Mexico - Housing Market Development Project

 ICRR 10348 Report Number : ICRR10348 ICR Review Operations Evaluation Department 1. Project Data : OEDID : OEDID: L3497 Project ID : P007696 Project Name : Housing Market Development Project Country : Mexico Sector : Urban Housing L/C Number : L3497 Partners involved : Prepared by : Roy T. Gilbert, OEDST Reviewed by : John Heath Group Manager : Gregory K. Ingram Date Posted : 06/30/1999 2. Project Objectives, Financing, Costs and Components : The project was approved in June 1992 and completed in December 1997, a year behind schedule. Objectives : (i) to expand funding for low-cost housing; (ii) to induce commercial banks to increase lending to lower-income home buyers; (iii) to support the removal of regulatory barriers to promote the participation of financier and private developers in the low cost housing sector; (iv) to improve public information about housing finance and the housing production market in Mexico; (v) to improve the wage index on which FOVI (Fondo de Operacion y Financiamiento Bancario a la Vivienda ) subloan repayment; (vi) to expand and liberalize the urban land market; improve the cost recovery and operational performance of the quasi -public pension funds' housing programs, increase the integration of the housing finance market with the overall financial system and promote investment in rental housing. Components : (i) regulatory reform; (ii) housing sector reform (iii) a FOVI credit line (iv) studies supporting the objectives above. The final cost of the project was US$2,527.8 million, substantially above the appraisal estimate of $ 1,594.0 million. Financing : The loan of US$450 million was used completely for a credit line (component iii). The rest of the project funds were supplied by FOVI (US$1,791.8 million) and the beneficiary homebuyers ($US286 million). 3. Achievement of Relevant Objectives : The project succeeded in expanding funding for low -cost housing. Through financing 163,691 units altogether, FOVI exceeded the appraisal target of 129,076. Targeting on the poorest beneficiaries was not so successful, though . Of the 99,142 lowest-cost units intended, FOVI financed only 73.8%. From project start up in 1992 until the 1995 economic crisis and devaluation, commercial bank lending for housing increased from US$ 3.2 billion to more than US$5.0 billion per annum. The effect of the 1995 crisis upon the banking system, however, interrupted commercial bank lending for housing, which increasingly fell into the hands of specialized financial institutions (e.g. pension funds). Regulatory reform objectives--especially reducing taxes and simplifying housing standards --were fully achieved and agreements to this effect were signed with the governors of all 31 states (against an appraisal aim of 22 only). As intended, information on housing in Mexico increased its coverage and became more widely disseminated thanks to project efforts by the Ministry of Social Development (SEDESOL). Although the idea of an improved wage index to determine FOVI loan repayments was studied, it was not put into practice . While there was a constitutional amendment to ease the conversion of "ejido" land (under agrarian reform) to urban use, the supply of urban land increased little as a result, as the day -to-day administration of such transfers proved to be cumbersome . 4. Significant Achievements : A significant increase in the supply of low --although not always lowest--cost housing, while at the same time addressing key regulatory reforms within the Mexico's public sector driven housing market . Succeeded in involving all 31 states of Mexico in the reform program . Achieved full recovery of the US dollar value of FOVI assets within a few years of the 1995 crisis and devaluation. 5. Significant Shortcomings : Substantial increase of capitalized interest (now accounting for 50% of total mortgage loans outstanding versus 24% at appraisal), indicating that low-income beneficiaries faced affordability constraints when purchasing the kinds of housing on offer. A significant increase in the unit costs of housing supplied . 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Satisfactory Satisfactory Institutional Dev .: Partial Modest Sustainability : Likely Likely Bank Performance : Satisfactory Satisfactory Borrower Perf .: Satisfactory Satisfactory Quality of ICR : Satisfactory 7. Lessons of Broad Applicability : A large number of project objectives --six in this case--can reflect a coherent whole, provided that the objectives are all anchored to a common borrower strategy, itself clearly reflected in an explicit policy statement. Borrower ownership--through FOVI in this case--was crucial not only in government support, but also through approving the regulatory reforms and the active promotion of project reforms at the state and municipal levels . Macroeconomic crises--such as the one that led to Mexico's 1995 devaluation--can adversely affect a project such as this, but skilful crisis management by the executing agency can help retain confidence in the housing finance system the project was designed to support . It is easy to underestimate the difficulties of transforming fundamental constitutional amendments into practical changes on the ground, owing to administrative bottlenecks, as was the case of "ejido" land reform promoted by the project. 8. Audit Recommended? Yes No Why? To learn why the institutional achievements of this project lagged behind its physical and financial successes, and the extent to which modest institutional impact constrained other project achievements . 9. Comments on Quality of ICR : Satisfactory in presenting the project results in an orderly fashion that clearly reflects the achievements of each of the objectives intended for this operation, while at the same time candidly reporting the shortcomings .