March 2007 Development of the Secondary Mortgage Market in Mexico: Current Situation and Perspectives

March 2007

Development of the Secondary Mortgage Market in Mexico: Current Situation and Perspectives.

2

I. The Mexican housing market

II. Role of SHF in the Mexican housing market

III. Importance of the Mortgage Insurance in the Mexican Market

IV. Mortgage Backed Securities market (BORHI’s)

V. Hipotecaria Total (HiTo)

VI. Future challenges

ContentsContents

3

ContentsContentsI. The Mexican housing market






4

0

100 000

200 000

300 000

400 000

500 000

600 000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

The housing sector in Mexico has experienced a great increase over the last years.The housing sector in Mexico has experienced a great increase over the last years.

Number of Mortgages Originated Yearly

Average annual growth rate (1996 – 2005) = 9.77%

Source:CONAFOVISource:CONAFOVI

One of the most important reasons of this increase is the growth of the mortgage market.

5

It is expected that between 2000 and 2030, the number of households will grow approximately 83%.It is expected that between 2000 and 2030, the number of households will grow approximately 83%.

Number of Homes in Mexico (millions)*

* According to the definitive results of the II National Population and Housing Count, total number of homes in 2005 ascended to 24.8 million

Source:CONAPOSource:CONAPO

4.8

9.8

22.8

36.3

41.8

0

5

10

15

20

25

30

35

40

45

1940 1970 2000 2020 e/ 2030 e/

e/ = estimate.

6

The household formation rate will present its highest levels over the next 7 yearsThe household formation rate will present its highest levels over the next 7 years

672

690

26.1

600

610

620

630

640

650

660

670

680

690

700

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Th

ou

sa

nd

s o

f N

ew

Ho

me

s

20

22

24

26

28

30

32

34

36

38

Mill

ion

s o

f H

om

es

New Household Total number of Household

Official estimations of population establish that in 2005, 672 thousand new households were formed nationwide. This figure will increase and reach its maximum in 2012, with 690 thousand new households.

Household Formation, 2004-2020 Population by Age Groups, 2005

Source: Elaborated with information from Conapo Source: INEGI

7112526 0.07080475 7311538 35-39 years

7,311,538.33 7.31

6017268 0.059901525 618563440-44 years

6,185,634.41 6.19

5015255 0.049926548 515558545-49 years

5,155,584.55 5.16

4090650 0.040722164 420510950-54 years

4,205,108.60 4.21

3117071 0.031030246 320428855-59 years

3,204,288.33 3.20

2622476 0.026106584 269585460-64 years

2,695,854.30 2.70

1958069 0.019492454 201285765-69 years

2,012,856.83 2.01

1496691 0.014899465 153856970-74 years

1,538,569.22 1.54

1048315 0.01043591 107764775-79 years

1,077,647.42 1.08

657011 0.006540503 67539580-84 years

675,394.52 0.68

345154 0.003435986 35481285-89 years

354,811.60 0.35

132325 0.001317287 13602890-94 years

136,027.53 0.14

61145 0.000608695 6285695-99 years

62,855.87 0.06

17649 0.000175695 18143100+ years

18,142.83 0.02

Total

0 1 2 3 4 5 6 7 8 9 10 11 12

0-4 years

10-14 years

20-24 years

30-34 years

40-44 years

50-54 years

60-64 years

70-74 years

80-84 years

90-94 years

100+ years

Ag

e G

rou

ps

Millions of People

Ages of household formation

7

Mortgage Portfolio Amount, 2006-2020

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Mill

ion

do

llars

INFONAVIT, FOVISSSTE Y FONHAPO SOFOLES & BANKS

Based on very conservative assumptions about the economic growth and interest rates evolution, SHF estimates show that the mortgage portfolio will grow from USD $79,600 million in 2006 to USD $338,300 million in 2020.

Source: SHF estimations

This population dynamics represents a great challenge and opportunity for the mortgage marketThis population dynamics represents a great challenge and opportunity for the mortgage market

*The projections of the mortgage portfolio are based on the potential estimated demand. An annual PIB growth rate of 3% is assumed and a decrease over the years of the home deficit that in 2005 was 8.4 million homes.

