Hipotecaria Su Casita

1. Hipotecaria Su Casita Case Study of primary Mortgage Lending in Mexico The World Bank Housing Finance in Emerging Markets March 10-13, 2003 Washington, D.C. Manuel Campos mcampos@sucasita.com.mx

2. Hipotecaria Su Casita in the beginning • In 1994 , seven Sofoles (Limited Scope Financial Institutions) were authorized to act as financial intermediaries. • HIPOTECARIA SU CASITA began operations with the following numbers: • Capital: US$3 MM. • Assets: $3 MM • Credit Portfolio: $2MM • No. of Loans: 45 • Employees: Two • Offices: one • Funding: equity and a possibility of FOVI funding. • December 1994 the Mexican crisis starts: • Rates increased by 10 fold • Increase in delinquency • Bank withdraw from the “lending business”

3. Hipotecaria Su Casita today 8 years later …. • SU CASITA is one of fifteen of 15 mortgage Sofoles with the following numbers: • Capital: US$93MM • Assets: $1,300 MM • Portfolio of $1,200 MM • Loans: 65,000 • Employees: 672 • Offices: 104 in 67 cities. • Funding: SHF (previously FOVI) funding (79%), Debentures and Debt Securities (11%), Financial Institution funding (10%). • Corporate credit rating: BBB+ from S&P, A3.mx from Moody’s and from BBB Fitch. • Servicing rating: Above average from all three rating agencies • Su Casita has the FOURTH largest private mortgage portfolio in Mexico.

4. Sustained growth • Su Casita’s growth has been sustained by the following: • High demand and growth of housing: Gross annual household formation over 750 thousand production of homes has doubled. • Availability of funding: • Governmental monies available (FOVI-SHF, Infonavit & FOVISSTE) • Development of debt capital markets • Favorable competitive environment. In 1995 banks withdrew from the housing mortgage market • Business Model. Specialized financial institution.

5. Su Casita’s Business Model What are we doing right?

6. Structure of the Mexican Housing Market 5% de Payroll $ INFONAVIT FOVISSSTE World bank $ Federal budget FOVI/SHF Debt market Bank Land Land Developers SU CASITA Construction Finance Goverment Developers Housing Developers Mortgage Buiklds Home Sales force Home Home Buyer • 20% of loans are originated and serviced by private players

7. Su Casita’s function • Main business lines: • Construction lending (20%). Housing construction financing with the take-out financing also provided by SU CASITA through individual mortgage underwriting. Housing developers are our main distribution channel • Individual mortgages (80%): • Origination: Underwriting of new loans. • Servicing: Collection and foreclosure of mortgages originated by SU CASITA. • Holding: Loans originated are in our balance sheet, our capital supports the credit risk. • SU CASITA sustains both credit and operational risk. There is no interest, term or prepayment risk. Assets mirror liabilities … PERFECT MATCH

8. Su Casita’s foundations • With the crisis of 1995 the Mexican financial authorities had to develop new ways to finance low income housing in Mexico. • The Sofoles had been born by accident (NAFTA). We were in the right place at the wrong time for everybody else. • We had to originate and service low income mortgages {The only game in town} • From the beginning our main source of funds (FOVI) did not want to work with us. Policies and incentives were set in place so that: • Develop efficient servicing model. With the margin we had. • Could access the debt market (Diversify founding) • Could only focus on mortgages and construction lending of one type of homes. {Specialization}

9. Servicing • Average loan size is US$22,000 • Servicing income is US$250 per year/per loan • We had to develop a low cost servicing model that handled the credit risk and eventually allowed us to access debt market {World class servicer}.

10. Volume • There are significant economies of scale in servicing, so a high volume results in a more efficient operation. • Economies of scale are better exploited when loans have a geographic concentration, loans use the same infrastructure. • Volume facilitates access to capital markets (Size matters).

