFIs have developed for their microenterprise products can help
3
Bottom of Pyramid
6
creditors better understand and mitigate the risk of lending to untitled or informal economy
borrowers where traditional mortgage underwriting practices cannot be applied.
In all cases, housing microfinance refers more to a set of practices than to an institution type.
Table 1 lays out the universe of housing microfinance and identifies the providers and borrowers
involved in each of its subsectors.
Mexican Housing Demand
Mexico has a population of approximately 105 million people, consisting of roughly 27.4 million
households. Several sources estimate that 4.3 million of these households are under housed and
that population growth and existing housing stock deterioration, respectively, generate
additional demand for at least 730,000 new units and 400,000 unit improvements annually (WB
2002, CSHM 2006). The World Bank estimates that new housing demand is distributed evenly
across income groups each year, and for the purposes of this analysis we will assume the same
for the 4.3 million unit shortfall in existing supply.4 Table 2 breaks down housing demand in
Mexico by income segment.
Table 2 – Housing Demand in Mexico, by Income Bracket (multiples of Minimum Wage)
Existing Demand
(thousands of households)
Income
Range
(xMW)
% of HHs
Cum
0-1
6.3%
6.3%
1-1.5
5.8%
12.1%
1.5-2
6.6%
18.6%
2-3
15.9%
34.6%
3-4
13.1%
47.7%
4-5
11.1%
58.7%
5-6
8.0%
66.7%
6-7
6.1%
72.9%
7-8
4.5%
77.4%
8+
22.6%
100.0%
Annual Additional Demand
(thousands of households)
New Unit
Demand
Improvement
Demand
New Unit
Demand
Improvement
Demand
% of
Bracket in
Informal
Economy
622
864
252
138
80%
579
804
235
129
50%
599
832
243
133
32%
1,800
2,500
730
400
Sources: INEGI 2006, World Bank 2002, CSHM 2006, Skelton 2006
4
If anything, this is a conservative estimate of the concentration of housing demand among low income segments of
the population. Per the World Bank report, existing new unit demand consists of households that are doubling up in
one unit, or living in homes beyond repair. That high income families are living under these conditions seems unlikely.
7
Mexican Housing Finance System
Housing finance in Mexico is dominated by three groups of lenders: INFONAVIT, commercial
banks and SOFOLES. Appendix B gives some indicative figures for each of the sectors in the
aggregate with lender-specific data where available. INFONAVIT, by far the largest actor in the
market, is a quasi-governmental organization that operates under a government mandate and is
charged with assisting in home acquisition for the middle class. The entity is funded by
mandatory payroll deductions from all formal private-sector employees which accumulate in an
investment account for each employee. Private sector workers may draw on their investment
accounts to make down payments on home purchases, the loans for which are also provided by
INFONAVIT or co-financed with SOFOLES through a program called Appoyo INFONAVIT. Debt
service payments are deducted directly from workers’ accounts (Fitch 2005). As shown in
Appendix B, the majority of home loans and specifically low income mortgages are originated
through INFONAVIT. The entity originated $11 billion in loans in 2007.5
SOFOLES came about following the Tequila Crisis in the mid-1990s. As a result of the volatility in
financial markets after the devaluation of the peso, commercial banks vacated the mortgage
lending space. In response, the government set up Sociedads Financieras de Objeto Limitado
(limited activity companies – SOFOL), which are non-deposit taking financial institutions
chartered to lend in a specific sector. SOFOLES Hipotecaria (mortgage SOFOLES6) filled the void
in the mortgage market left by commercial banks. Since 2003, commercial banks have become
more active again by increasing their mortgage portfolios organically and acquiring SOFOLES.
Table 3 – INFONAVIT Loans by Income
Bracket, 2007
Income Bracket
(xMW)
# Loans
% of Total
Loans
0-2
82,761
19%
2-4
191,894
44%
4-7
88,676
20%
7-11
35,559
8%
11+
41,676
9%
Total
440,657
Source: INFONAVIT
5
The system dominated by these three
institutions fails to reach a sizable portion of
Mexican households. Commercial banks are
generally interested in loans of $40,000 or
greater (Fitch 2007), which puts an income
floor around 10 minimum wages. According to
interviews with ratings agencies and industry
experts (Arguelles 2008, Martin 2008, Moser
2008, Suarez 2008), the average size of most
SOFOL loans is around $20,000 and the
minimum falls somewhere around $15,000. As
a result, minimum household income of
roughly 5 minimum wages is needed to access
these financing sources without any form of
government support.7
From INFONAVIT website:
http://www.infonavit.org.mx/inf_general/infonavit_cifras/valor_creditos_otorgamiento_2007.shtml, accessed
3/4.,08
6
Unless otherwise noted, as used in this paper, SOFOLES will refer to SOFOLES Hipotecaria, or mortgage SOFOLES
7
See Appendix C for an affordability analysis of various loan types and sizes. Skelton 2006 put the threshold for access
to mortgage finance without government support in the region of 6x MW.
8
Various direct, wholesale lending and other implicit subsidies from the government make
financing available to lower income households. The government’s housing finance agency,
Sociedad Hipotecaria Federal (SHF), has historically been the primary source of SOFOLES’ capital
enabling them to offer mortgages to households in the 4x MW range. Other direct subsidy
programs, including the recently launched ‘Esta es tu Casa’ (see Box 1 on page 9), may serve
lower income families in conjunction with private sector operators. Finally, INFONAVIT, by virtue
of an implicit subsidy that it receives in the form of a pension guarantee from the government, is
able to provide below market interest rates. As a result, it is able to offer mortgages to
households at the lowest end of the income ladder (See Table 3 on last page). However, nearly
all of these resources are directed towards the formal economy.
Referring back to Table 1, the income brackets served by commercial banks and SOFOLES
include only one third to half of Mexican households. However, their penetration of this income
class is limited by the fact that anywhere from 30% to 50% of these households earn their
income in the informal economy. INFONAVIT helps fill the gap by serving the lowest income
groups, but INFONAVIT loans, by design, are available only to salaried formal-economy
employees. This constraint is even more problematic in the lowest third of the income
distribution where 80% of households earn in the informal economy. This situation leaves
anywhere from 25% to 40% of Mexico’s nearly 30 million households without access to the
country’s primary sources of housing finance in Mexico.8
These so-called “unbanked” households either find alternative means to attain financing for
housing and other purchases or build their homes incrementally as they accumulate savings. A
2006 World Bank study of Mexico City9 found that nearly half of the unbanked households in the
capital rely on department stores for credit. Most of these individuals do not keep their money
in savings accounts because minimum deposit amounts are too high. Instead, they save money
in cash at home, or they channel it through family and friends as informal loans with interest
rates.
Importantly for our analysis, the study found that 63% of this unbanked population owns a
home. Many of these unbanked homeowners engage in “progressive housing” or do-it-yourself
construction. Some form community savings groups called “tandas” to pool their financial
resources together. Members of the tanda contribute periodically to a group savings account
and then take turns purchasing the materials needed to improve a segment of their home. For
instance, a homeowner may save either individually or through a tanda until he can afford
enough cement to replace a makeshift wall with permanent concrete. When the cement runs
out, he will have to wait until he can save more money for another project, or until he takes
another turn with the support of the tanda. Progressive housing is very slow and inefficient.
Owners construct their homes over several years, often with inadequate materials.
8
This agrees, and is conservative by comparison, with an estimate in CSHM 2007 that 15 million families cannot
afford to purchase a home or cannot be serviced by the finance system.
9
The study relied on a survey of households in Mexico City. 76% of the population was “unbanked,” which the survey
defined as a person who did not have either a savings deposit account, or a credit account with a formal sector
banking institution. 98% of the unbanked population earned less than $15,000, and half had less than a high school
education
9
Box 1 – Ésta es tu Casa
The Mexican government is aware of the unmet demand for housing finance and has launched a
new subsidy program funded by the Comision Nacional de Vivienda (CONAVI) and administered by
SHF. The program “Ésta es tu Casa” attempts to address the unmet demand for finance to support
progressive and other alternative housing solutions. Participants who meet certain criteria and
obtain qualifying loans from banks, SOFOLES and MFIS are eligible to receive substantial subsidies
for home purchase, construction or improvement. The subsidy may provide the down payment for
the loan or enhance the purchasing power of the borrower.
Eligible Loans and Subsidies for Ésta es tu Casa (US$)
Max Loan Amt
Term
Required
Savings**
Subsidy
New Home
< 12,050;
12,050-18,050
20 yr.
4%; 5%
4,000;
3,000
Used Home
< 12,050;
12,050-18,050
20 yr.
4%; 5%
4,300;
3,300
Construction
5,150
7-10 yr.
4%
3,600
Improvement
1,700
2-3 yr.
4%
1,200
Lot Purchase*
4,100
4-7 yr.
4%
3,000
* Lot must have services.
** As percentage of total value of project.
The program partners with private lenders offering loans for home purchase and improvement (up
to US$18,000 and US$1,700, respectively). In order to be eligible for the subsidy, borrowers must
establish savings accounts of at least 4% of the project value, and they must attain credit through a
formal sector lender that is participating in the program. This mutual requirement of saving and
borrowing in the formal sector could have the affect of inducing the large unbanked population to
become banked. In addition, the subsidy, which can cover up to 70% of some projects, could
significantly increase access to credit for low income borrowers. Because the subsidy requires a
private sector loan participant, the scheme should increase, not decrease, private sector
involvement. Currently, several NGO’s, commercial banks, SOFOLES, and MFI’s have partnered
with SHF to provide the subsidy (See Appendix D for a list..).