Annual rate of compound growth : 10.1%

8

Source: FMI, World Economic Outlook September 2004; South Africa Central Bank, CMHC (Canada), SSKI (India), Komoco (Korea), GHB (Thailand), China On-Line, SHF (Mexico), Michael Lea.

Data from 2001 for Korea, Thailand, Brazil, Poland, China, India and South Africa.

An annual growth in the PIB of 3% is assumed.

Mortgage Portfolio Amount / GDP of selected countries (%)

The growth of the Mortgage Portfolio as a percentage of the GDP would be important, even though, it would still be located at an average level compared with the rest of the world.

The growth of the Mortgage Portfolio as a percentage of the GDP would be important, even though, it would still be located at an average level compared with the rest of the world.

0%10%20%30%40%50%60%70%80%90%

100%

Nethe

rland

sUSA UK

Austra

lia

Germ

any

Irelan

d

Canad

a

Spain

Mex

ico (2

030)

Japa

n

Mex

ico (2

020)

Franc

e

South

Afri

ca

Thaila

nd

Korea Ita

ly

Mex

ico (2

005)

Brazil

China

India

Poland

10%

36%39%

9

Given the competition and the improvement of the economic environment, in 2006 a borrower with 7 minimum wages of income could borrow a mortgage 16% higher in value than what he could in 2000, and 35% higher in value if he uses the joint program with INFONAVIT (Cofinavit)

The previous projections do not consider the potential growth from improvements in affordability.The previous projections do not consider the potential growth from improvements in affordability.

Borrower’s income:

7 MW 11.6

Payment Factor

11.17

Payment Factor

Attainable Housing per Program

30,380

26,173

22,428

5,000

10,000

15,000

20,000

25,000

30,000

35,000

PROFIVI 2000 PROFIVI 2006 COFINANCING 2006

Mil

lio

n U

SD

Payment Factor

9.94

*Figures in pesos

10

That scenario is conservative if you consider that for the first time in many years, all the participants in the mortgage market are growing at high rates.

That scenario is conservative if you consider that for the first time in many years, all the participants in the mortgage market are growing at high rates.

Individual Balance per ParticipantConstant Million USD

-

4,500

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

FOVI/SHF Bank Sofols Sin FOVI/SHF

Exchange rate: 11 MXP/USD

11

To finance such volumes of credit it is necessary to have an efficient market for mortgage backed securities.To finance such volumes of credit it is necessary to have an efficient market for mortgage backed securities.

Amount issued up to date BORHI's vs. CEDEVI's (million USD)

250 260

1,136

178 298

545

14254

-

2003 2004 2005 2006 2007

BORHI's CEDEVI's

12







ContentsContents

13

SHF was created in 2001 as a government financial institution oriented to foster the development of the primary and secondary mortgage markets.

Until 2013, SHF will count with the 100% guarantee from the Federal Government. After this moment, SHF must be self sufficient.

Today it serves as a mortgage bank and a financial guarantor.

• SHF grants long term financing to financial intermediaries and covers their interest rate risk. SHF does not lend directly to individuals.

• SHF offers mortgage insurance and financial guaranties and a swap that allows borrowers to pay in terms of minimum wages versus UDIS denominated loans.

SHF mandate and activitiesSHF mandate and activities

14

• According to SHF´s Law, after 2009 SHF will not be able to grant finance. Hence, it is necessary to develop alternative mechanisms of housing financing.

• SHF considers the securitization of mortgages as the most efficient mechanism of house financing; and in accordance with this idea, it is focusing on accomplishing to finance most of the mortgages in Mexico through it.

SHF mandate and activities (Cont…)SHF mandate and activities (Cont…)

15

Local capital and

international derivatives

markets

World Bank & IADB

MORTGAGE LENDINGSOFOLES

SHF funds SOFOLES on a matched funds basis, absorbing market and prepayment risk

SHF hedges market and prepayment risk through debt and derivatives markets

Mortgage Insurance

SHF started operations in 2002, overtaking the activities of FOVI and has the capacity to fund in the markets.SHF started operations in 2002, overtaking the activities of FOVI and has the capacity to fund in the markets.

