Mexico - Housing Market Development Project

/I-1 V I7 AXL T Document of The World Bank FOR OFFICIAL USE ONLY MICROFICHE COPY Report No. 10475-ME Type: (SAR) ReportNo. 10475-ME ZEARLEY, T/ X38758 / I8 100/ LA2IE STAFF APPRAISAL REPORT MEXICO HOUSING MARKET DEVELOPMENT PROJECT MAY 26, 1992 Country Department II Infrastructure and Energy Operations Division Latin American and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the perfornance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit Pesos (Mex$) US$1.00 - Mex$3057 (as of 5/20/92) Monthly Minimum Wage = Mex$399,900 (as of 5/20/92) (in the Federal District) FISCAL YEAR January 1 - Decemoer 31 MEASURES 1 hectare (ha) - 10,600 sq. meters (m2) - 2.47 acres (a) 1 meter (m) - 3.28 feet (ft) ABBREVIATIONS AND ACRONYMS BANOBRAS Banco Nacional de Obras y Servicios Publicos S.N.C. (National Development Bank for Public Works and Services) CETES Certificados de la Tesoreria de la Federaci6n (Treasury Bills) CPP Costo Promedio Porcentual de Captacion (Average Cost of Funds to the Banking System) FICAPRO Fideicomiso Casa Propia (Fund for Home Ownership) FONHAPO Fondo de Habitaciones Populares (Government's Low-Income Housing Fund) FOVI Fondo de Operaci6n y Financiamiento lancario a la Vivienda (Housing Fund for Commercial Banks) FOVISSSTE Fondo de la Vivienda del Sistema de Seguridad Social de los Trabajadores del Estado (Housing Fund of the Social Security System for State Service Workers) GDP Gross Domestic Product INFONAVIT Instituto del Fondo Nacional de la Vivienda para los Trabajadores (Institute of the National Housing Fund for Workers) MMW.s Multiples of Monthly Minimum Wage SEDUE Secretaria de Desarrollo Urbano y Ecologia (Ministry of Urban Development and Ecology) SHCP Secretaria de Hacienda y Cr6dito Publico (Ministry of Finance and Public Credit)  FOR OFMCLL USE ONLY HOUSING MAET DEVELOPMENT PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. LOAN AND PROJECT SUMMARY ....................................... . i-i* i I. THE HOUShI SECTOR A. Macroeconomic Setting ...... . .. ....... .......... ............. 1 B. Housing Conditions ... ... ... 0.0................. .............................. 2 C. The Construction Industry ........ .. .......*.............. s... 3 D. The Housing and Housing Finance System................. 3 Role of the Publi- Housing Agencies ...... 4 Role of Pensions' Funds Housing Programs .................. . 5 Role of the Commercial Banks. ........ .0. ........ . ......... 6 Role of FOVI. ..... .... s .... ....... .. 9 E. Sector Isse....oou.o-.... o .........o.....o....o.... o. 13 P. Government's Strategy for the Housing Sector ........ see . ......... 17 G. Experience with Past Bank Lending .... .8..................... i H. Bank Sector Support Strategy and Rationale for Involvement ............... ... * .............. 19 II. THE PROJECT A. Background .............. s ... ... ................. 20 B. Project Objectives ...... .o ........... . .... .. . .20 C. Project Description ....... . .. . see ....... ............. . 21 D. Project Implementation . ................................... 23 E. Project Costs and Financing Plan .............# ................. 27 F. Disbursements .......ses............ .......... . .. * ....... 28 G. Procurement ................................... 28 H. Accounting and Auditing ... . ......... ...... ..... ............. . 29 I. Project Benefits*. ......... s ........ . .. ..................... 29 J. Environmental Impact .. .......................... .......... 30 K. Risks and Safeguards ........ . ............. ............... 30 III. AGREEMEYTS REACHED AND RECOMMENDATIONS A. During Negotiations ..... ...... s ............................... 30 B. Effectiveness... ... .s ..... ..... . ........ ...... ....... . . ...... 