In 2007, SHF issued approximately US$33.4 million in subsidies via the Ésta es tu Casa program.
This amount will likely increase in 2008. In January and February alone, SHF issued US$13.7 million
under the program.
10
Housing Microfinance Providers
Housing microfinance encompasses the practices that can help address the needs of those
households that are not reached by the Mexican housing finance system. Financial services
appropriate for these families will largely be characterized by either (i) their availability to
informal economy workers, or (ii) a design that supports affordable housing solutions like
progressive building. Many Mexican institutions, including banks, SOFOLES, credit unions, MFIs
and building material vendors may be in a position to provide these services.
As discussed above, commercial banks are for the most part not active in the low income and
informal markets.10 In addition, while credit unions in many instances provide finance for
housing solutions to their members, who may be low income or informal economy workers,
credit unions’ corporate form is problematic for the HMF, LLC Bonds. As a result, we will limit
our consideration of potential housing microfinance providers to SOFOLES, MFIs and building
materials vendors. A brief description of each of these institutions is provided below.
SOFOLES
In Mexico, individuals and business entities may engage in credit activities under the General
Law on Negotiable Instruments and Credit Operations (Ley General de Títulos y Operaciones de
Crédito) ("LGTOC") (Hayaux-du-Tilly and María José Pinillos, 2006). The general law allows
Mexican businesses to offer various products on credit without substantial regulation.
However, Lenders engaging in housing financing fall under different regulations depending on
how they are structured. In 1993, Mexico reformed the Law of Credit Institutions (Ley de
Instituciones de Crédito) to allow the creation of SOFOLES. These reforms allowed SOFOLES to
operate in specific lending sectors without direct regulation of capital adequacy or lending
practices, but they prohibited SOFOLES from accepting borrower deposits (Su Casita 2007). As a
result, SOFOLES Hipotecarias could offer innovate programs to borrowers without excessive
regulations, but they could not rely on the relatively cheap source of funding provided by
customer deposits.
Although relieved from some banking regulations, SOFOLES are still required to comply with
regulations from the National Banking and Securities Commission (Comisión Nacional Bancaria y
de Valores) ("CNBV"), including registration, annual audits, and the obligation to provide
financial disclosure statements. In addition, SHF established rules which, among other things,
limited loan to value ratios, required allowing borrowers to make accelerated payments, and
required certain reporting procedures. SOFOLES must follow these rules in order to qualify for
federal SHF funding. Due to the SOFOLES’ broad reliance on SHF funding, these rules became de
facto regulations (Su Casita 2007).
10
While it is generally assumed that commercial banks are focused on middle and upper income borrowers, 4 of the
largest banks in Mexico have partnered with SHF under the “Ésta es tu Casa” program, indicating that they may be
looking for entry points into down market lending. This area may warrant further research, but because of the ample
resources of commercial banks we will assume in this paper that they would not be interested in the HMF, LLC bond
and exclude them from our analysis.
11
In 2006, Mexico enacted further reforms that allowed for deregulation of lending activities
through the creation of an entity called a Sociedad Financiera de Objecto Múltiple (“SOFOMES”).
The law still prohibits SOFOMES from accepting customer deposits, but it removes the other
regulatory requirements that SOFOLES face. SOFOMES may offer credit products in multiple
sectors. In other words, whereas a SOFOL Hipotecaria can only engage in housing lending, a
SOFOM can offer housing loans, consumer loans, and any other type of product it wants. As a
consequence of the legal change, SOFOLES will likely follow one of two options: (i) convert to
banks by complying with increased banking regulations and thereby gain the ability to attain
cheap capital from customer deposits; or (ii) convert to a SOFOM and take advantage of the
ability to expand lending activities into multiple sectors with less regulation. Regardless of the
choice the SOFOLES Hipotecarias make, they will likely face increased competition in housing
finance. For example, Financiera Independencia, a non-mortgage SOFOL that previously
operated as a consumer micro credit lender, converted to a SOFOM and now offers housing
construction products (discussed in more detail below).
There were 18 SOFOLES Hipotecaria in Mexico with active loan portfolios as of September 30,
2007 (See Appendix E for a list of all currently authorized SOFOLES Hipotecaria). Collectively,
these lenders had assets over $13 billion and loan portfolios of $11 billion. A substantial portion
of this portfolio consists of construction loans, and some SOFOLES such as Metrofinanciera,
operate exclusively in the construction space. However, the entities are an important provider
of mortgage finance in Mexico.
SOFOLES Hipotecaria offer interesting distribution channels for a number of reasons. First,
because they are not deposit taking institutions, the laws governing their lending practices are
not terribly restrictive. SOFOLES can therefore offer loans to borrowers in the informal
economy (Fitch 2006). Second, most SOFOLES operate branch locations across Mexico. For
example, Su Casita operates 75 branches throughout the country with at least one office in
nearly every state.11 In addition, they are generally well regarded and trusted in the
communities where they operate. Su Casita, as further discussed in the analysis section, has
been innovative in its approach to originations and collections among more challenging
borrower segments. However, SOFOLES are also very active in the growing and profitable
middle and upper income mortgage market, so their relevance with regard to this analysis will
depend in part on the extent to which they are focused on the business lines that serve
potential housing microfinance borrowers.
MFIs
The term “Microfinance Institution” does not refer to any bright line legal or industrial category
in Mexico. In this paper, we classify organizations as MFI’s if they engage in micro credit lending
activities in any sector of the economy. Legally, MFI’s can exist as a non-mortgage SOFOL, a
SOFOM, or neither.
Appendix F lists all of the Mexican MFIs for which the Microfinance Information Exchange
website (MIX Market) keeps data. By LAC standards and for its size, the Mexican MFI sector is
somewhat under developed. MIX lists only 27 institutions versus 40 in Peru, and 29 and 26 in
much smaller countries like Ecuador and Nicaragua, respectively. In addition, the sector is highly
11
Su Casita website: www.sucasita.com.mx/sucursales.html
12
concentrated with the top 3 institutions holding 94% of the aggregate MFI credit portfolio in
Mexico (52% in one), compared to a much more even distribution in other countries.
Housing products do not appear to be widely offered by Mexican MFIs. In a search of the
websites and financial statements of each Mexican MFI listed by MIX, only 3 (Caja Popular
Mexicana, Caja Libertad and FUNHAVI) appear to offer housing loans. Nevertheless, given the
access to the potential housing microfinance borrowers afforded to MFIs by their
microenterprise lending business, they will be included in our analysis. One MFI, Financiera
Independencia’s (“FI”) is not listed on MIX but probably gives the best example of a housing
microfinance product in Mexico (see Box 2 on the next page for a description).
Materials Vendors
As an alternative to mortgage financing and loans from microfinance institutions, several
prospective homeowners rely on do-it-yourself, progressive construction. Low income
households will construct their homes as resources become available. They may start by
scrounging enough money to purchase a few old bags of cement from a commercial
construction site. They will then use this cement to build as many walls as they can until it runs
out. Constructing a completed home in this manner may take several years; meanwhile, the
intermediate housing remains inadequate.
Materials vendors in Mexico have adopted various programs to provide construction material to
these progressive home builders on credit. For example, CEMEX, Mexico’s enormous national
cement manufacturer, began the “Patrimonio Hoy” program. Under the program, groups of
individuals begin savings plans with the company under which each member makes weekly
contributions. After 5 weeks, the company will deliver cement worth 10 weeks of saving
contributions to the homebuilder, who will continue to make payments to the savings group to
pay off the full value of the cement. In effect, Patrimonio Hoy provides micro credit advances to
its customers for cement purchases (Prahalad 2006).
Home Depot - Mexico also offers consumer financing options to its customers.12 Under the
“Pagos Fijos” (fixed payments) program, low income customers may qualify to make installment
payments on purchases from Home Depot. The store partners with GE Bank, which originates
and services loans under the Pagos Fijos program. GE Bank personnel operate a booth inside
participating Home Depot stores. Customers with minimum incomes of US$150 per month (just
over 1 minimum wage) can qualify for payment plans of 6 to 24 months. GE Bank applies a fixed
rate for the life of the loan, and the customer may choose the duration. Customers then pay a
fixed weekly or monthly amount for the duration of the loan (Anhalt 2008).
Middle and high income customers make up The Home Depot, Mexico’s primary market. In partnership with GE
Money, the store offers these customers traditional revolving credit lines (i.e. Home Depot Credit Cards) with interest
rates similar to most U.S. credit cards. The store also offers a government guaranteed credit program that relies on
employer payroll deductions to service the loans related to home purchase or construction. Under this program,
called FONACOT, the government assumes the risk of borrower default (Anhalt 2008).
12
13
Box 2 – Financiera Independencia
Financiera Independencia (“FI”) is an MFI incorporated in Mexico as a Sociedad Financiera de
Objecto Multiple (“SOFOM”). Since its inception in 1993, the MFI has grown to include a network
of 128 branches in 30 of the 32 Mexican States. The institution offers 4 products: CredInmediato,
a credit line for formal economy salaried workers making at least 1x minimum wage; Credit
popular, a similar product for informal economy borrowers; CrediMama, a product designed for
single mothers; and CrediConstruye, for home improvements.
FI introduced CrediConstruye in 2006,. Loans range from $300 to $1,500 and like the rest of FI’s
products, do not require collateral. The interest rate offered on the product is 3.6% per month,
excluding a 10% disbursement fee, and loans are typically outstanding for 6-24 months. 97%
percent of CrediConstruye borrowers work in the informal economy. FI loans can pair with the
federal subsidy offered by the Ésta es tu Casa program, through which borrowers can receive
grants worth up to 70% of the CrediConstruye loans. FI believes the subsidy program has had a
substantial impact on the growth of CrediConstruye. The table below shows the size and
performance of this product relative other products offered by FI.