11. On site collection • Facilitates collection. • Better supervision of asset guarantee. • Customer service. • Lower operation costs (i.e. hand deliver of monthly statements vs. mail delivery). • Facilitates communication with borrower (face to face). • Establishment of programs the enforce relationship with customers (ie Su Salud). • Possible cross selling

12. Standardization • Since 1996 the Sofoles have agreed on standardize underwriting forms, facilitating the usage of common technology. • Standard electronic files have been developed; this facilitates the transfer of loans (i.e. purchase of Finazte) and the creation of a common data base (Done by the SHF)  ASSET MANAGEMENT • Standardization facilitates the understanding of the industry by investors  TRANSPARENCY • Facilitates the exploitation of shared economies of scale (i.e.. Reporting of financial statements to investors, regulators and rating agencies). • Facilitates the existence of a substitute servicer which is necessary to access debt markets.

13. Sound process and automation • Clear processes are necessary to create a world class servicing platform. • As the portfolio grows, clearly defined processes facilitate control and the exploitation of economies of scale. • Well understood processes allow for automation and cost reduction. • Automation is key in the exploitation of economies of scale and disciplined growth. • Sound processes reduce operational risk and facilitate control. • Clear and well documented processes facilitate company training. • As debt markets are accessed, funding source diversification is achieved resulting in operation complexity. This transition is facilitated by the automation of processes and information systems.

14. Usage of existing infrastructure • Su Casita’s clients can pay in our own locations or in bank branches (Over 3,000 points of contact through out Mexico). • Shared telecommunication networks, the Fair-matching technology allows for on-line communications between offices at a very low price. • Internet, programs allow on-line connection with developers, internal branches, SHF, etc. This reduces servicing and origination costs.

15. Loss mitigation • HSC strategy includes and aggressive approach to avoid judicial process, which is both costly and lengthy. • HSC will sell the house in behalf of the borrower when he can not make payment. • Collection is the most important aspect of “Customer Service”. When we can solve the customer’s problem we will solve ours. • Being close to the borrower allows to anticipate losses. • Credit risk can be reduce by an effective negotiation with the borrower. “Es mejor un mal arreglo que un buen pleito” • Analysis of portfolio is basic to develop credit scoring and behavior predicting models.

16. Internal Audit and external controls • Risk is reduce by creating controls that insure a better quality of operations. Su Casita is overseen by: • Internal audit department (Operational audit and quality control). Through this process the compliance of loans in different programs is supervised. Also the following of procedures. • External Audit by recognized firm. • Rating agencies (Credit rating and servicer rating). • SHF operational and legal audit. • National Banking and Securities Comision. • Investment bankers when doing and issuance. • The Audit process also serves as a tool for training and improvement of processes.

17. Access to debt markets • In 1999 100% of Su Casita’s funds were provided by the SHF. • In 2002 86% of Su Casita’s funding is not related to the SHF. Over 70% of our construction lending activity is founded through bank lines, non bank financial institutions (ie. FMO & GMAC-RFC) and bond issuances. • In order to archive theses a two year effort to inform institutional investors was needed, a long term relationship has to be established. • Debt markets have been accesses through the issuance of commercial paper, mid term notes, long term notes and the securitization of credit assets.

18. Example of debt issuance • In 2000, HSC issued the first mortgage backed security for financing of middle and residential individual mortgages Issuance Date: 06/21/00 y 07/19/01 Ticker:CASITA 00U Amount: 60’000,000 UDI’s Tenor: 10 years Interest Rate: 8.80% Use of Proceeds: Mortgage loan financing for middle income and residential housing. Rating:AAby Fitch and Aa2 by Moody’s Relevant Aspects: Over collateral (75% Su Casita, 25% IFC) Cash Reserve Total Coverage Cash Cash Down payment (B) Total Guarantee (B) 75% Mortgages (B) 25% Down payment (A) Total Guarantee (A) Mortgage (A) Mortgages funded The bond’s proceeds

19. Examples of Houses financed • Homes under US$30,000.

20. Example of houses • Homes over US $30,000 and $70,000