32 This report is based on the appraisal mission which visited Mexico in tanuary/February 1992. Mission members vere: Messrs./Imes. Thomas Zearley (Task Manager, LA2IZ), Peter Doty (Cons.), Tova M. Solo (Cons.), Violeta Rosenthal (Economist, LA2C1), and Feresc Molar (Lawyer, LEGLA). It also incorporates the findings of earlier preparation work by Messrs. Samuel Talley (Financial Cons.) and David Wilk (Envirormental Cons.). Ma. Angela Chioariu assisted in producing the report. Mr. Ricardo Halperin is the managing Division Chief and Mr. Rainer Steckhan the Department Director responsible for the operation. This document has a rstricted distribution and may be used by recipients only in the performance of their omcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  ANNEXES Annex 1. Estimated Total Housing Investment and Number of Mortgages Approved by Type of Housing Institution in 1991 Annex 2. Mortgage Lending of Commercial Banks and FOVI (1989-1991) Annex 3. FOVI Financing Operations and Credit Auctions Annex 4. FOVI Historical Financial Results and Financi.l Projections Annex 5A. Key Features of the FOVI Model Agreement Annex 5B. Li-st of Mexican States and Signature Status of FOVI Deregulation Agreements Annex 6. FOVI Regulatory Cost Survey Data for 1991 Annex 6A. Regulatory Costs in FOVI Surveys Annex 6B. December 1991 Survey of Regulatory Costs Annex 7. Federal Government Housing Sector Policy Declaration With Respect to a World Bank Loan to FOVI Annex 8. Terms of Reference for Studies: a) policy options for the creation of a secondary mortgage market within the Mexican housing finance system b) development of a salary index for adjusting payments on FOVI mortgages c) housing market information requirements Annex 9. Regulatory Environment Assessment Information for Mexican States Annex 10. FOVI Monitoring Indicators and Performance Targets Annex 11. Mexico Housing Sector Monitoring Indicators Annex 12. Estimated Schedule of Disbursements Map IBRD 20343  HOUSING MARKET DEVELOPMENT PROJECT LOAN AM PROJECT SUMMARY Borrower: Banco Nacional de Obras y Servicios Publicos, S.N.C. (BANOBRAS) Guarantor: United Mexican States Executing Banco de Mexico as trustee of Fondo de Operacion y Financimiento Asency: Bancario a la Vivienda (FOVI) Loan Amount: US$450 million Terms: 15 years, including 5 years of grace, at the standard variable interest rate Ralendina The Borrower would onlend the proceeds of the Loan to Banco de Termgt Mexico as trustee of FOVI in Pesos at the Government's treasury bill rate of interest (CETES). Private builders would construct houses and sell them in the market at their own risk, using mortgage funds under the FOVI credit line, for which builders would bid through public auctions. The commercial banks would be responsible for mortgage loan approvals, collecting downpayments and mortgage payments from homebuyers, and debt servicing to FOVI. They would bear the credit risk on the mortgage loans and would charge the homebuyers a one-time upfront loan origination fee and commissions on monthly payments, both of which would be market determined. In addition, depending on the FOVI house type financed, the commercial banks would be paid by FOVI a fee of 21 or 3Z annually on the outstanding mortgage loan balance. FOVI funds would be lent to homebuyers at the banking system's average cost of term funds (CPP), plus the one-time upfront origination fee and the monthly commissions. FOVI's income would be derived from the auction premiums paid by the developers and the mortgage repayments from commercial banks at CPP less the fee of 21 or 31. These arrangements result in lending terms to the homebuyer that are aligned to market conditions, and allow FOVI to cover its funding and overhead costs. The Government would assume the foreign exchange and interest rate risks on the proposed Bank loan. Project In addition to expanding the supply of mortgage finance for low- Obiectives: cost housing to be built by private developers, the project would support the Government in (i) removing regulatory barriers in order to lower housing costs and to encourage private commercial banks to increase lending for housing; (ii) broadening and deepening the housing policy dialogue to include inter-alia the expansion and liberalization of the urban land market, the improvement in the cost recovery and operational performance of the quasi-public pension funds' housing programs, and the further integration of the housing finance market with the overall  - ii - financial system; (iii) improving FOVI's mortvage instrument and its onlending mechanism .o as to stimulate commercial bank interest in lending for low-cost housing; and (iv) improving information on the ho-sing market. Proiect The project would have four broad components, as follows: (a) Descriltion: Regulatorv Reform Component. The project would assist in further developing and supporting ongoing FOVI measures to eacourag.i state and local governments to reduce their regulatory burdens on housing. As state and local governments are largely