CredInmediato
CrediPopular
CrediMama
CrediConstruye
Total
Portfolio
6/07
(Ps mm)
2,148
394
82
84
Portfolio
6/06
(Ps mm)
1,757
135
27
3
2,707
1,922
Y/Y
Growth
%
22%
192%
209%
2597%
Avg Loan
Size (Ps)
4,337
2,910
1,597
5,972
NPL: +90
6/07 (Ps
mm)
118
26
8
2
NPL %
5%
7%
10%
2.4%
3,890
154
6%
Loan Approval Process: FI has developed a highly automated loan approval and collection
process. Once a customer submits an application, loan officers equipped with personal digital
assistants (PDAs) visit contact the customer in person to collect a personal photo, images of
government IDs and address information through a GPS system. Information is immediately
relayed to a call center at FI headquarters in Leon where over 200 employees complete over
130,000 background verification calls per month. 82% of loan requests are approved within 48
hours and the company rejects approximately 36% of applications.
Funding: Effective May 4, 2007 SHF made a Ps 210 million ($US 18.8 million) line of credit
available to FI for 2 years to support small home improvement loans. FI must provide proof to
SHF that 85% of the loans funded by the SHF facility are used for home improvements. The
facility provides the loans that accompany the SHF grants under the “Ésta es tu Casa” program.
The interest rate on amounts drawn under the facility range from 9.35% to 10.98%.
Source: Financiera Independencia 2007, Mayo 2008
14
The partnership between Home Depot and GE Bank is contractual. GE Bank assumes all of the
risk for the loans and earns all of the interest profit. Home Depot benefits by increasing sales
without assuming the credit risk of the financing program. GE Bank, with very limited
consultation from Home Depot, sets the terms of the loans, including interest rates, collection
methods, and originating practices. Current annualized interest rates for Pagos Fijos loans are
approximately 93% (Anhalt 2008). The high interest rates reflect the risk involved in the
unsecured loan, as well as the high administrative costs.
Although low income customers do not make up the primary target market of Home Depot, the
store considers the Pagos Fijos program a starter product that will encourage customers to
increase purchases. The Pagos Fijos program is an incentive to attract low income customers,
but the store regards the program as a niche product that does not reflect their core
demographic.
Overall, consumer lines of credit for building materials purchases allow do-it-yourself
construction to occur much more quickly. By acquiring quality products up front, borrowers can
complete construction or improvement projects that would otherwise take much longer to
accomplish.
HMF, LLC
HMF, LLC is in the process of raising a targeted $100 million to fund housing microfinance loans
to be originated by existing lending institutions. We have attempted to demonstrate in the
preceding sections that while housing microfinance products might be appropriate for a large
portion of Mexican households, no clear distribution channel exists for the HMF, LLC bonds. The
following section will assess ability of three potential channels – SOFOLES, MFIs and building
materials vendors – to fill this gap.
15
Analysis
HMF, LLC is attempting to deploy $100 million worth of Bonds to fund housing microfinance
portfolios and will provide technical assistance to the institutions that will originate the loans
funded by the Bonds. The Background section above demonstrates that from a demographic
perspective, the type of home finance products that HMF, LLC wishes to support would be
appropriate in Mexico. Finding intermediary institutions that can channel the proceeds of the
Bonds to this untapped market is therefore the critical task for our client.
We have described three particular institutions in Mexico – SOFOLES, MFIs and building
materials vendors – that might serve as intermediaries for this transaction. Their relative ability
to put our client’s Bonds to work depends on their performance against several criteria:
•
Market Presence – The ideal intermediaries for the Bonds will have a meaningful
presence in, or access to, the market of potential housing microfinance borrowers.
By applying this criterion, we will assess the extent to which each lender type does,
or could, provide financial services to low income and informal economy
households.
•
Business Capacity – The proceeds of HMF, LLC’s bonds will be used to fund a
housing microfinance portfolio. Therefore, in addition to a presence in the target
market, Lenders should also have expertise in providing housing loans to low
income and informal economy borrowers. Further, their models for rendering these
services should be scalable enough to put the HMF, LLC Bonds’ proceeds to work.
We will analyze the three distributions channels according to the appropriateness
and scalability of their business models for originating housing microfinance loans.
•
Profitability – For the HMF, LLC bond to make sense from the perspective of both
HMF, LLC and the Lenders, the Lenders have to be able to put the Bond to work
profitably. We will assess each lender type’s ability to meet this performance
standard by looking, where possible at existing housing microfinance products. In
other cases we will try to understand how the performance of a housing
microfinance business might differ from the financial performance of existing
businesses.
•
Competitiveness of Funding – In addition to the pricing of the bonds, several
features, including the 10 year term, their availability in local currency and the
technical assistance offered should make them competitive with Lenders’ other
sources of funds. We will broadly outline the capital market activities of each
sector in order to understand the strengths and weaknesses of the HMF, LLC Bonds
in Mexico.
•
2nd Tier Security – HMF, LLC requires that it secure the Bonds against the Lenders’
assets, ideally the housing microfinance portfolio that the Bonds support. Under this
criterion will assess the ability of each lender to provide this security.
16
The balance of this section will explore the performance of SOFOLES, MFIs and building
materials vendors against each of these five criteria in more depth. Table 4 on the next page
summarizes this analysis and forms the basis of our recommendations in the section that
follows.
Criteria 1: Market Presence
If HMF, LLC is attempting to support funding of housing loans for low income and informal
economy borrowers, it will need to channel the its capital through institutions that have a
presence among these segments of the population. This section will assess the extent to which
SOFOLES, MFIs and building materials vendors do, or could, address the financial needs of lower
income and informal economy households.
SOFOLES
We have essentially defined the market for loans supported by the HMF, LLC bonds as those
households that exist outside of the Mexican housing finance system. Under this construct,
SOFOLES – a major component of this system – should perform poorly against the criterion of
market presence. This conclusion is largely accurate with respect to low income borrowers. As
discussed earlier in the paper, interviews with ratings agencies and industry experts put the
lower end SOFOLES loan sizes around $15,000. According to these sources and our affordability
analysis in Appendix C, this loan amount with typical terms is affordable only for households
with incomes of 4x MW or greater, excluding nearly half of all Mexican households. This
conclusion is further supported by the World Bank study of Mexico City which found that only
1.4% of household in the lowest income quartile relied on credit from SOFOLES (Gwinner 2006).
SOFOLES, however, may make a stronger case for a market presence in the informal economy.
Lenders are generally aware of the market opportunity presented by low to moderate income
borrowers that do not qualify for conventional mortgages and SOFOLES are trying to understand
how to attack this market segment (Suarez 2008). Their main approach seems to be a
requirement that borrowers whose income cannot be verified enroll in a savings program to
prove their ability to pay. Because SOFOLES cannot take deposits, they typically partner with a
mutual fund company that can accept the payments and then provide capital for the loans
originated by the SOFOL (Arguelles 2008). Su Casita’s Flexiplus program is structured like this
and requires that informal economy borrowers enroll in a six month savings program in order to
qualify for a loan.13 As a benchmark, on February 2007, Su Casita estimated that 30% of its
mortgage loans were lent to borrowers in the informal economy (Su Casita 2007).
13
See program description on Su Casita’s website: https://www.sucasita.com.mx/productos.html
17
Table 4 – Lending Institutions and Performance Criteria
SOFOLES
MFIs
Building Materials Vendors
Market Presence
Weak for low income;
Growing for moderate income
informal economy
Exclusively focused on
demographic, but limited
penetration
Strong
Business Capacity
Home lending experts;
Cost could prevent scalability in
target market
Microenterprise experience in
target market; Limited home
lending activity
No expertise in lending, may
require financial partner;
Very scalable retail model
Profitability
Increased rates and fees could
offset increased overhead
Lower margins, increased volume
Increased volume for vendors and
financial partners
Competitiveness of Funding
Not competitive for bank-like
SOFOLES;
Potential opportunity with
SOFOMES
Technical Assistance and term
attractive
Not competitive for direct lending
to retailer;
Security against mortgage
portfolio
Portfolio may contain unsecured
loans
Portfolio may contain unsecured
loans; Other assets my provide
security
nd
2 Tier Security
18
MFIs
Microfinance institutions, by virtue of their name and mission, should have a presence among
communities for whom housing microfinance might be appropriate. One of their primary
purposes is to deliver financial services to unbanked and under banked individuals, a goal that is
in line with that of our client. Mexico’s microfinance industry reaches very poor families and
informal economy households. In 2006, 10 of the institutions listed in Appendix F had average
loan balances below $300 and the group as a whole, excluding Caja Libertad and Caja Popular
Mexicana, had an average balance of $390, putting their loans within the reach of even the
poorest borrowers. As a barometer of informal economy penetration, Financiera Independencia
estimates that 97% of its CrediConstruye borrowers earn money informally.
MFIs are certainly active in the communities with which our client is concerned, but their
aggregate penetration is limited. The institutions listed in Appendix F had 1.9 million borrowers
in 2006, roughly 7% of households compared to the 30% we are estimating might need housing
microfinance services (and, as discussed below, few of these institutions appear to offer housing
products). The microfinance industry in Mexico is generally regarded as being in a
developmental phases, which means that it may exhibit strong growth in the next few years but
has limited reach now (CSHM 2007).
