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Global Conference on Housing Finance in Emerging Markets MORTGAGE SECURITIZATION IN COLOMBIA: KEY ASPECTS AND DEVELOPMEN

Global Conference on Housing Finance in Emerging Markets MORTGAGE SECURITIZATION IN COLOMBIA: KEY ASPECTS AND DEVELOPMENT ALBERTO GUTIERREZ Washington, DC, March 2006. CONTENT. The Colombian Mortgage Sector Titularizadora Colombiana (TC) Lessons from the Colombian Experience.

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Global Conference on Housing Finance in Emerging Markets MORTGAGE SECURITIZATION IN COLOMBIA: KEY ASPECTS AND DEVELOPMEN

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  1. Global Conference on Housing Finance in Emerging Markets MORTGAGE SECURITIZATION IN COLOMBIA: KEY ASPECTS AND DEVELOPMENT ALBERTO GUTIERREZ Washington, DC, March 2006

  2. CONTENT • The Colombian Mortgage Sector • Titularizadora Colombiana (TC) • Lessons from the Colombian Experience

  3. GENERAL INFORMATION • COLOMBIA: • Population • 46 Million • GDP per capita • US$ 2,100 • Annual Inflation • 5.0% Mortgage Loans / GDP Source: European Mortgage Federation, Federal Reserve

  4. HOUSING FINANCE EVOLUTION • 1970-2000: Specialized Mortgage Banks: CAVs (7) Funding: Short term deposits Market Risk Primary Market Experience Initial Securitizations (95/99): USD 500 million Individual / Trust / Low Standardization / High Cost Crisis 97/02 • 2000: New Housing Law • CAVs turn into banks • Loans in units (UVR) linked to inflation • Incentives to Capital Markets funding • Creation of Securitization Companies

  5. MORTGAGE SECTOR CRISIS 1997-2002 Main Causes: - GDP Contraction - High Interest Rates - High Unemployment - Fall in House Prices - Legal Framework Instability

  6. MORTGAGE SECTOR AND MORTGAGE LOANS Mortgage Loans Features Current Mortgage Sector Denomination: § UVR (Real Value Units) Entities: § 7 Mortgage Banks Interest Rate : § UVR + 12% Mortgage Loans: § US$6.000 Term : § 15 - 20 years millions (US$12.000 M) Amortization System: § Monthly Fixed Payments (UVR) Actual Loans: § 800,000 Financing Maximum : § 80% Annual Loans: § 100,000 ( Av )

  7. CONTENT • The Colombian Mortgage Sector • Titularizadora Colombiana (TC) • Lessons from the Colombian Experience

  8. TITULARIZADORA COLOMBIANA (TC) • Origin: Housing Law 1999 • - Specialized Entities • - Mortgage Securitization Regulation • Objectives: • Resources for housing from Capital Markets • Lower Risks for the System • Rules: • Capital Requirements: Similar to Banks (US$25 Mill) • SPV: Universalidad • Supervision: Finance Superintendence • Temporary Income Tax Exemption for Securities • Stockholders: 5 Private Mortgage Banks + IFC

  9. Mortgage Securitization Structure Titularizadora Colombiana Titularizadora Colombiana - - Purchase Purchase Loans Loans - - RMBS Structure Structure - - RMBS Placement Placement - - Run Run the the Process Process Market Market Universalidad (SPV) Universalidad (SPV) Originators Originators ( ( Banks Banks ) ) Títulos Títulos Hipotecarios Hipotecarios - Originate - - Investors Investors - - Loans Loans ( ( Assets Assets ) ) ( MBS) - Sell Loans - - Originators Originators - - RMBS (Liabilities ) - Loans servicing - - Titularizadora Titularizadora Credit Credit Enhancements Enhancements - - IFC IFC - - Government Government Guarantee Guarantee on on RMBS backed backed on on Social Social Housing Housing Loans Loans - Titularizadora Colombiana

  10. TC ACTIVITIES • Selection of Originators and Servicers: Standards and Qualification • Mortgage Loans Eligibility Criteria: Scoring • Structuring and Placement of RMBS: Statistics and Models • Administration of the Securitization Process Loans Servicing Supervision Payments Information to the Market • Credit Enhancement Provider

  11. TRANSACTIONS SUMMARY 2002-2005 • Securitized Loans: 30 % of Total Mortgage Loans • Largest Private Issuer in Colombia

  12. PERFORMING RMBS: TIPS • Loans Features: • At least 12 months since originated • Minimum Scoring • TIPS standard structure: www.titularizadora.com • Based on Loans Features and Investors needs • Simple • Standard • UVR (Inflation) • Terms: 5, 10 and 15 years (local AAA) • Prepayment Risk: Investors • Credit enhancements: • Reserve Fund - Subordinated Bonds • Liquidity Facility (IFC-TC) - Guarantees: Government

