Conference: Expanding Housing Finance to the Lower Income Groups The World Bank, Washington D.C.

1. Lease-to-Purchase Housing Finance in Chile: Context, Past Experience, Future Opportunities & Challenges Conference: Expanding Housing Finance to the Lower Income Groups The World Bank, Washington D.C. 17 March, 2006 Presented by: Juan Enrique Montes Gerente General de Securitizadora Security GMAC-RFC S.A.

2. Outline of Presentation • Context: • Macroeconomic Scenario • Income Distribution and Housing Needs • Housing activity • Lease-to-Purchase Housing Finance: Past Experience and Current Status • Funding Players in Housing Activity • Leasings versus other Financing Vehicles • Historic Evolution • The Role of Government • MBS: Securitization of Leasings and Mutuos Hipotecarios Endosables (EMC) • ABS Track Record • MBS Track Record • Mortgage Prepayment Impact on MBS • Securitizatio of Lease-to-Purchase Housing Contracts: Future Opportunities and Challenges • Needs, Opportunities & Challenges • Expected Future Outcomes

3. Macroeconomic Scenario: GDP Dynamism

4. Macroeconomic Scenario: Spread Comparison

5. Macroeconomic Scenario: Unemployment Rate

6. Income Distribution & Housing Needs

7. Income Distribution & Housing Needs

8. Income Distribution & Housing Needs

9. Housing Activity: Sales v/s Housing Deficit • As of 2002, Housing Deficit reaches 543,000 houses or 14% of Total Housing stock • Housing Deficit is explained by 2 basic factors: • 387,000 difference between number of Families v/s Number of Houses • 155,000 of houses in poor structural conditions • House building pattern (120,000 new houses per year) would take 4,5 years to meet Housing Deficit Needs • However, population growth (1.3%) plus social-economic changes has meant a 2.3% housing need growth • In addition to that, house deterioration also boost housing needs • Considering just home 2.3% growth and 4% house building growth, Chilean housing deficit would disappear in 12 years • This housing deficit is focused in the lowest socio-economic spectrum, thus representing a long-term demand for leasing

10. Housing Activity: Sales v/s Housing Deficit • In 2005, house sales reached US$ 3.2 billion in Santiago. (This data does not include houses provided by the government to poor people) • These sales only represents houses valued at US$ 17,500 (or more) • Leasings typically funds US$ 17,500 to US$ 52,500 houses • 33% of total sales (in number) are concentrated in the Leasing niche but, in terms of amounts, sales in this niche represent 13% of the total volume • Thus, this segment reached US$ 420 million sales in 2005 • Giving that Santiago represents 40% of Chile housing activity, we may estimate Leasing Market Volume at US$ 1 billion per year • Economic growth (through employment & wages increases) plus Income Distribution improvements may boost this market volume

11. Housing Activity: Public v/s Private Sector Roles • Government Activity: • Has focused on supporting poor people • Has basically used a demand-side approach • Has replaced loan by subsidies to poor people • US$ 8,700 houses are simple provided (free) to very poor people • Houses of higher values may be purchased by using subsidies

12. Leasings : Funding Players in Housing Activity • Real Estate Developers and Constructing companies Bank Loans • Demand Side Funding: Government Funding Mechanisms and Banco del Estado (average mortgage of Banco Estado: US$ 9,000). Commercial Banks Loans (average mortgage: US$ 56,600) “Mutuos Hipotecarios Endosables” (EMC) Leasing Habitacional (Lease-to-Purchase Housing Vehicle)

13. Leasings : Pros/Cons v/s Alternative Vehicles • Advantages • No tax applicable (Alternatives: 1,6% of Loan Volume) • No down-payment (Alternatives: non less than 25% of house value) • Houses of US$ 35,000 (or less) are eligible for automatic subsidy (Alternatives: Subsidy uses an “application system”) • Collateral is the house (Alternative: Mortgage over the house) • Legal Framework allows quick “arbitral” legal process (Alternative: Longer legal process) • No tax for investors if house is a “DFL-2” (Alternative: pays 17% corp. tax or personal tax, DFL2 is an “economic house of 140 or less sq. meters) • Disadvantages • Relatively new vehicle (Alternatives: More than 25 years track record provides experience) • Some uncertainty in case leasings are used as collateral and borrower falls into bankruptcy (Alternatives: Pledge over EMC presents no legal uncertainty) • Must be held by a Securitizadora, Lease Originator or Real Estate Fund, only (Alternatives: EMC are eligible for Life Insurance Companies and Banks) • Consequences • Leasings has focused in medium income segments (US$ 17,500 to US$ 52,500 houses) • Leasings have not been fully exploited in terms of volume and rates

14. Leasings: Historic Evolution of Funding Vehicles

15. Leasings: Historic Evolution of Funding Vehicles

16. Leasing: Historic Evolution of EMC & Leasings

17. Leasings: The role of government • Demand Side Subsidy (Borrower) • Eligibility: House Values of US$ 8,750 to US$ 35,000 • Magnitude: 11% of House Value (From 56% to 9%) • Leasing Case: New (Bond) System v/s Old System • Supply Side Subsidy (Originator) • Eligibility: House Values of US$ 21,000 or less • Magnitude: 2.3% of House Value (“Modest” Houses) • Lender Subsidy (SPV or other credit holder) • Eligibility: House Values of US$ 21,000 or less • Loss Limit capped at US$ 7,000 or 75% of loss volume

18. MBS Track Record: Capital Market Penetration As of December 2005 in US millions Total Investment ABS Penetration Pension Funds 74.755 309 0,4% Life Insurance Co. 23.063 614 2,7% P&C Insurance Co. 576 11 1,9% Banks 16.168 N/A N/A Mutual Funds 12.628 167 1,3% Others N/A 701 N/A Total 127.190 1.802 1,4% *

19. ABS Track Record: Outstanding Bond Volumes Figures in Millions US$ MBS Non MBS Total Total Bond 1.274 1.625 2.899 Number of Total SPV's 37 32 69 MBS Non MBS Total Total Bond 44% 56% 100% Number of Total SPV's 54% 46% 100%

20. Mortgage Prepayment Impact: Risk-Free Rate Trajectory

21. Mortgage Prepayment Impact: MBS Shock Note: 2 of the 11 downgrade-liquidated cases were impacted by asset default performance and prepayment, whereas 9 were impacted by prepayment only

22. Mortgage Prepayment Impact: Long-Term Consequences • No (or negligible) negative equity on Senior Bonds • Originators not able to continue making short-run profits • Rating Risk Agencies and Securitizadoras improving structures • Regulator increases control • Institutional investors more able to assess different risks • In sum, a deep change on MBS industrial organization

23. Securitization of Leasings: Opportunities & Challenges • Social and Private Needs: • Housing deficit reduction • Leasing penetration & rates reduction • Higher MBS penetration: Improve volumes, liquidity and risk features • Challenges : • Government: Improve Leasing legal framework, Simplify ABS issuance rules • Rating Risk Agencies: Anticipate potential portfolio changes • Originators: Adaptation to new business environment and improve U/W criteria • Securitizadoras: Boost MBS penetration • Opportunities: • Originators: Focus on originating activities • Banks: Provide long-term funding to warehouse and/or credit enhancement • Securitizadoras: Launch a new business model

24. Securitizations of Leasings: Opportunities & Challenges • Expected Future Outcomes • Housing deficit reduction • Individuals with more funding opportunities • Long term bankers with more loan exposure • Private credit enhancement replaces Government subsidies • Capital Market (MBS) development • Securitizadora and Originators more focused on their core competencies