Building Materials Vendors
Several studies and anecdotal evidence suggest that poor households obtain credit directly from
the vendor of the product or service they wish to purchase, rather than from a financial
institution. The World Bank Mexico City study showed that 43% of households in the lowest
income quartile obtained credit from commercial stores and that 60% of these unbanked
households used informal credit to buy or renovate their homes (Gwinner 2006).
That shops and department stores are a primary source of credit for poor households makes
sense from a behavioral perspective. Whereas not every household has daily interactions with
banks or other financial services companies, most people visit stores with some regularity.
Building materials vendors’ existence, therefore, as part of most households’ daily interactions
gives them an advantage over MFIs and SOFOLES with respect to market access. CEMEX’s
estimate that low and middle income do-it-yourself home builders consumed 40% of cement
the cement sold in Mexico (Prahalad 2006) illustrates the potential for these entities to reach
large numbers of households.
Market Presence – Conclusion
Speaking strictly in terms of volume of interactions with informal economy and low income
borrowers, building materials vendors have a clear advantage over SOFOLES and MFIs as a
distribution channel in Mexico. SOFOLES and MFIs display mixed performance against this
criterion. SOFOLES appear interested in accessing informal economy borrowers, but their
success in this endeavor is unclear. MFI’s are exclusively focused on the unbanked, but the
overall development of the MFI sector in Mexico is limited.
19
Criteria 2: Business Capacity
The business model of each lending channel affects the appropriateness of the HMF, LLC bond in
supporting those institutions. In addition to actually serving the target market, which we
discussed above, the Lenders would ideally have experience originating and servicing housing
loans to low income and informal economy borrowers. Moreover, the Lenders’ business
practices should allow for scaling up home credit portfolios to these population segments. Few
Lenders meet both of these criteria as established models for housing microfinance are limited.
This section will assess how appropriate components of each Lenders’ existing business models
are for serving the target market and increasing portfolio size while minimizing marginal
transaction costs.
SOFOLES
By statute, mortgage SOFOLES specialize in originating and servicing housing loans.
Consequently, they have developed high levels of expertise as housing lenders. Their general
underwriting expertise is evidenced by delinquency rates in SOFOLES-originated loan portfolios
of 2.5% (CSHM 2006). SOFOLES enhance their ability to originate and service loans by using
development-based models. For example, SOFOLES frequently locate kiosks on location at large
housing developments. The hours of the kiosks correspond to the needs of the local borrowers
who purchase units within the new housing development (CSHM 2006). This model allows the
SOFOLES’ to provide technically expert service in dispersed locations that meet the needs of the
potential borrowers. SOFOLES also use standardized lending origination and underwriting
procedures, promulgated by SHF, which reduces administrative costs.
Based on their current business practices, SOFOLES have both a high degree of expertise and the
ability to scale up their operations. However, the advantage SOFOLES hold in these areas
diminishes as they move down market to lower income and informal economy borrowers. These
customers complicate the application of SOFOLES’ standard underwriting procedures that rely
on straightforward property ownership and proof of income. Savings programs like Flexiplus
offer a potentially standardized approach to expanding into the informal market but its success
is unproven. In general, the applicability of SOFOLES’ practices to housing microfinance may be
inhibited by the increased marginal costs of originating servicing non-traditional loans.
MFI’s
The business capacity of MFI’s is more problematic. At this time, very few MFI’s serve the
housing markets. FUNHAVI, the only Mexican MFI offering only housing products, has not
achieved profitability (Cities Alliance 2002, MIX Market). In 2006, Financiera Independencia
began offering a housing microfinance product to borrowers for home construction that uses
the federal Ésta es tu Casa subsidy. The product is growing, but as of June 2007, represented
only 3% of Financiera Independencia’s total portfolio (Financiera Independencia 2007).
Although Ésta es tu Casa could potentially spur demand, it is not clear that MFI’s, other than
Financiera Independencia, currently have the technical capacity to develop housing portfolios.
While experience with home lending is limited for MFIs, they do have technical expertise in
underwriting and servicing micro loans. These Lenders engage in originating and servicing
practices that minimize default rates and set appropriate interest rates based on the increased
20
risk of low income and informal economy borrowers. Potentially, MFI’s could modify their
expertise to apply to a housing product. Investment in MFI’s should include a substantial
technical assistance package regarding housing lending. If MFI’s achieve the technical expertise
to serve the housing market, their general business structure should allow scalability because
the nature of microfinance lending involves small branches located in the borrowing
community.
Building Materials Vendors
Building materials vendors operate their credit products under different incentives than typical
lending institutions. The vendor’s primary goal is to increase sales in its core business. For
Cemex, this means selling more cement by offering tandas the opportunity to accept deliveries
in advance and paying off the costs over time. For Home Depot, the partnership with GE Bank
offers low income customers the chance to purchase Home Depot products they might not
otherwise afford. However, Home Depot’s partnership with GE Bank does not earn the store
any direct profits from the lending operations. Rather, GE Bank earns all of the interest profits
(and assumes all of the risk) in exchange for increasing Home Depot’s sales.
Applying Home Depot’s model of partnering with a financial institution, the materials vendor
does not necessarily have any technical expertise in lending practices. Rather, the vendor relies
on the financial partner to provide both the expertise and the business practices for originating
and servicing loans. In most cases, a vendor’s financial partner would be a bank, a SOFOM, or
an MFI. As such, the business practices regarding expertise and scalability discussed above
would apply to the financial partner. The financial partner is also the entity that the HMF, LLC
bond should support. It would not make sense for the bond to support the vendor directly
because there would be no mechanism for distinguishing the core business from the lending
operations.
From a retail perspective, the scalability of credit products offered by building materials vendors
is very high. Assuming the vendor either gains expertise in lending or partners with a financial
institution, the opportunity to expand the loan portfolio will increase along with the store’s core
business expansion. Because the lender can co-locate with the vendor for relatively little cost
(i.e. the cost of floor-space in the store), it can reduce its overhead costs. Moreover, the
location allows for direct access to the target customers, which makes marketing and new
business generation much easier.
Business Capacity – Conclusion
From an expertise and scalability perspective, each lending channel offers advantages and
disadvantages. SOFOLES have the greatest expertise in housing finance, but the standardized
practices that allow SOFOLES to keep relatively low delinquency rates may not allow lower
income borrowers to qualify for loans. In contrast, most MFI’s will have experience managing
the high administrative costs associated with lending to the target market, but they will have
little expertise in housing finance. Finally, the appropriateness of building materials vendors as
a housing finance source will depend on the structure of the lending operations.
21
Criteria 3: Profitability
For the HMF, LLC bond to make sense from the perspective of both HMF, LLC and the Lenders,
the Lenders have to be able to put the Bond to work profitably. Lenders’ prospective housing
microfinance businesses must therefore generate sufficient cash flow to service this debt and
still make a positive contribution to the overall business’s bottom line.
The fact that few housing microfinance business models exist in Mexico complicates our
analysis. By definition, SOFOLES are not very active in this business and apart from Financiera
Independencia and FUNHAVI, we were not able to find much data on MFIs’ housing
microfinance programs in Mexico. Consequently, we do not have sufficient data to evaluate the
stand alone profitability of individual housing microfinance businesses. As an alternative, we will
look generally at the financial health of SOFOLES’ and MFIs’ existing businesses and then try to
assess how expanding into the housing microfinance business would impact several measures of
financial performance. Table 5 on the next page lays out the metrics we will use to make this
assessment. Using this framework we will try to make broad inferences about which of these
two lender types might be better positioned to expand into the housing microfinance space
from the perspective of profitability.
Structural differences exist between SOFOLES and MFIs, which are financial institutions, and
building materials vendors. As a result, understanding the ability of a housing microfinance
business operated by a building material vendor to service the Bonds requires a different
approach..
SOFOLES
Given the general growth and success of SOFOLES as mortgage lenders, we will assume for the
starting point of our analysis that SOFOLES can conduct their core business profitably.
With respect to interest income, housing microfinance products would carry a higher interest
rate than the 12.5% rate on standard mortgages originated by SOFOLES that conform to SHF’s
standards (Fitch 2007). They would therefore offer greater interest income for each dollar lent.
In terms of interest expense, the HMF, LLC bonds would be more expensive than the funding
available for residential mortgage backed securities in Mexico by substantial margins.14
However, looking at the bank loans on Su Casita’s balance sheet, we see a 3 year peso loans at
TIIE (Mexican Interbank Rate – 7.9% as of 3/18/0815) plus 350 basis points, which is competitive
with the HMF, LLC bonds. Housing microfinance products would therefore increase interest
expense per dollar lent, but the magnitude of this increase is unclear.
We have been assuming that mortgage SOFOLES’ interest in entering the housing microfinance
space is limited to loans to informal economy borrowers and excludes smaller progressive
housing loans. If only the ability to verify income differentiates informal economy borrowers
from their salaried counterparts, then the performance of the two types of loans should not
necessarily differ. The cost of evaluating these credits, however, will increase. Expanding into
housing microfinance space would therefore likely increase administrative costs, but could
14
15
See CSHM 2007, page 69 for a list of outstanding residential mortgage backed securities and rates.
http://www.banamex.com/eng/finanzas/historicos/fondeo/tiie.jsp?id=32&year=2008
22
theoretically have little impact on portfolio quality if the new credits were properly
underwritten. Finally, fee income could increase in the near term because households without
access to housing finance should be willing to a pay a premium for that access.
The overall impact on SOFOLES’ margins of introducing a housing microfinance product depends
on whether the increased rates and fees they can charge will cover the additional interest
expense of the HMF, LLC bonds and the additional overhead associated with the new product.