  13. TIPS STRUCTURE BANK´S N LOANS BANK´S 1 LOANS • Conditions • Scoring FILTER U N 5 years I V No VIS Loans E TIPS A AAA 10 years R 70% S A 15 years L Subordinated B (15 years) TC I Social Housing (VIS) Loans Subordinated Mz (15 años) D A 30% IFC Guarantee - No VIS D Government Guarantee VIS

  14. TIPS INTEREST RATES Issues

  15. TIPS INVESTORS

  16. NPL SECURITIZATION - TECH • Loans Characteristics: 6 months minimum delinquency 38 months average delinquency Foreclosure legal proceeding • TECH Structure: www.titularizadora.com • Cash flow origin: recovery and selling of houses • Statistical Base: 25,000 foreclosure processes (2000-2003) • Tranches: 5 and 7 years (local AAA) • Credit Enhancements: • - Reserve Fund • - Subordinated Bonds • - Liquidity Facility (IFC and TC) • - Overcollateralization • Transaction Benefits: • Room for performing loans securitizations • Market Risk Mitigation • Liquidity • Latin Finance Award: Best Local Market Securitization LA 2004

  17. NPL SECURITIZATION EFFECT

  18. TITULARIZADORA´S FUTURE CHALLENGES • Securitization of newly disbursed loans Origination Scoring (standard) New Originators • Develop Fixed-Rate Loans: Securitization (30% of loans) • Higher Standardization in the Mortgage Sector • Development of the RMBS Secondary Market • Securitization of Low Income Mortgage Loans (Informal sectors and low amount loans). • Securitization without Tax Benefit • Reach 40% of Total Mortgage Loans (5 years)

  19. CONTENT • The Colombian Mortgage Sector • Titularizadora Colombiana (TC) • Lessons from the Colombian Experience

  20. EMERGING MARKETS FEATURES • Low Income • Macroeconomic Instability: • Legal Instability • Low Development in Long Term Financing: Mortgage Loans • Low Development of Capital Markets • Weak Risk Management in Financial Sector • Political Instability

  21. COLOMBIA: SECURITIZATION KEY ASPECTS • Primary Mortgage Market Development • Experience in origination and servicing - 7 mortgage banks - 30 years (Crisis) • Stock of mortgages available: 13% of GDP • Some mortgage standardization • - Amortization systems by Law • Historical data: 1.2 million loans – 10 years history

  22. COLOMBIA: SECURITIZATION KEY ASPECTS (Cont.) • Basic Legal Framework • Specialized Securitization Companies • New SPV: Universalidad (Mortgages) • Simple procedure for mortgages loans assignment • True Sale definition • Adjustment of Accounting and Tax Rules • Capital Markets • Development of long term and fixed rate assets: Public Debt (15 years) • Long Term investors: Funds, insurance companies, etc. • Market confidence in RMBS: Information and understanding • RMBS Valuation Rules (Marked to market)

  23. COLOMBIA: SECURITIZATION KEY ASPECTS (Cont.) • Mortgage Banks Motivation • Mortgage Crisis (Market Risk) • Profitable Operation • - RMBS Rates + Transaction Costs <Short Term Rates + Market Risk • Yield curve structure • Tax benefits • Alternative Funding Sources • Change in Mortgage banks structure: margin for fees

  24. PUBLIC DEBT YIELD CURVE Colombian Local Public Debt Yield Curve 10% 1.6%

  25. COLOMBIA: SECURITIZATION KEY ASPECTS (Cont.) Government Support • RMBS Regulation General Regulation Adjustments to existing Rules • Financial Incentives: Tax Benefit for RMBS Guarantee for RMBS backed by Social Housing Loans

  26. BENEFITS GENERATED BY MORTGAGE SECURITIZATION IN COLOMBIA • Additional Resources for Housing: USD 1,700 million • Reduction of Mortgage Loans Interest Rates: 600 bps • Market Risk reduction for entities: 30% • Lower Capital Requirements (Higher Solvency) • Mortgage Loans Standardization – Best Practices • Mortgage Loans documentation • Real Estate Appraisal • Servicing, Collection and Foreclosure • Capital Markets Development • Future Benefits: • Higher competition in the mortgage market: new originators • Higher Stability for the Mortgage Sector • Specialized Originators and Servicers

  27. SPECIALIZED SECURITIZATION COMPANY • Coordinate and Lead the securitization process: Emerging Economies • Lead adjustments to the mortgage securitization legal framework • Promote Market Standardization • Transparency and Market Confidence • Lower costs due to economies of scale

  28. FINAL CONCLUSIONS • Mortgage Securitization: important benefits • Instability of Emerging economies: Limitations • Feasible in Emerging Economies. Requirements: • Mortgage primary market - Minimum Standardization and information • Adequate Legal framework • Minimum Capital Markets • Government Support • Development according to local market features • Specialized Securitization Company: Lead process

  29. Contact Information Alberto Gutierrez Bernal – President: agutierrez@titularizadora.com Address: Carrera 9 A No.99-02 Of. 702 (Bogotá) Phone: 57-1 6183030 – Fax: 57-1 6183018 THANKS !!!

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