Mexico - Housing Finance Project

Document of The World Bank FOR OFFICIAL USE ONLY -LvLI/7 - - Report No. P-4731 MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT CF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$ 300.0 MILLION TO BANCO NACIONAL DE OBRAS Y SERVICIOS PUBLICOS S.N.C. WITH THE GUARANTEE OF THE UNITED MEXICAN STATES FOR A HOUSING FINANCE PROJECT May 6, 1988 This document has a restricted distribution and may be used by recipients only in the performance of their ofricial duties. Its contents mav not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit - Pesos (Mexs$) The exchange rate of US$1 - Mex$1,500, representing the anticipated average exchange rate for 1987 was used for the project analysis. The actual average free market rate was: US$1 - Mex$1,404 The most recent exchange rate as of May 3, 1988, was: US$1 = Mex$2,291 FISCAL YEAR January 1 to December 31 ABBREVIATIONS AND ACRONYMS ACF Average Cost of Funds to the Banking System BANOBRAS Banco Nacional de Obras y Servicios Publicos, S.N.C. (National Bank for Works and Public Services) FONHAPO Fondo de Habitaciones Populares (Low Income Housing Fund) FOVI Fondo de Operacion y Financiamiento Bancario a la Vivienda (Housing Fund for Commercial Banks) GDP Gross Domestic Product GIRA General Interest Rate Agreement GOM Government of Mexico INFONAVIT Fondo Nacional de la Vivienda para los Trabajadores (Housing Fund for Workers) SEDUE Secretaria de Desarrollo Urbano y Ecologia (Ministry of Urbanism and Ecology)  FOR OFFmIIAL USE ONLY MEXICO HOUSING FINANCE PROJECT LOAN AND PROJECT SUMMARY Borrower: Banco Nacional de Obras y Servicios Publicos, S.N.C. (BANOBRAS) Guarantor: United Mexican States Executing Agency: Banco de Mexico (the Mexican Central Bank) as trustee for Fondo de Operacion y Financiamiento Bancario a la Vivienda (FOVI) Amount: US$300.0 million equivalent Terms: 15 years, including 5 years of grace, at the Bank's standard variable interest rate. Relending Terms: BANOBRAS would enter into contractuai arrangements for on-lending the loan proceeds to FOVI in Pesos to finance exclusively lower cost housing of Type A. FOVI would relend the funds to the banking system on FOVI's loan terms and conditions, which are acceptable to the Bank, minus applicable spreads. The Guarantor will bear the foreign exchange and interest rate risks. Financing Plan: Local Foreign Total --------US$ Million---- Banking System 717 717 FOVI 402 402 IBRD 300 300 Down Payments by Homebuyers 157 157 1,276 300 1,576 Economic Rate of Return: Not applicable Staff Appraisal Report: No. 7097-ME, dated May 6, 1988 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. 1. .nv 'ts may not otherwise be disclosed without World Bank authorization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO BANCO NACIONAL DE OBRAS Y SERVICIOS PUBLICOS S.N.C. FOR A HOUSING .INANCE PROJECT 1. The following memorandum and recommendation on a proposed loan for a housing finance project to Banco Nacional de Obras y Servicios Publicos S.N.C. (BANOBRAS) with the guarantee of the United Mexican States for US$300 million is submitted for approval. The proposed loan would be repaid over 15 years including 5 years of grace. 2. Background. The population of Mexico is young and has been growing rapidly, particularly in the main cities, requiring a significant expansion of the housing stock. While the level of annual new investment in housing is comparable to other countries at a similar level of development, Mexico's housing deficit of about 5.0 million units is large and continues to grow. The housing problem is compounded by the population's unever. and generally low capacity to generate savings for housing financing and the scarcity of long-term housing finance. Mexico has a highly segmented structure of housing supply. During the past decade, about two thirds of housing has been supplied by the informal sector i.e., the households themselves, and the remainder has been financed equally by public programs and financial institutions. In recent years, the informal sector and financial institutions have