Without specific data on the pricing and administrative costs of standard versus informal
economy mortgages, we cannot make definite claims about the impact of the housing
microfinance products on margins. We can say with reasonable confidence, however, that the
impact could be positive and any deterioration of margins would be moderate. If this assertion
is true, then SOFOLES, assuming they start from a position of reasonable profitability, ought to
be able to execute a housing microfinance business profitably as well.
Table 5 – Impact of HMF LLC Bonds on SOFOLES v. MFIs
SOFOLES
MFIs
Adequate
Mixed
Interest Income
Increase
Decrease
Cost of Funds
Increase
Unclear
Borrower Defaults
Neutral
Improve
Fee Income
Increase
Decrease
Administrative Expense
Increase
Neutral
Uncertain
Decrease
Likely still profitable
Possible with strong and
scalable microenterprise
lending model
Current Profitability:
Impact of Bond on:
Net Impact on Margins
Housing Microfinance
Profitability:
MFIs
The current financial health of Mexican of MFIs is less clear than that of the SOFOLES. As
measured by profit margin, 10 of the 27 entities listed in Appendix F do not operate profitably,
including the only one dedicated exclusively to housing loans, FUNHAVI. On the other hand, two
Mexican MFIs, Compartamos and FI, have successfully completed IPOs, indicating commercial
viability on some level. We will characterize the general profitability of sector as mixed for our
analysis.
According to the broad outline provided by ACCION and described in the table in Appendix A,
housing microfinance loans will likely carry lower interest rates than MFIs’ microenterprise
23
products. This trend is born out in the case of FI, where the 53% annual interest rate on the
CrediConstruye product is meaningfully lower than the 71% average per annum interest rate for
their total portfolio (Financiera Independencia). Per unit interest income will therefore likely
decline for MFIs that expand into housing products. The picture for MFIs interest expense is less
clear. As described below, HMF, LLC Bond is more expensive than FI’s funding for the
CrediConstruye program, but competitive with its other major debt obligation, a Ps 2 billion
credit line at TIIE + 275 bps. The Bond should in theory be competitive with the funds raised by
both Compartamos and FI on equity markets, but these transactions are not directly comparable
to one involving the HMF, LLC Bond. In general, the sporadic nature of capital market support of
Mexican MFI’s makes the impact of the HMF, LLC Bond on interest expense difficult to evaluate.
Using FI as an example again, CrediConstruye is the company’s best performing product as
measured by the level of nonperforming loans. The performance trend is supported by findings
from an ACCION study of their LAC-wide microfinance network. They found that repayment
rates for housing microfinance products were superior to repayment rates for enterprise loans
for all seven on their network members that offered housing products (ACCION 2007). This
ACCION study further asserted that housing loans were less costly per amount lent, though
provided less data to support this assertion. They also noted that housing loans generated fewer
fees because they were longer termed and therefore renewed less frequently. Financiera
Independencia appears to have been able to leverage its existing operating systems to roll out
the CrediConstruye product, and pays its CrediConstruye sales agents the same amounts it does
loans for other products. The product also charges less origination and service fees to customers
than the other products (Mayo 2008, Financiera Independencia 2007). The ACCION study and
FI’s experience indicate that housing microfinance products are neutral with respect to their
impact on MFIs overhead expenses, but have a negative impact on fee income.
Given this analysis, housing microloans would appear to reduce the margins of MFIs. MFIs would
therefore only be interested in moving into the space to diversify their portfolio or increase unit
volume. The interest of MFIs in portfolio diversification is unclear, but the incentive for those
MFIs with adaptable and scalable business models to increase unit sales should be strong due to
Mexico’s demographics.
Building Materials Vendors
Building materials vendors operate under different profitability constraints than financial
institutions. Unlike SOFOLES and MFI's, building materials vendors may not require lending
operations to sustain a profit in their own right. Vendors want to increase sales in their core
business. Offering credit products is a means to achieve that end. Therefore, as long as the
vendor’s profit margins on increased sales remain greater than the overall costs of operating the
lending operations, then the vendor should still support the lending operations. This gives the
Lender more leeway in evaluating interest and fees income against expenses. Moreover,
lending operations will benefit from reduced overhead costs by co-locating with the vendor.
These advantages in profitability will change if the building materials vendor partners with an
external entity. The vendor is not concerned with the profitability of the financing program, as
long as the Lender's business-generating operations are sustainable. However, in order for a
Lender to partner with a vendor, it must achieve profitability. Whether or not the Lender can
24
achieve profitability will depend on the same issues faced by SOFOLES and MFI's, discussed
above.
Profitability – Conclusion
The profitability of SOFOLES transitioning into housing microfinance will be a function of
whether the increased rates it can charge on housing microfinance products will offset the
increase overhead expenses of underwriting and servicing informal economy mortgages. By
contrast, housing products will unambiguously decrease margins for MFIs, making their interest
a function of diversification and prospects for increased volume. Building materials vendors’
profitability considerations are complicated by structural issues.
Criteria 4: Competiveness of Funding
The pure price competiveness of the HMF, LLC Bond was discussed in the previous section as it
related to interest expense. However, the full competiveness of HMF, LLC’s bonds will be a
function of several factors including the 10 year term, their availability in local currency, the
availability of technical assistance and the general market for funding of each lender type.
It is worth noting that our client is an experienced banker with expertise specifically in selling
money. Our goal in this analysis is to provide a framework for thinking about putting the HMF,
LLC bonds to work. Our client is better equipped to execute individual transactions and the true
competiveness of the Bonds will ultimately be determined by whether or not our client can
close deals with individual lenders.
SOFOLES
The capital market picture for SOFOLES is currently complicated by the subprime mortgage crisis
in the United States. Even the best regarded SOFOLES, like Su Casita, have indicated that they
are having trouble accessing long term credit (Moser 2008). Leaving the opportunities
potentially created by these events aside, we think it makes more sense to look at SOFOL
demand for the Bonds in the context of the structural changes facing the industry as the SOFOL
corporate form expires. Some SOFOLES who are especially concentrated in standard mortgage
lending will likely convert to banks. Their business practices are nearly the same and maintaining
their status as SOFOLES or SOFOMES prohibits them from accessing cheaper funding in the form
of deposits (Moser 2008, Martin 2008). These entities will then have access to diverse sources of
funding, and presumably little interest in technical assistance as their mortgage lending models
will be well developed.
SOFOLs that convert to SOFOMs however will face a different environment for funding. Freed
from the requirement that they limit their lending activities to the mortgage sector, they may be
interested in capital that will support the application of their home lending expertise into
housing microfinance products. Demand for funding may be accentuated by the completion of
SHF’s exit from the business of providing capital to SOFOLES and SOFOMES. If Su Casita’s model
of enrolling informal economy borrowers in savings plans administered by mutual funds gain
traction, it will likely limit the competitiveness of the HMF, LLC Bonds. This model would be
scalable and transferable, reducing the need for technical assistance, and the mutual funds
would be a source of ample long term capital. In general, however, the uncertain futures of
25
SOFOMES could make them amenable to partnering with a provider of long term capital and a
technical assistance package that could help them adapt their models to the provision of loans
to informal economy and low income households.
MFIs
The limited scope of MFI activity, and specifically MFI home lending activity, in Mexico makes it
difficult to assess how appealing the HMF, LLC bonds would be in this sector. The two top MFIs
listed in Appendix F are coops, a corporate structure that lends itself to a different analysis than
one that would be applicable for the Bonds. With respect to general capital market activity of
Mexican MFIs, both Compartamos and FI have issued shares through public offerings. Their
ability to execute these transactions reflects capital market interest in their microenterprise
businesses but probably does not present a useful comparison for the HMF, LLC Bonds.
The SHF microfinance facility that funds FI’s CrediConstruye program might serve as a useful
benchmark for the competiveness of the HMF, LLC bonds for MFIs. At present FI is the only
entity to draw on this facility (Financiera Independencia 2007, Mayo 2008). Effective May 4,
2007 SHF made a Ps 210 million ($US 18.8 million) line of credit available to FI for 2 years to
support small home improvement loans. FI must provide proof to SHF that 85% of the loans
funded by the SHF facility are used for home improvements. The facility funds the loans that
trigger eligibility for the SHF grants under the “Ésta es tu Casa” program. The interest rate on
amounts drawn under the facility ranges from 9.35% to 10.98%. The tenor of the HMF, LLC
bonds would certainly seem to make it a reasonable complement to or replacement for the SHF
facility for entities with a long term plans to introduce a housing microfinance product.
More broadly, we have demonstrated that vast demand for housing solutions exists among
households in the communities that MFIs serve. We have also highlighted the limited technical
expertise in home lending among MFIs. The need for technical assistance in housing finance
could offer an attractive advantage for the HMF, LLC bond compared to other private
investments that do not offer technical assistance. As they exist now, the lack of housing
finance expertise or standardized practices make expansion into housing products risky. On the
other hand, MFI’s offer experience in general lending practices to down market borrowers.
Rounding out this access to and knowledge of the target market with housing finance skills
could be an appealing proposition from MFIs.
Building Materials Vendors
The competitiveness of the HMF, LLC bond for building materials vendors will depend on
whether the lending activities of the vendor are internalized in the general operations of the
vendor. If the vendor funds consumer credit options with its own general sources of funding,
such as Cemex's Patrimonio Hoy program, than the bond will likely not be attractive.
Sophisticated actors such as Cemex and Home Depot will have access to funding at more
favorable terms than those offered by the bond.