Central Bank loans

MI is offered to prepare loans for securitization

16

LOANS

Financial

Intermediaries•Banks•Sofoles $

$

Mortgage Insurance

MBS

K

MBS

Mortgage Portfolios

SPV

Capital Markets

Partial Credit Guarantees

SHF’s main challenge is to develop an efficient market for mortgage-backed securities (MBS) through its role as guarantor and liquidity provider.

SHF’s main challenge is to develop an efficient market for mortgage-backed securities (MBS) through its role as guarantor and liquidity provider.

17

$

$

Mortgage Insurance

Capital Markets

Financial Guarantee Insurance

SHF has been actively seeking the entrance of private providers of guarantees. The end-game is a market based on private providers of financial solutions.

SHF has been actively seeking the entrance of private providers of guarantees. The end-game is a market based on private providers of financial solutions.

LOANS

Financial

Intermediaries•Banks•Sofols

MBS

K

MBS

Mortgage Portfolios

SPV

18

The same effect happened in 2004 for individual loans. The acquisition of Sofoles by Banks and securitization have been a source of diversification for Sofols funding

The same effect happened in 2004 for individual loans. The acquisition of Sofoles by Banks and securitization have been a source of diversification for Sofols funding

0

2 000

4 000

6 000

8 000

10 000

12 000

14 000

16 000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006e/

SHF & FOVI Funding Bank Funding Securitizations

Mortgage Portfolio Administered by SofolesEquivalent in Million Dollars

19







ContentsContents

20

The securitization model in Mexico in 2003:The securitization model in Mexico in 2003:

SOFOL or BANK

Mortgage Insurance Company

Mortgage + Insurance 25%

BORROWER

PRIVATE ADMINISTRATION

TRUST

MORTGAGE INSURANCE (First loss up to 25%)

Mortgage Packages structured to this level. The

Trust acquires the Mortgages.

Financial Guaranty Insurance Company

Financial Guaranty Partial or Total

InsurancePREMIUM

Mortgage $

$

BORHIs with repayment of principal and interest,

supported by structure and guaranties

$

PREMIUM

Securities Market

Depends on the issuer´s preference, but the mortgage insurance is required unless there is a Financial Guaranty of a 100%.

=

21

SHF does not buy individual credits to pack and securitize them, and also will not offer 100% coverage with the GPO. Instead, SHF has been supporting the securitization of individual credits in the following way:

Offering a Mortgage Insurance of up to 35% on the first loss to the Mortgages. Granting the swap UDIS - Minimum Wages to isolate the currency risk in the

structure. Granting Partial Financial Guaranties to structures that comply with the minimum

issuance criteria. Supporting the development of the BORHIs market through the Market Maker

figure and with an active presence on the secondary market.

SHF has participated actively in the securitization model.SHF has participated actively in the securitization model.

22

Banks, Sofols and Trusts issuers of BORHIS

MI Companies

Private MI Companies

SHF

1. Short Term (2004 - 2006): SHF offers an MI coverage, looking for reinsurance with international specialized companies.

2. Medium Term (2006 - 2013): Private Insurance companies offer medium and residential coverage. SHF takes risks with the low income sector, and with some other risk not covered by the private sector.

3. Long Term (2013+): Private Insurance companies offer coverage in all segments, SHF offers reinsurance for riskd not accepted by private entities.

Promoting the creation of an MI market in MexicoPromoting the creation of an MI market in Mexico

MI Reinsurance

International MI

Companies

AHF

23







ContentsContents

24

Up to day there are 27 BORHIs issuances, for a total amount of USD$ 2,478 million. And also, two transactions which are innovative for this market.

Up to day there are 27 BORHIs issuances, for a total amount of USD$ 2,478 million. And also, two transactions which are innovative for this market.