reduced their voluntary participation in the sector while the relative importance of public programs has increased in response to adverse economic developments. High inflatlon and real wage decreases have had a negative effect on availability and affordability of housing finance. In 1985, housing financing through public p-ograms amounted to about US$2.75 billion equivalent for 363,000 housing units. Public sector finance for housing is provided mainly by commercial banks and payroll funds with a share of about 432 each of the total, and by various federal and state housing agencies (14Z). Central Bank regulations require the commercial banking system to lend 6Z of its total res,;urces for two categories of low and middle income housing. Because of the large differential between mortgage portfolio yields and the ACF (the average cost of funds to the banking system and the key market reference rate in Mexico's financial system) foregone revenues of the commercial banks amounted to some US$670 million equivalent in 1986. These revenue losses forced commercial banks to increase interest rates on their unregulated loans to at least partially offset these losses. The Fondo de Operacion y Financiamiento Bancario a la Vivienda (FOVI), a trust fund of the Central Bank, supervises compliance with Central Bank housing regulations and provides supplementary financing once individual banks have met their mandatory 62 lending requirement. FOVI is well managed and efficient, following sound housing standards and supervision practices. 3. In order to address the severe credit subsidy problems resulting from high and increasing levels of inflation and low fixed interest mortgage rates under the mandatory lending system, a new variable rate mortgage instrument was introduced in 1984. Because of expected resistance from borrowers, interest rates were initially set well below market rates,  and full cost recovery could not be achieved. As inflation continued to rise, thp authorities made further significant adjustments to the new system in 1986 and 1987 to reduce subsidies, and in March 1988, Central Bank regulations allowing full cost recovery were issued. However, effective implementation requires appropriate action in each one of the 32 Mexican states. Main features of the new mortgage system are: (a) interest rates equal to ACF; (b) monthly loan payments defined as a percentage of the loan amount, and ad;usted in parallel with the minimum wage to ensure affordability; (c) no limit on capitalization of interest, in casa the monthly loan payment is insufficient to cover the interest due; and (d) a flexible loan maturity subject to a 20 year maximum term. GOM has furnished the Bank with a Letter on Housing Sector Policies indicating its intention to (i) maintain the current system of full cost recovery and to (ii) review issues concerning mobilization of savings for housing finance and for the development of rental housing and take remedial action, if appropriate. 4. Rationale for Bank involvement. The Bank's involvement in the proposed project is important to help fully implement the housing loan reform measures and pursue the agreed policy initiatives in the future. The proposed project would be the second of several proposed operations aimed at supporting Mexico's housing sector. It would build upon the findings of: (i) sector analyses underlying the Low Income Housing Project (Loan 2612-ME) approved in 1985 and (ii) a housing finance study carried out by the Central Bank under Loan 2612-ME in close cooperation with the Bank. The study focused on the provision of housing finance through the commercial banks, the payroll funds, the low income housing fund (FONHAPO) and the informal sector. Its findings contributed to improved cost recovery on housing finance provided by the commercial banks and FONHAPO (the intermediary under Loan 2612-ME) and it provided a key analytical input to the formulation of a GOM Housing Policy Statement in February 1987. Preparation of the proposed project during a two year period was closely linked to this