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The Expansion and Future of Sofols in Mexico

The Expansion and Future of Sofols in Mexico. Housing Finance Systems in Emerging Economies World Bank Group Conference Session 3 The Role of the Specialized Housing Lenders March 15 Manuel Campos Spoor Hipotecaria Su Casita. Su Casita ’ s profile.

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The Expansion and Future of Sofols in Mexico

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  1. The Expansion and Future of Sofols in Mexico Housing Finance Systems in Emerging Economies World Bank Group Conference Session 3 The Role of the Specialized Housing Lenders March 15 Manuel Campos Spoor Hipotecaria Su Casita

  2. Su Casita’s profile • 120,000 mortgages in the last 10 years. Current portfolio 105,000. • Financed the construction of 160,000 new homes. • 22,000 new loans in 2005. • Active in Infonavit cofinancing and Fovissste. • US$3B portfolio under administration. • Average loan US$30,000, average income of client $1,000. • Over 130 offices in Mexico and the US. • Total issuances in 2005 US$711 MM including mortgage and Construction loans securitization and Cross Border Construction loan issuance.

  3. What is a Sofol? • The Sofols (Sociedad Financiera de Objeto Limitado) were born in 1993 as a result of NAFTA, with a limited scope. Next Mexico entered its’ worst economic crisis in history. • In the last 13 years they have been a success story granting over 13 MM loans and represent 10% of Mexico’s financing. • They are specialized financial institutions that grant Mortgage, Consumer, Automotive, Agricultural and other kind of loans (i.e. Working Capital). • For the past three years they have successfully competed with commercial banks that have returned to the market. • The current administration has decided to deregulate the sector and eliminated the limited scope restriction. The Sofols have to decide: “What do to do when we grow up”

  4. 1994 worse than 1984 • In the NAFTA negotiation the figure was created. • The Mexican financial system was dominated by commercial banks that channel 76% of all resources. • When Mortgage Sofols started operations no sources of funds existed (One time loan right auction). • In December 1994, the “Tequila Crisis” resulted in the biggest economic crisis in history and a collapse of the Mexican Banking system (Opportunity). • Opportunity. The Sofols, which were just starting operations, were not affected by the crisis (No loans). In the case of the Mortgage Sofoles we became the sole intermediary of FOVI (Now SHF) as the banks closed all their mortgage programs. 1994 was bad for some and good for Sofols.

  5. Present Situation • There are 58 Sofols that manage a portfolio of US$20B, 2.6% of GDP. • Mortgage loans represent 63% of balance. • 3.2 MM loans were originated last year, mostly personal and working capital loans. • 30% of funds come from issuances in public markets and less than half from development banks.

  6. Participation in Financial Sector • The Sofols are a significant player in the market. They represent 10% of credit. • They serve the middle and lower market, more than 50% of clients have incomes below 8 MW. • In the case of mortgages, 85% of loans are for families that earn less than 12 MW.

  7. Mortgage Sofols profile • Two products: mortgages and construction lending (Bridge loans). • Two business: Origination and collection. • In the last ten years: • Have originated over 850,000 mortgages. • Financed 1.4 MM new homes. • Portfolio of US$12 Billion. • Equity of $1.1 Billion. • Focused in serving the affordable market(4-15 MW) over 50% of population.

  8. Business model (Success factors) • Specialized in the origination and collection of mortgages and construction loans. • Collection adapts to the client. • Hand deliver statements. We collect door to door. • When the client in problems we try to work out a solution. • Funded though other financial institutions and public debt. Ultimate bet: Securitization. There are US$2.3 Billion in the market.

  9. How? • It is clear that the growth of the Sofoles has been a success story. • The Sofols are part of the Housing Finance System complementing the banks and Government Institutions • The Sofoles serving a large part of the population (Middle market potential 40% of population). • Two questions need to be answered: • How did it happen? • What happens next? Surviving Garage Industry (94-98) Growing Up (99-02) Market Consolidation (03-06)

  10. 1º Surviving • The Sofols distributed FOVI funds half of them with subsidy. • Showing that we were viable was the challenge. Surviving Garage Industry (94-98) Growing Up (99-02) Market Consolidation (03-06) • The collection model was being developed • 100% of funding came from FOVI. Market Focus Products Funding Collection Process Competition Affordable (VIS) New Homes A and B1 (Up $22K) FOVI, subsidy Reduced On site Simple basic Systems (Excel) None

  11. 2º Becoming market entities • Market funding, issuances and loans. Broader markets. • Reaching volume and independent construction funding. Surviving Garage Industry (94-98) Growing Up (99-02) Market Consolidation (03-06) • First issuance, FOVI stops funding construction. • 84% of funding came from SHF. Market Focus Products Funding Collection Process Competition VIS and Lower middle (M) Broader coverage (Up to $70K) SHF and market No Subsidy On site and bank branches Cottage systems More sophisticated Banks return to Market

  12. 3º Established players. Competition • Bank re-entered the market. Increased competition. • Banks and international players buy or invest in Sofols. Surviving Garage Industry (94-98) Growing Up (99-02) Market Consolidation (03-06) • 1º Securitization. • Some portfolios exceed US$1 B • 52% of funding comes from SHF. • The Sofol operational model has proved it works. Market Focus Products Funding Collection Process Competition All range New & Used Udis & Pesos Cofinancing (Up $250K) SHF commercial Banks, x-border securitization On site and bank branches Sophisticated systems (Bank Core) Aggressive Purchase of Sofols

  13. Next Stage: Turning Point • The law is changing so the Sofol will disapear. • It will become a Multiple object financial institution or a Bank Surviving Garage Industry (94-98) Growing Up (99-02) Market Consolidation (03-06) Bank or Sofom (07- Market Focus Products Funding Collection Process Competition How not to loose lower income. Next home, HEL, Other loans, x selling Securitization, Warehouse, Deposits (?) Improve systems Better Information Reduce costs. With banks and new entries (Deregulation).

  14. Questions to consider • The efficiency of the secondary market model against portfolio based lending. • What are the needs of the client. • One product vs. portfolio of products and services. • Deposits are a source of funds or a product. • How to continue in the affordable housing market while our market coverage increases. • Collection system (Door to door vs. Checking account debit). • How to incorporate technology to reduce costs and broaden market coverage. • What is the best figure? Bank or a Non Deposit Financial Institution

  15. Evolution of Mortgage Sofols • The Mortgage Sofoles started as “garage startups” they have to become world class players funded through the SMM. Surviving Garage Industry (94-98) Growing Up (99-02) Market Consolidation (03-06) Bank or Sofom (07- Market Focus Products Funding Collection Process Competition Affordable (VIS) New Homes A and B1 (Up $22K) FOVI, subsidy Reduced On site Simple basic Systems (Excel) None VIS and Lower middle (M) Broader coverage (Up to $70K) SHF and market No Subsidy On site and bank branches Cottage systems More sophisticated Banks return to Market All range New & Used Udis & Pesos Cofinancing (Up $250K) SHF commercial Banks, x-border securitization On site and bank branches Sophisticated systems (Bank Core) Aggressive Purchase of Sofols How not to loose lower income. Next home, HEL, Other loans, x selling Securitization, Warehouse, Deposits (?) Improve systems Better Information Reduce costs. With banks and new entries (Deregulation).

  16. Thank you Manuel Campos Spoor Vice-President Hipotecaria Su Casita Questions: Email: mcampos@sucasita.com.mx Phone: (52)-55-5481-8306 Or Mark Zaltzman Director Corporate Finance Email: mzaltzman@sucasita.com.mx Phone: (52)-55-5481-8365

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