USD Yield Date of issuance

1 Su Casita/GMAC I BRHCGCB 03U 54,142,182 5.00% 05-Dic-032 Su Casita/GMAC II BRHCGCB 04U 106,333,010 6.35% 19-Ago-043 GMAC I MXMACCB 04U 97,512,124 6.43% 25-Nov-044 Metrofinanciera METROCB 04U 46,042,433 6.75% 16-Dic-045 Metrofinanciera II METROCB 05U 45,971,738 6.50% 01-Jun-056 GMAC II MXMACCB 05U 45,345,150 6.10% 04-Ago-057 Metrofinanciera III MFCB 05U 44,910,141 5.91% 18-Ago-058 Su Casita I BRHSCCB 05U 62,590,786 5.39% 30-Sep-059 GMAC III MXMACCB 052U 61,077,130 5.57% 20-Oct-05

10 GMAC IV MXMACCB 06U 47,839,161 5.60% 30-Mzo-0611 Su Casita II BRHSCCB 06 P 47,700,518 10.15% * 17-Abr-0612 Crédito y Casa I CREYCCB-06U 49,265,758 5.74% 18-May-06 13 Metrofinanciera IV METROCB 06U 44,833,749 6.20% 02-Jun-0614 Su Casita III BRHSCCB 06U Serie "A" 90,073,207 6.10% 09-Jun-06

Su Casita III BRHSCCB 06-2U Serie "B" 10,120,557 7.85% 09-Jun-0615 Su Casita IV BRHSCCB 063U Serie "A" 84,219,778 5.45% 04-Ago-06

Su Casita IV BRHSCCB 06-4U Serie "B" 9,462,888 7.15% 04-Ago-0616 Su Casita V BRHSCCB 065U Serie "A" 65,380,321 5.00% 31-Ago-06

Su Casita V BRHSCCB 06-6U Serie "B" 7,346,098 6.70% 31-Ago-0617 ING Comercial América HICOACB 06U Serie "A" 56,608,379 5.00% 22-Sep-06

ING Comercial América HICOACB 06-2U Serie "B" 6,396,413 6.40% 22-Sep-0618 FINCASA FCASACB-06U 45,906,681 5.10% 12-Oct-0619 GMAC V MXMACFW 06U Serie "A" 60,884,337 4.40% 26-Oct-06

GMAC V MXMACFW 062U Serie "B" 5,323,209 6.60% 26-Oct-0620 Su Casita I BRHSCCB 06-2 Serie "A" Pesos 56,525,100 8.60% 15-Nov-06

Su Casita I BRHSCCB 06-3 Serie "B" Pesos 7,429,009 10.42% 15-Nov-0621 Patrimonio I PATRICB 06U 90,289,091 4.29% 04-Dic-0622 Crédito y Casa I CREYCCB-06U Serie "A" 147,775,304 4.78% 13-Dic-06

Crédito y Casa I CREYCCB-06U Serie "B" 16,602,616 6.45% 13-Dic-0623 Banorte I BNORCB-06 Serie "A" Pesos 180,489,273 8.27% 18-Dic-06

Banorte I BNORCB-062 Serie "B" Pesos 5,640,282 9.45% 18-Dic-0624 Su Casita II BRHSCCB 07 Serie "A" Pesos 68,468,636 8.81% 26-Ene-07

Su Casita II BRHSCCB 07 2 Serie "B" Pesos 9,411,491 10.65% 26-Ene-0725 Crédito y Casa I (Reap) CREYCB-06U Serie "A" 57,138,220 4.78% 09-Mar-07

Crédito y Casa I (Reap) CREYCB-062U Serie "B" 6,575,241 6.45% 09-Mar-0726 GMAC V MXMACFW 07U Serie "A" 81,701,723 4.08% 23-Mar-07

GMAC V MXMACFW 072U Serie "B" 5,741,215 6.55% 23-Mar-0727 HSBC I HSBCCB-07 Serie "A" Pesos 208,888,100 8.24% 30-Mzo-06