process, especially to supporting GOM efforts to eliminate subsidies on wandator- housing lending by the commercial banks. This conti.nuing dialogue between the Bank and the GOM was an important element in achieving the March 1988 reform, which finally introduces full cost recovery on housing loans. This achievement greatly facilitates GOM's efforts to reduce the pressure on interest rates by providing the basis for gradually eliminating revenue losses to the commercial banks on their mandatory housing loan portfolio, which is a key step towards the resumption of voluntary commercial bank lending for housing. In addition, achieving full cost recovery strongly supports the GO1's strategy of eliminating overall credit subsidies. 5. Project Objectives. The primary project objectives would be to: (i) support housing finance reforms allowing commercial banks to achieve full cost recovery on mandatory housing loans; (ii) stimulate the introduction of savings schemes geared to households and institutions; (iii) increase the supply of affordable housing to the lower income segments of the population, especially through the testing of a new lower priced housing product; (iv) provide a strong incentive to state governments to reform speedily mortgage registration procedures necessary to register mortgage liens which fully cover interest capitalization; and (v) widen the sector dialogue to include the role of the public sector, coordination of public housing programs, and policies related to investment in rental housing and mobi'lization of savings by households and institutions.  - 3 - 6. Project Description. The project would help finance construction and individual mortgage loans by the commercial banks up to 1993 exclusively for the lower priced housetype (Type A) which is targeted to households with an income of up to 4.0 minimum wages. The loan would fund only those housing loans which incorporate the March 1988 Central Bank regulations that allow full cost recovery. Bank funds would be channeled by BANOBRAS to FOVI for onlending to the commercial banks. The proposed loan would contribute about 19? of the total funding requirements for Type A housing during the project implementation period. 7. Actions Agreed Upon: During negotiations it was agreed that: (i) the full amount of the Loan will only fund subloans which incorporate the March 1988 reforms ; (ii) by March 31, 1989, a study will be completed on incentives required to tap savings from households and institutions, the results of which will include a proposed plan for implementation to be discussed with the Bank by June 30, 1989 and subsequently appropriate actions will be implemented; (iii) by December 31, 1989, a study will be completed to review the t.ousing rental market and to identify measures required to make investment in rental properties sufficiently attractive, and by March 31, 1990, the study, together with an implementation plan, would be discussed with the Bank and appropriate act ons implemented thereafter; (iv) FOVI will complete test-marketing of about 2,500 houses of a new housing product (selling at a price of 202 lower than the prevailing market price for Type A housing) by March 31, 1989 and review results by June 30, 1989; and (v) GOM will take measures, as appropriate, to promote mobilization of savings for housing finance and investment in rental housing. A lette. discussing the GOM's Housing Sector Polices has been received in the Bank. 8. Benefits. The Mexican Government assigns high priority to meeting the housing needs if its population: in this context the achievement of full cost recovery is an important step toward the resumption af voluntary commercial bank lending and the mobilization of savings for housing. The loan would increase the supply of affordable housing to lower income households, especially by supporting the development of a lower priced h3using product. 