On the other hand, if a building materials vendor separated the funding of its lending
operations, either by creating a self-sufficient subsidiary or partnering with an external entity,
26
then the HMF, LLC bond could potentially offer a competitive source of funding. The
attractiveness of the bond's interest rate would depend on the makeup of the lending
operations. If the materials vendor acted in support of the lending operations, the Lender could
probably secure cheaper funding from other sources. However, the stability of the bond's 10
year term would likely compliment the desires of the materials vendor to establish a reliable
source of funding to sustain the business-generating potential of the lending operations. For
example, Home Depot's partnership with GE Money in its Pagos Fijos program is motivated
primarily by the ability of GE Money to increase low income customer purchases. Home Depot
is not particularly concerned with the profits on lending that GE Money realizes. The continued
stability of the customer base is more important to Home Depot's concerns than the Lender's
interest rate profits. Presumably, Home Depot or other vendors would appreciate a funding
source that allowed a Lender to conduct sustainable lending practices, and the relatively
expensive interest rates would not matter as long as the Lender's profitability was sufficient to
sustain its operations.
Competitiveness – Conclusion
The competiveness of the HMF, LLC Bonds among SOFOLES depends to a large degree on the
strategic direction of each individual institution. Those convert to a banking structure will likely
not have use for the Bonds, but SOFOMES expanding the product offerings could make
interesting partners. For MFIs, the technical assistance should be an attractive feature of the
Bond that would help the take advantage of the grants offered under the Esta es tu Casa
program. The competiveness for building materials vendors depends on the structure. For those
that are currently funding credit provision themselves, any opportunity to transfer credit risk
and focus on their core retail business. For these vendors partnered with financial institutions,
competitiveness will be a function of the financial partner’s resources.
Criteria 5: Security against Underlying Portfolio
A final criteria involves the ability of HMF, LLC to secure its Bonds against the underlying
portfolio of a lender in the event the underlying lender defaults or goes into bankruptcy. This
secondary security would allow HMF, LLC to acquire a lien against the assets of the lender. The
most practical implementation would be a lien against the mortgage or loan portfolio supported
by the bonds. In the case of SOFOLES, these underlying portfolios will typically be loans secured
the underlying property. In contrast, MFI and building materials vendors' loan portfolios may
include unsecured loans. Each type of loan portfolio is valuable as security for the bond. The
SOFOLES' asset portfolios will be a little more valuable as they will consist of larger loans with
liens attached. However, the high cost of foreclosure reduces the comparative value of secured
loans versus unsecured loans.16 Therefore, the unsecured loans in MFI portfolios will be less
valuable, but they can still be used to secure the bonds.
Another option would allow for a lien against the general assets of the underlying institution.
Building materials vendors offer a very attractive option in this context. The assets of the
vendor’s core business could be used to directly secure the bond.
16
See Appendix G for a description of Mexican foreclosure law
27
Recommendations
In our analysis, we evaluated three Mexican lending institutions in Mexico with respect to their
ability to deploy our clients’ capital by borrowing under the terms of the Bonds designed by
HMF, LLC. We evaluated mortgage SOFOLES, MFIs and building material vendors according to (i)
their presence in the target market of housing microfinance borrowers, (ii) their capacity to
execute and grow a housing microfinance business, (iii) the impact on their current financial
performance of entering this market, (iv) the competitiveness of the Bonds as a source of
funding for each lender type, and (iv) each Lenders’ ability to offer security for the Bonds.
Our client may provide capital to each of these three institutions. Its options are not mutually
exclusive. Similarly, no single lender type clearly outperforms the others against the criteria we
have used and given the differences between the types of housing microfinance products they
might offer, relative comparisons are difficult. As a result, we will make a conditional
recommendation for how HMF, LLC should go about investing their capital in each type of
Lender. We will then make broader recommendations about approaches to the transaction they
are trying to execute.
SOFOLES
Recommendation: Target SOFOLES that will convert to SOFOMES, and focus technical assistance
around underwriting loans to informal economy borrowers.
Our analysis has shown that SOFOLES are attractive conduits for HMF, LLC’s capital primarily
because of their expertise in mortgage lending in Mexico. With the support of SHF they have
developed a standardized approach to home lending that has fostered capital market support of
the Mexican mortgage industry. In addition, their corporate form as non-bank financial
institutions allows them flexibility with respect to their lending practices such that they could
potentially design and deliver home lending product that meet the needs of informal economy
and low income borrowers.
The origination of standard mortgages to households earning 4x the minimum wage or greater
in the formal economy underlies the financial success of SOFOLES. This standardized approach
has allowed them to control administrative expenses and reduce their costs of funds. Efforts to
provide smaller loans to households below the 4x minimum wage bracket would likely increase
their administrative expense and compromise the success of their business model. We therefore
do not think SOFOLES are a useful avenue for accessing the low income segment of the potential
housing microfinance market.
However, SOFOLES are well positioned to expand housing finance solutions to the 50% of
households earning between 3 and 6 minimum wages, and 30% of households earning 6
minimum wages or more in the informal economy. Furthermore, SOFOLES that convert to
SOFOMES will be looking for new markets in which they can establish themselves as formal
banks with access to deposit-based funding continue to compete for standard mortgage
business.
28
SOFOMES’ ability to profitably operate in this new market will depend on their ability to control
expenses and risk associated with a more complicated underwriting process. To the extent the
Flexiplus model gains traction, HMF, LLC’s Bonds would face stiff competition from the
resources of the mutual funds with which some SOFOLES/SOFOMES are partnering. However, if
HMF, LLC can design such a lending program and include it in their technical assistance package,
they could offer real value to this sector.
MFIs
Recommendation: (1) Target MFIs with commercially viable microenterprise business and
provide technical assistance for home lending practices and administering ‘Esta es tu Casa’
grants; (2) Explore relationship with Financiera Independencia.
Their growing expertise in lending to the poorest households – those almost completely
untouched by the Mexican housing finance system – makes MFIs attractive partners for our
client. Their business models are designed around the origination of loans in small amounts to
borrowers with complicated credit profiles. In addition, the Bonds’ term and currency
denomination should make them a competitive source of funding for MFIs. In Mexico, however,
the MFI sector is underdeveloped by regional standards, limiting advantages that these
institutions offer in terms of access to the target demographic. Finally, Mexican are not heavily
engaged in the home lending business and housing loans offer less attractive margins than their
existing microenterprise products.
HMF, LLC’s approach to the sector should offer MFIs the opportunity to gain expertise in home
lending and increase their customer volume. A technical assistance package that includes
blueprints for home lending procedures and the mobilization of ‘Esta es tu Casa’ grants is
therefore essential for HMF, LLC’s transactions with MFIs in Mexico. The home lending guidance
will complement MFIs existing expertise in lending to the poor and will mitigate the risk to HMF,
LLC, as a bondholder, of their creditors’ expansion into a new business line. Understanding how
to access the ‘Esta es tu Casa’ grant will help the MFIs attract customers whose interest in
obtaining credit and purchasing power will be enhanced by the subsidy.
Financiera Independencia’s CrediConstruye product is a good model for housing microfinance in
Mexico. SHF currently funds the product with a 2 year credit line at rates that might make the
Bonds competitive as a source of longer term support. HMF, LLC should explore a relationship
with FI and at a minimum, further research the proprietary IT system that FI uses to evaluate
and monitor its customers.
Building Materials Vendors
Recommendation: Establish joint ventures between MFIs or SOFOMES and retailer, and provide
technical assistance in accordance with the type of financial service provider.
The appeal of building materials vendors as channels for our client’s capital relates to access.
This Lenders’ business operations are part of the existing credit behavior of the target
population, giving the sector a significant advantage over SOFOLES and MFIs. However,
structural issues complicate HMF, LLC’s ability to lend to building materials vendors.
29
In some cases, like CEMEX’s Patrimonio Hoy program, the material supplier runs a credit
program itself. If the vendor operates an internal lending practice, its costs of funding for the
credit program will be the same as the costs of funds for its wider business. The HMF, LLC bond
will not be competitive with those funding sources for any reasonably sized retail business.
In other situations, vendors prefer to transfer the obligations and risks associated with lending
to a separate financial entity, similar to Home Depot’s relationship with GE Bank under the
Pagos Fijos program. This construct is still not ideal for HMF, LLC because while it can provide
funding and technical assistance, it cannot provide personnel to run the lending business on a
day to day basis. Therefore, HMF, LLC would need to find a building materials vendor receptive
to partnering with a financial entity and a financial institution that could administer customer
credit program.
The complex structure of a transaction with a building materials vendor does not necessarily
prohibit HMF, LLC form partnering with these entities. To the extent HMF, LLC identifies MFIs
and SOFOLES with the expertise to grow a home lending portfolio, an additional partnership
with a building materials vendor makes sense because it provides access to a large customer
base to support the financial institution’s growth. Similarly, the material retailer should be
receptive to the partnership because the provision of credit should make its product affordable
to more customers, thereby increasing unit sales. HMF, LLC’s search for a qualified financial
services provider, however, should follow the recommendations outlined for SOFOLES and MFIs.
Technical Assistance Package
Recommendation: Focus technical assistance design for Mexico on underwriting informal
economy mortgages, adapting microenterprise lending models to progressive housing loans, and
helping borrowers qualify for ‘Esta es tu Casa’ grants.
In each of the Lender-specific recommendations above, we emphasized the need for a specific
component of a technical assistance program. We believe that the greatest obstacle to the
effective provision of housing microfinance in Mexico involves the absence of technical
expertise with respect to making housing loans to informal economy or low income borrowers.
The technical assistance portion of the bond issue this therefore critical. Specific technical needs
vary by sector and population so we have outlined the required program components by lender
type:
•
•
SOFOLES: underwriting practices for informal economy borrower
MFIs: (i) home lending procedures, and (ii) assistance with access and providing Esta es
tu Casa grants.