HSBC I HSBCCB-07 Serie "B" Pesos 20,409,091 9.58% 30-Mzo-06

Total 2,158,370,141 TC= 11* Bursatilización en Pesos

USD Yield Date of issuance

1 Su Casita Cross border USD Serie "A" USD 239,750,000 0.00% 0Su Casita Cross border USD Serie "B" USD 22,654,545 0.00% 0

2 Deutsche Bank DBCB-07U Serie "A-1" 22,420,128 4.05% 27-Mzo-06Deutsche Bank DBCB-072U Serie "A-2" 33,630,192 4.58% 27-Mzo-06Deutsche Bank DBCB-073U Serie "AIO" 1,938,596 6.00% 27-Mzo-06

320,393,461

Issuance

Issuance

25

*Exchange rate = 11 MXP/USD.

As of March 2007, the total BORHIS outstanding was around USD $1,842 millionAs of March 2007, the total BORHIS outstanding was around USD $1,842 million

BORHIS Issued Amount (million USD) and number of mortgages securitized

$1,842$1,700

$564

$304

$54

$-

$300

$600

$900

$1,200

$1,500

$1,800

2003 2004 2005 2006 2007

-5,000

5,000

15,000

25,000

35,000

45,000

55,000

65,000

Cummulated Issued Amount Mortgages securitized

26

The increase on the number of issuers was, of course, an important factor to increase the issued amountThe increase on the number of issuers was, of course, an important factor to increase the issued amount

GMACSu Casita

Metrofinanciera Hip. Nacional

GMACSu Casita

GMAC (Patrimonio)GMAC (Crédito y Casa)


GMACSu Casita

2003 2004 2005

GMAC (Patrimonio)GMAC (Crédito y Casa)


GMACSu Casita

2006

BanorteCrédito y CasaPatrimonioING FINCASA

27

LOAN SECURITIZATION IN PESOS, FIXED RATE, 20 YEAR TERM

MortgagesPortfolio

97%Senior Bond

3% Subordinate

d Bond

25%First loss

Mortgage Insurance

10%Financial

Guarantee Average rate

Servicing fee

Life & damage Insurance + structure costs

Funding rate BORHIs

15.50%

1.25%

1.25%

1.25%

8.94%

2.81%

Mortgage Ins. & Fin. Guar.

Excess rate

+

-

-

-

-

=

The return over equity for the Sofols which securitize is relatively highThe return over equity for the Sofols which securitize is relatively high

Rates in pesos

28

Though Borhis are a relatively new product in the mexican market, the demand for these type of Bonds has consolidated….Though Borhis are a relatively new product in the mexican market, the demand for these type of Bonds has consolidated….

Issuance

1.8

1.20

2.10 2.132.31

3.12

4.13

3.3

2.35

2.882.93

3.003.13 3.2

3.5

5.17

4.58

3.65

2.1

4.83

3.5

2.43

4.25

4.78

5.1

-

1

2

3

4

5

6D

em

an

d v

s.

Su

pp

ly R

ati

o

SU CASIT

A/GMAC 1

SU CASIT

A/GMAC 2

GMAC -

H. NACIO

NAL

METRO I

METRO II

GMAC- P

ATRIMONIO

METRO III

SU CASIT

A 1

GMAC 1

GMAC 2

SU CASIT

A 1

CREDITO Y

CASA 1

METRO IV

SU CASIT

A 3

SU CASIT

A 4

SU CASIT

A 5

ING C

OMERCIAL

AMERIC

A

FINCASA

GMAC

Su Cas

ita I

Patrim

onio

I

Crédit

o y C

asa

Banor

te

Su Cas

ita I

Crédit

o y C

asa

(reap

ertur

a)

29

…. and spreads versus government securities have shown a stable trend…. and spreads versus government securities have shown a stable trend

One of the main reasons why BORHIS have been well demanded is the existence of a liquid secondary market for these securities.

**Government Real Rate Benchmark (with similar duration to that of the BORHIS).

*Weighted Average YTM (calculated, at each time, with the outstanding amount of each issue). Source: VALMER; Mexican Price Vendor.