9. Risks: With the regulatory basis for full cost recovery already in place upfront, there are no major risks involved. However, each Mexican State needs to complement the March 1988 reforms by reforming speedily mortgage registration procedures. The risk of any slowdown in disbursements, however, is considered minor, especially since the loan provides a strong incentive for action. 10. Recommendations: I am satisfied that the proposed loan would comply with the Articles of Agreement of the IBRD and recommend that the Executive Directors approve the proposed Loan. Barber Conable President Attachments Washington, May 6, 1988  SCHEDULE A MEXICO - HOUSING FINANCE PROJECT Estimated Prolect Costs Local Foreign Total -------(US$ Million)----- Market prices of House Type I 1,276 300 1,576 .n...m =minui = ..... Financing Plan Banking System 717 717 FOVI 402 402 World Bank 300 300 Down Payments by Homebuyers 157 157 1,276 300 1,576 ..M = =m ... ...  SCHEDULE B MEXICO - HOUSING FINANCE PROJECT I. Procurement Arrangements ICB LCB Other 1/ Total Project - 3Q0 1/ Regular commercial practices applicable to FOVI financed construction. II. Loan Allocation Z of Total FOVI supported Mortgage Lending 100 III. Estimated Disbursements Bank FY 1989 1990 1991 1992 1993 1994 Annual 30 60 60 60 60 30 Cumulative 30 90 150 23.0 270 300  SCHEDULE C MEXICO - HOUSING FINANCE PROJECT Timetable of Key Project Processing Events (a) Time taken to prepare: Two years (b) Prepared by: Banco de Mex.'co and the Bank (c) First Bank Mission: November 1985 (d) Appraisal Departure date: May 1987 (e) Negotiations: April 1988 (f) Planned date of effectiveness: September 1988 (g) List of PCRs N.A.  SCHEDULE D STATUS op SANL SoASs SpEIAISUNS is *ia s' sma.u.eS.s ..ufr..r................. ~..,.05SSa...................................- A. $e*asoset of lseb .0k . taof et o.obg off 1S6T) ~~~~~~~tO .i~to 0*~ * - fl fl - C C~ CO SC* S .n *~ f ~ feS OOCOOOO ...n.........* IS a a-9 isso 11AP158A asASOSS &so saet Leo. Is. Yogu Sgpeogo Puppeog Sgmggltitigbi Ub*eo 1S legal Cull, Etebee 4 a.s1 *40-a lose APUS8A tetellse **e*@ 35.1 16541 lose sApiUSA ge'g oodsa 15.55 gigSt 81*s lost 5APIseAS PuOLrnI 6osolPOs 2116.0 3.5 81641 loss ANAPIUAI orn guooi 1uisd its?7mg355 felt isa. BAPImsA bmpito aegis Z , 11.35. 4,4o tell Ilest SAPRUSAB Pelgldoter seupply CU1.$1 1335 166: S"|@*^$ " less APIUIA ?%IF$ on/sod t 15. 3551 1337 SAUCONIX? Laprsp Io.olopssrn 66.5.* #all lsmA sAuosmAa w1i1osop 36..50 im.1s *ama lssa sANPEICA Parts 15355.75 olua less UAPINUA Shiggos lusrot Nees. l.s. sale less AFAI SA chiggos Aguto Sog. 57Y,4 3454 isiS *AfIUSA so/Ned $Sae 31.1mg 32 3Is 61.6 #Ss$ isis sApIsiA VWroejsmol *iwosl 51.60 53.55 3876 1535 sl^"OAlaX lotlsps V*lb" 55.5 *5:.15 aia 55 SAPAS Agusuls^o Seou,,l 90.50 e.65 W4e Iles SAPOSAs gL1.sgeo Ve ta 2. 15.55 11.3 ISI1 1a3I UIaFINIA Agaouvso -41 15d.Iso me see7 le #s samasmAs Loe-goho. b sse.o 1186.6 sel iss$$ eAmos@Am agsei.a. 3t,s spgmsoretrng 4550 37. 66 Isis aasssms Ugiti Scal PileS *s.sa mss 1748 133, sAICONIX? Tludu Psliet LOSS I 661.0 10.3 1746 loll DAPIS loiuesplgl tseo6rnel 155.65 117.75 1747 ? I05 * AF 1 tler eloap Ue,olspep t 45.30 33.of a177 167 l once per$ lo,olgpoi**$ t2 tosess I5.1 I of4 1557 BSAMSPAt Sborn Tglmognt es I .I@ tu.J coal Is$? SAPIS Aguio.louuol gusite 4*S6.S 3,.33 613 ofI/ I166I7 NAVIN 3m/Ned 3seiurntvt IV 161.6 16.6 also 16 lAPIN AFtSOulNFol ltasoige las. 1o41 TOTAL 9016S.U of obtob born boo0 opold to *be aso* 10.31.16 Assessne sesli 33.34ga.~ St sAturn 0a bOOS upoplE $s.o4 a,ae beSot 00s botl by lomk I/ lIasi 10001 ojdlobsugd 3,477.73 1/ TaT stusg* of t*o puojeoto toesod is parl I s mo * opguooi nogu "s sit .s"k/zoA fimernod projeus* 1. *grouliesO *his% Is gopigle $ilto yorl? 05d olresuateo to &be bgoosolo eeseto so A* i Ut as ad aogsbee Si. 3/ Petet to *&shop$e eajuesgom$o. *OgrStoes,Clet UesI iA..,d? IAa.*w.u..LAlCo October set, Is?  less #is 4646133 0*86414ses gist$$golds64 VI oplefe do *sei*i,i i *she~ ~~~~~~~~~~~~| So a -psees 6plows 4116A soo 969 toileOS494966 *%|@4@P1.43 46|eb 36,6633 *pe106 .-._..................--_ .. @_-..... .. .......II loo.e epa.oploe _ ......_ _ .........d_ __ ..... 1le1 W*1Iu ,s.S4 56s.I, 89*S6eu p 13303 .*snseuau *uusumemu *uesmgegm~dso o *10 g.ggg *see g',I '01'6 PI Ives 9696590 VI|@W i'l