As discussed in the last section, either an MFI or a SOFOL/SOFOM would participate in an HMF,
LLC partnership with a building materials vendor and the corporate form of the operator under
this arrangement would determine the type of TA assistance required.
Housing Microfinance Product Segmentation
Recommendation: Consider narrowing the range of housing microfinance products HMF, LLC
plans to support to maximize the utility of the technical assistance program.
30
The need for a distinct TA program for each lender type highlights a particular problem facing
HMF, LLC. Specifically, the concept of housing microfinance is broad, and poorly defined in
practice. As a result, the types of businesses that HMF, LLC is trying to support may be very
different. The range of activities falling under the heading of housing microfinance in Mexico
stands as an example of this problem. The business of underwriting informal economy
mortgages is very different from that of providing loans for progressive housing.
As previously stated, absence of ‘housing microfinance’ expertise in Mexico makes the technical
assistance component of the transaction critical for all potential lender types. However, the
client’s technical assistance budget is limited. HMF, LLC may therefore benefit from narrowing
the types of housing microfinance products it plans to support. This focus would allow for the
design of a more robust technical assistance program for a particular product, thereby maximize
the program’s utility for a specific type of lender. Because HMF, LLC’s mandate is Latin America
wide, a decision about the types of products to focus on would require region-wide research.
3rd Party Service Provider
Recommendation: Consider selling technical assistance services, specifically underwriting and
servicing IT systems, through a standalone business.
Conversations with industry experts and a case study of Financiera Independencia suggest that
investment in IT infrastructure is an important component of any scalable housing microfinance
business model. In addition, we noted in the context of the last recommendation that HMF,
LLC’s limited technical assistance budget could potentially limit the types of housing
microfinance activities it could support.
Investments that HMF, LLC plans to make in the development of housing microfinance business
practices will likely have value for a variety of institutions in Latin America. HMF, LLC could
therefore set up a separate for profit business to sell services developed in the context of its
technical assistance program. If such a business could be commercially viable, it might provide
additional revenue to support the development of systems beyond the scope of the technical
assistance program, such as a software package that could be sold to entities interested in
expanding into the housing microfinance space. The marketing of a system like this might be
attractive as a standalone business, and it would increase the capacity for lending institutions to
put the HMF, LLC Bonds to work.
31
References
Anhalt, Ricardo, Director of Credit Division, The Home Depot, Mexico, Personal Communication,
February 2008.
Arguelles, Rogielo, Director, Structured Finance, Fitch Ratings. Interview conducted by phone,
February 22, 2008.
Chiquier, Loïc, Olivier Hassler and Michael Lea. “Mortgage Securities in Emerging Markets.”
World Bank Policy Research Working Paper 3370, August 2004.
“Current Housing Situation in Mexico, 2006.” Prepared for Sociedad Hipotecaria Federal by
Centro de Investigacion y Documentation de la Casa, 2006. Referred to in this paper as CSHM
2006). Available at: www.shf.gob.mx/files/pdf/CHSM_2006.pdf., accessed 3/18/08
“Current Housing Situation in Mexico, 2007.” Prepared for Sociedad Hipotecaria Federal by
Centro de Investigacion y Documentation de la Casa, 2007. Referred to in this paper as CSHM
2007). Available at:
www.shf.gob.mx/files/pdf/CURRENT%20HOUSING%20SITUATION%20IN%20MEXICO%202007.pdf.,
accessed 3/18/08
Escamilla, Joaquin, INFONAVIT, Personal Conversation March 3, 2008.
Ferguson, Bruce. “Advances in Housing Microfinance: Is the Glass Half Full or Half Empty?; The
Key Importance of Broadening Distribution Channels to House the Low/Moderate Income
Majority of Emerging Countries.” Pre-publication, 2007.
Financiera Independencia, S.A.B. de C.V. Prospectus for the Initial Public Offering of 76,895,000
shares, October 31, 2007. Available at:
http://www.independencia.com.mx/src/doc/Listing%20Prospectus%20English%20Version.pdf.
Accessed 3/18/08.
“Getting to Scale in Housing Microfinance: A Study of ACCION Partners in Latin America.”
ACCION InSight, No. 21, May 2007.
Gwinner, William Brit, et al. “From Financial Exclusion to Inclusion: Increasing the Availability of
Credit to the Urban Poor in Latin America.” World Bank En Breve Series, No. 98, November 2006.
“FUNHAVI’s Housing Microfinance Program in Mexico.” Cities Alliance 2002. Available at:
www.citiesalliance.org/citiesalliancehomepage.nsf/Attachments/funhavi/$File/funhavi_final_DM
W.pdf. Accessed 3/18/08.
Hayaux-du-Tilly, Yves and María José Pinillos, “Mexico: Deregulation Of Credit, Financial Leasing
And Factoring Activities In Mexico.” Jáuregui, Navarrete y Nader, S.C., 29 Sept. 2006,
www.mondaq.com/article.asp?article_id=43130&print=1, accessed March 17, 2008.
32
Hipotecaria Su Casita, S.A. de C.V., Sociedad Financiera de Objeto Limitado. Prospectus for
Issuance of US$150,000,000, 8.50% Senior Notes due 2016. February 16, 2007.
Martin, Stephen. Consultant to SHF. Telephone interview conducted by Christopher Elias, March
3, 2008.
Mayo, Vicente Gutiérrez, Investor Relations Manager, Financiera Independencia. Interview
conducted by telephone by Christopher Elias, March 3, 2008.
“Mexican Low Income Housing RMBS Methodology 2005.” Fitch Ratings, October 5, 2005.
“Mexico Low Income Housing: Issues and Options.” World Bank, September 16, 2002.
“Mexican RMBS Rating Criteria.” Fitch Ratings, October 26, 2007.
Moser, Lauren, Vice President, Shorebank International. Interview conducted by telephone by
Christopher Elias, March 4, 2008.
Nelson, Grant and Dale Whitman, Real Estate Transfer, Finance and Development, Thomson
West, St. Paul, MN, 2006.
“Patrimonio S.A. de C.V.” Fitch Ratings, June 18, 2007.
Perez, Eduardo. Personal conversation, Feb. 2008.
Pickering, Nancy. “The SOFOLES: Niche Lending or New Leaders in the Mexican Mortgage
Market?”Joint Center for Housing Studies, Harvard University, May 2000.
Prahalad, C.K. The Fortune at the Bottom of the Pyramid. Pearson Education Inc., 2006.
Skelton, Edward. “Laying the Foundation for a Mortgage Industry in Mexico.” Economic Letter
from the Federal Reserve Bank of Dallas, Vol. 1, No. 10, October 2006.
Suarez, Francisco, Associate Director, Standard & Poor's. Interview conducted by telephone,
February 22, 2008.
“The Urban Unbanked in Mexico and the United States”, World Bank, Working Paper 3835,
February 2006.