Spread = BORHIS* – “Mexican Government Real Rate Benchmark”(Dic-2003 – YTD)

50

75

100

125

150

Dic

-03

Fe

b-0

4

Ab

r-0

4

Ju

n-0

4

Ag

o-0

4

Oct-

04

Dic

-04

Fe

b-0

5

Ab

r-0

5

Ju

n-0

5

Ag

o-0

5

Oct-

05

Dic

-05

Fe

b-0

6

Ab

r-0

6

Ju

n-0

6

Ag

o-0

6

Oct-

06

Dic

-06

BORHIS* - UDIBONOS**

Avg. = 104 BP

30

BORHIS offer very attractive yields to Foreign Investors …. BORHIS offer very attractive yields to Foreign Investors …. YTM: BORHIS* vs. “Mexican Government Real Rate Benchmark”, “TIP’s + EMBI+”, TIP’s

(Dic-2003 – YTD)

4.57%

3.49%3.36%

2.35%

*Weighted Average YTM (calculated, at each time, with the outstanding amount of each issue). Source: VALMER; Mexican Price Vendor. **Government Real Rate Benchmark (with similar duration to that of the BORHIS).

TIP’s = Treasury Inflation Protected Bonds; EMBI+ = Emerging Markets Bond Index (Mexico).

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Dic

-03

Fe

b-0

4

Ab

r-0

4

Jun

-04

Ag

o-0

4

Oct

-04

Dic

-04

Fe

b-0

5

Ab

r-0

5

Jun

-05

Ag

o-0

5

Oct

-05

Dic

-05

Fe

b-0

6

Ab

r-0

6

Jun

-06

Ag

o-0

6

Oct

-06

Dic

-06

BORHIS* UDIBONOS** TIP's 20 yr + EMBI+

TIP's 20 yr TIP's 10 yr + EMBI+ TIP's 10 yr

31

…. sovereign risk adjusted and inflation protected…. sovereign risk adjusted and inflation protected

The average spread between the “GNMA 30 Yr.” and the “10 Yr. UST” has been of 90 Basis Points (2004-YTD).

Spread = BORHIS – “Mexican Government Real Rate Benchmark” and “TIP’s + EMBI+”(Dic-2003 – YTD)

50

75100

125150

175200

225250

275300

325

Dic

-03

Feb

-04

Abr

-04

Jun-

04

Ago

-04

Oct

-04

Dic

-04

Feb

-05

Abr

-05

Jun-

05

Ago

-05

Oct

-05

Dic

-05

Feb

-06

Abr

-06

Jun-

06

Ago

-06

Oct

-06

Dic

-06

BORHIS - (TIP's 10 yr + EMBI+) BORHIS - (TIP's 20 yr + EMBI+) BORHIS* - UDIBONOS**

Avg. = 104 BP

Avg. = 201 BP

32

SHF created the Market Maker figure in order to promote the Borhis’ secondary marketSHF created the Market Maker figure in order to promote the Borhis’ secondary market

There are now 10 Market Makers who have participated with competitive positions since the last 12 Borhis’ auctions, and who operate actively in the secondary market the 23 outstanding issuances.

33







ContentsContents

34

The securitization process of mortgages (BORHIs) is recent, its development depends on the following key elements:

1. Portfolios of credit that fulfil certain minimal criteria in their origination and administration (solid and trustable mortgages).

Currently the issuances in the market are backed by portfolios that:

• Fulfill a common standard in terms of strict mechanisms of origination (eligibility criteria) and administration, integration of the credit file, reports of the information, etc.

• Were reviewed by a third party (insurance credit housing providers or financial guarantees) that will face loses in case of defaulting).

In order to develop in Mexico a securitization market there must be 4 key elements In order to develop in Mexico a securitization market there must be 4 key elements

• LTV <= 65%

• Housing credit insurance or GPI

• Valid credit

• Complete filing (certificates of property, appraisal, etc.)

35

2. Credit enhancers with value and trustworthy included in the market:

Currently the structures have diverse credit enhancers that strengthen them when possible defaults from debtors may occur:

• Mortgage Credit Insurance or GPI

• Financial Guarantees (GPO) or Partial Credit Guarantees (PCG).