autonomous from the national government, the project would rely on market mechanisms (the POVI funds auctions) reinforced by public pressures created by the dissemination of information on regulatory costs and on government deregulation commitments to key housing market participants so that they can induce states and municipalities to change their regulatory frameworks. (b) Housing Sector Policy Comgonent. Under this component, the Government has provided a Sector Policy Declaration which spells out its medium-term strategy for the sector and specifies measures it will take to address important sector issues. (c) FOVI Cred.t Line Comoonent. The project would help fund a share of FOVI's 1992-96 lend:'ng program for houses with a selling price of not greater than 130 -multiples of the monthly m'nimum wage (MMWs) (US$17,000), targeted to households earning less than 5 MMWs (US$650). The propo -4 loan would finance about 28% of FOVI's future lending pr~g- a, estimated to cost about US$1.6 billion equivalent. (d) S.adies ComRonent. The project would include studies on the development of a new wage index to adjust payment; on FOVI mortgages, on the creation of a secondary mortgage market, and on a development plan to improve housing market: information. IBRD financiag would be provided exclusively for component (c). Proiect The project would increase the supply of affordable housing to Benefits: lower-income households, especially by promoting the provision of non-traditional housing solutions. In addition, the improvements in the efficiency of the housing finance system and deregulation measures should be reflected in an overall reduction in the relative price of housing and an increase in housing production. Furthermore, the project studies would provide the analytical basis for important future government action to improve both public and private sector participation in the housing market, and for the integration of the housing finance system with the overall financial markets, which should lead to enhanced liquidity and resource mobilization for mortgage lenders. As the project will offer home financing to low- and moderate-income households, many of today's environmental problems derived from substandard housing conditions will not be reproduced in newly- developed areas. Project Risks: Since the initiation of project preparation, the Government has taken measures *.o address key sector constraints regarding inter alia the urban land market and the operations and cost recovery of pension funds' housing programs. There are no specific risks  - iii - with regard to the Government'e fulfillment of commitments made under the project. Past Bank experience in Mexico's hiousing sector is that once a program is agreed, implementation has proceeded smoothly. The principal project risk is that the market mechanisms to induce deregulation may not bea fully effective, or may take longer to have a significant impact than envisaged under the project. To minimize risks, the project includes cumulative limits on loan disbursements to FOVI to ensure adequate time for the deregulation mechanisms to be implemented and to show results. Additionally, the project provides for annual and mid-term reviews, requiring the Government to take remedial actions, should the pace toward achieving the project's objectives be deemed unsat-sfact r Estmsted Proiect Costss Local Foreign Total --------(US$ Million)---------- FOVI Credit Program 1,196 398 1,594 _____ ____ ,"__ Percentage Distribution 75 25 100 Financina Plan: FOVI 984 984 IBRD 52 398 450 Homebuyers' Downpayments 160 160 Total 1,196 398 1,594 Estimated Disbursements: Bank FY 1993 1994 1995 1996 1997 - -------------(US$ Million)-------------- Annual 120 a/ 180 75 55 20 Cumulative 120 300 375 430 450 Retroactive Financina: Up to US$5.0 million for eligible expenditures as of April 22, 1992 Economic Rate of Return: Not applicable. a/ Includes retroactive financing of up to US$5.0 million equivalent and initial deposit of US$30.0 million in Special Account.  MEXICO HOUSING MARKET DEVELOPMENT PROJECT I. THE HOUSING SECTOR A. Macroeconomic Settir.= 1.1 The 1980s were a difficult period for the Mexican economy. The decade began with rising world interest rates and falling oil prices, which eventually led the Government to declare a moratorium on its external debt service, and resulted in fiscal deficits and devaluations of the peso that