33
APPENDIX A: Comparison of Housing Microfinance to Mortgage Lending and Microenterprise
Lending
Housing Microfinance v. Mortgage Lending
Characteristic
Target Market
Loan Term
Loan Amounts
Loan Use
Type of Guarantee
Housing Microfinance
Low Income Clients
< 5 years
Small/Medium
Home Improvement &
Progressive Building
Co-guarantor, non-traditional
collateral
Mortgage Backed Loans
Middle to High Income Clients
> 5 years
Large
New Home Construction &
Purchase
Formal Mortgage
Source: ACCION 2007
Housing Microfinance v. Microenterprise Lending
Factor
HMF
Microenterprise
Average Loan Size
$915 - $3,312
$300 - $900
Collateral
Loan Terms
Interest Rates
Source: ACCION 2007
Guarantor (or cosignor), proof of
‘possession’ of home
Up to 36 months but
generally 12-18 months
24% - 35%, sometimes
higher
Guarantor or a
household asset
3 – 12 months
25% - 90% (48%
average)
Difference
HMF loans are typically
3 times larger than
micro enterprise loans
Similar – psychological
rather than legal
inducements
HMF loans are longer in
term
Lower for HMF loans
34
APPENDIX B: Mexican Home Loan Providers – Annual Credit Generation
Provider
Commercial Banks
Year
Loan Type/Use of
Proceeds
# Loans
Value ($US
mm)
Loan Size ($
mm)
Rates (Ann)
2006
Mortgages
60,000
$4,200
Min $40,000
12.5%
Mortgages – Formal
SOFOLES Hipotecaria
2006
Mortgages – Informal
125,000
$4,000
Ésta es tu Casa
Min $15,000,
Avg $20,000
Min $15,000,
Avg $20,000
12.5%
n/a
Max $18,050
n/a
INFONAVIT/SOFOLES Hip
2007
Appoyo INFONAVIT
18,000
See below
Max $92,000
n/a
INFONAVIT
2007
Mortgages
440,000
$11,000*
Avg $24,857
Min 4%
Financeria Independencia
FY 2007 (ends
6/07)
Home Improvement
14,000
7.9
$300 - $1500,
avg $539
53%
CEMEX – Patrimonio Hoy
2003
Home Improvement
36,000
10.0
$50-70
n/a
n/a
Home Improvement
n/a
n/a
n/a
93%
Home Depot
*Includes Appoyo INFONAVIT
Sources: INFONAVIT, SHF, Prahalad 2006, Fitch 2007, CSHM 2007, Pickering 2000, Financiera Independencia, Moser 2008, Martin 2008, Anhalt 2008
35
APPENDIX C: Affordability Analysis
Banks & SOFOLES
Loan Amount
Interest Rate (Annual)
$40,000
$20,000
$15,000
12.5%
15%
15%
20
20
20
$454
$263
$198
$1,515
$752
$658
11.1
5.3
4.6
Term (Years)
Monthly Payment
Minimum Monthly Income Required (Assuming 30% Debt to Income Ratio
Number of Minimum Wages (using $140/month)
MFIs & Building Materials Vendors
Loan Amount
$300
$300
$600
$600
$1,500
$1,500
Interest Rate (Annual)
53%
93%
53%
93%
53%
93%
Term (Years)
2
2
2
2
2
2
Monthly Payment
$21
$28
$41
$56
$102
$140
Minimum Monthly Income Required (Assuming 30% Debt to Income Ratio
$68
$80
$117
$159
$293
$398
Number of Minimum Wages (using $140/month)
0.5
0.6
0.8
1.1
2.1
2.8
36
APPENDIX D: Esta Es Tu Casa Participants (signed on by mid 2007, from CSHM 2007)
Banks
ACREMEX
BANAMEX
Banco Aztec
BBVA BANCOMER
Banco Ve por Más
BANJERCITO
SOFOLES
Condesa Financiera
Corporación Hipotecaria
Crédito Inmobiliario
Finpatria
Hipotecaria Casa Mexicana
Hipotecaria Crédito y Casa
Hipotecaria Independiente
Hipotecaria Nacional
Hipotecaria Su Casita
Hipotecaria Vértice
ING Hipotecaria
Patrimonio
MFIs
Caja Reforma
Caja Popular
Financiera Independencia
Other
Apaseo el Alto
Civil Pensions Office of the State of Michoacán
FOMEPADE
FOVISSSTE
INFONAVIT
Habitat for Humanity
Municipal Housing Institute of Leon
Municipal Housing Institute of Morelia
Tamaulipas Housing and City Planning Institute
Veracruz Institute for Regional Urban and
Housing Development
Housing Institute of Colima
Housing Institute of the State of Aguascalientes
Housing Institute of San Luis Potosi
Housing Institute of Sinaloa
Institute of Housing and Urban Land of Guerrero
Servicios de Autoconstrucción CEMEX
Suelo y Vivienda Progresiva de Occidente
37
APPENDIX E: SOFOLES Hipotecaria (Figures in $US)
Name
Hipotecaria SU CASITA
GE MONEY CREDITO HIPOTECARIO
Hipotecaria CREDITO Y CASA
METROFINANCIERA
CREDITO INMOBILIARIO
ING HIPOTECARIA
PATRIMONIO
Hipotecaria NACIONAL
FINCASA HIPOTECARIA
GMAC HIPOTECARIA
Hipotecaria MEXICO
Hipotecaria CASA MEXICANA
Hipotecaria VERTICE
FINPATRIA
Hipotecaria INDEPENDIENTE
CORPORACION HIPOTECARIA
FOMENTO HIPOTECARIO
CONDESA FINANCIERA
Total
Assets 9/30/07
Loan Portfolio 9/30/07
3,102,327,500
1,617,533,927
1,682,903,315
2,008,629,624
1,351,482,350
793,235,392
909,765,993
866,065,949
492,076,492
361,893,255
214,569,708
167,256,080
159,823,022
63,092,882
34,574,701
30,196,442
20,613,543
18,183,014
2,629,512,863
1,561,708,463
1,337,568,792
1,149,049,966
1,047,037,204
767,367,113
763,343,638
570,639,346
408,383,937
221,738,109
199,097,101
152,465,821
147,147,585
58,343,048
32,634,293
24,322,260
19,223,779
11,541,158
13,894,223,190
11,101,124,476
Source: Asociacion Mexicana de Entidades Financieras Especializadas
38
APPENDIX F: Mexican MFIs Listed in MIX Market – Data as of 12/31/2006
Gross Loan
Portfolio ($US
mm)
%
Total
Return on
Assets
Return on
Equity
Profit
margin
Portfolio at
Risk > 30 days
Ratio
Number of
Active
Borrowers
Average Loan
Balance per
Borrower
# Active Borrowers
Caja Popular Mexicana
941,664,645
52%
3.15%
29.00%
19.86%
11.90%
643,659
1,463
643,659
Caja Libertad
488,526,623
27%
6.00%
45.13%
26.09%
8.02%
290,328
1,683
290,328
Compartamos
271,098,542
15%
23.18%
57.35%
44.82%
1.13%
616,528
440
616,528
FINCOMUN
27,112,566
2%
5.71%
28.84%
16.79%
4.90%
33,290
814
33,290
FINCA - MEX
16,207,364
1%
8.45%
26.93%
15.09%
2.31%
63,614
255
63,614
CAME
Name
13,640,981
1%
-0.56%
-3.16%
-0.37%
0.83%
80,262
170
80,262
ASP Financiera
5,962,038
0%
5.14%
22.47%
10.69%
3.28%
7,625
782
7,625
ASEA
5,781,803
0%
10.28%
31.47%
21.25%
3.81%
14,515
398
14,515
ADMIC
5,470,118
0%
4.88%
12.63%
10.99%
7.80%
14,045
389
14,045
EUREKASOLI
4,655,943
0%
-1.38%
-4.82%
-8.39%
0.82%
6,589
707
6,589
ProMujer - México
4,090,549
0%
10.16%
27.38%
20.41%
1.71%
15,613
262
15,613
FRAC
3,716,204
0%
9.92%
19.97%
17.92%
2.41%
10,839
343
10,839
SOLFI
2,734,232
0%
-3.34%
-4.42%
-5.91%
3.59%
12,648
216
12,648
CONSERVA
2,718,241
0%
-
-
-
1.95%
8,643
315
8,643
ATEMEXPA
2,493,364
0%
4.37%
23.03%
14.99%
3.29%
13,615
183
13,615
CAFASA
1,706,029
0%
3.66%
29.02%
5.04%
12.06%
8,298
206
8,298
APROS
1,674,293
0%
-1.32%
-9.81%
-4.38%
23.52%
4,648
360
4,648
AMEXTRA
1,318,076
0%
9.14%
20.56%
22.40%
0.96%
2,655
496
2,655
COCDEP
1,199,371
0%
18.96%
42.26%
31.48%
0.52%
6,613
181
6,613
FUNHAVI
1,188,583
0%
-2.42%
-3.41%
-6.01%
39.41%
1,357
876
1,357
SEMISOL
FORJADORES DE
NEGOCIOS
981,323
0%
4.77%
21.90%
8.78%
1.85%
3,229
304
3,229
857,312
0%
6.84%
11.64%
11.44%
0.29%
2,907
295
2,907
Oportunidad MF - MEX
853,421
0%
-55.92%
666.17%
-134.75%
0.19%
5,216
164
5,216
FVP
737,613
0%
-10.94%
20.36%
-19.54%
17.38%
1,045
706
1,045
FIPS
665,020
1,807,054,254
0%
100%
-7.55%
-29.40%
-14.36%
0.33%
7,054
94
7,054
1,874,835
Source: MIX Market search by country for Mexico
39
APPENDIX G: Mexican Foreclosure and Titling System
Foreclosure laws greatly affect the level of risk mortgage lenders face. From the lender’s
perspective, the amount of money typically involved in home lending is very large compared to the
borrowers overall asset base. The lender will therefore want a high level of assurance that the loan
will be adequately secured. From the borrower’s perspective, the consequence of default could
potentially lead to the loss of the family’s home, a highly valued social asset. This situation creates a
conflict between the financial needs of Lenders, which influences the availability of loans, and the
protection of the borrower’s welfare through restrictions against foreclosure.
In Mexico, foreclosure laws allow Lenders to secure mortgages against the underlying property
(Perez 2008). However, the practical implementation of foreclosure is very costly. The foreclosure
process ends when a judge orders the legal repossession of the property, or when the debtor agrees
to a transfer of the property in lieu of repayment (Fitch 2005). Trials can proceed very slowly. Once
a judgment comes down, the lender still may not be able to recover any value on the loan. If the
debtor has equity in the property, local officials often hesitate to eject the family from their home,
despite a court order (Escamilla 2008). Due to the costs of executing a foreclosure, lenders will
typically have an economic incentive to work with borrowers to prevent foreclosure. The costs of
foreclosure become particularly acute when the loan value and the underlying security are of
relatively low value. In these cases, the Lender must engage in costly legal proceedings in order to
regain a relatively small security value. Therefore, although foreclosure exists as a legal tool to
recover from borrowers in default, it is an expensive option, particularly where the outstanding loan
value is low.
The ability of lenders to adequately secure mortgages relies heavily on the clarity of title to the
underlying property. Title refers to the characteristics and encumbrances related to a specific piece
of real property. The various state governments in Mexico administer the country’s titling process.
Each state operates a title registry that determines the definitive nature of a property’s
characteristics. A borrower seeking to prove ownership of a property she wishes to use as security
for a loan can apply to the Public Registry to clearly establish title. The downside of the state run
system is that it is often inefficient and slow. Delays and costs associated with registering and
formalizing title may prevent low income borrowers from using their property as a sufficient security
for lending purposes. Lenders may also face delays in foreclosure proceeding while they wait for the
Public Registry to formalize title. The federal government is in the process of studying and
modernizing the various state run public registries with the goal of developing a more standardized
and efficient national system (CHSM 2007).1 Nevertheless, the delays and costs of the titling system
add to the overall costs of foreclosing on a home loan. Lenders offering low value loans will face
high relative costs to recover from defaulting borrowers. Consequently, those Lenders who offer
micro credit to high risk borrowers will likely insist on strict originating practices and/or aggressive
collection methods to keep default rates very low.
1
“Current Housing Situation in Mexico, 2007,” SHF 2007.