• 100% coverage of the full-wrap portfolios

SHF has worked together with diverse financial intermediaries and multinational organisms to participate as guarantors in these structures. The answer has been positive, since currently the IFC and FMO participate in PCGs, United and Genworth in GPI through the re-insurance figure, and this year they worked directly with Sofols and Banks.

AMBAC gave its first coverage of multinational AAA to the 100%.

We are working with the 3 credit rating agencies in the optimization of this credit enhancers that may permit to optimize the structures.

In order to develop in Mexico a securitization market there must be 4 key elementsIn order to develop in Mexico a securitization market there must be 4 key elements

36

In order to develop in Mexico a securitization market there must be 4 key elements (Cont…)In order to develop in Mexico a securitization market there must be 4 key elements (Cont…)

3. The possibility of taking in firm of long term securities in behalf of the investors

The investors have shown a greater participation both in the primary and the secondary market of BORHI´s in the way in which the issuances have been done for many reasons:

a) A market of national and foreign investors has been developed, in its majority institutional (Siefores, Insurance companies) that have manifest appetite for securities in a long term.

b) The curves of the government are longer and are a reference that facilitates the development of the long term debt market that includes BORHI´s.

Demand of BORHIS

1.8

1.20

2.10 2.132.31

3.12

4.13

3.3

2.35

2.882.93

3.003.13 3.2

3.5

5.17

4.58

3.65

2.1

4.83

3.5

2.43

4.25

-

1.00

2.00

3.00

4.00

5.00

6.00

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4. Efficient mechanisms of portfolio adjoin that permits to give certainty to the originators/administrators of the mortgage credits about:

a) The existence of a source of liquidity and continuous and safe funding trough the capital markets.

b) A well known interest rate to discharge their credits from their balance, and to permit to eliminate the market risk that is currently given to between the credit origination and its securitization (It takes about 28 months in average between these two events)

SHF and diverse financial intermediaries have focused and been able to develop the key elements, nevertheless it hasn't been possible to advance in the following last element: Efficient mechanisms of portfolio adjoin. It is one of the reasons why the small and middle size Sofols have not shared in the securitization.

In order to develop in Mexico a securitization market there must be 4 key elements (Cont…)In order to develop in Mexico a securitization market there must be 4 key elements (Cont…)

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Debtor: Requests

credit

Sofol

Requires Funding

Government rate + X bp

Sofol

Gives Credit

Sofol

Accumulates mortgages

Securitization

The process is long, about 35 monthsCurrent Model

When there are no adjoin of efficient mechanisms, the current securitization model last 28 months in averageWhen there are no adjoin of efficient mechanisms, the current securitization model last 28 months in average

If the market conditions permit it

Gives Funding

39To promote the use of a vehicle that may guarantee the liquidity of the originators and eliminates the market risk between origination and securitization, a solution called HiTo has been developing

To promote the use of a vehicle that may guarantee the liquidity of the originators and eliminates the market risk between origination and securitization, a solution called HiTo has been developing

• In 2001 an agreement of “Partnership for prosperity” was singed between the Governments of Mexico and The United States.

• The United States Department of the Treasury requested Soros to look for the best solution to finance the great housing need of Mexico.

• SOROS & VP agreed in June 2003 to establish an Institution focused in the aim to offer to Mexico the Danish Model of Mortgages.

After a continuous interaction of the Danish institutions with their Mexican counterparts (INDEVAL, SHF and some Sofols), an adaptation of their business model has been defined for Mexico by creating a company called Hipotecaria Total (HiTo)

With that purpose, SHF has kept a close relationship with Danish mortgage banks, the Danish Central Depository Institution (VP), and Soros Equity Fund.

40The Sofols participation in HiTo, will be very simple The Sofols participation in HiTo, will be very simple

The idea is that with simple interfaces and sending similar lay-outs to those sent currently to SHF, Sofols could access the Capital Markets continuously to fund their mortgages at a low cost and anytime they need it.

Hito Mexico Hito will adapt to Mexico the systems that support the operation in Denmark, which is well known for the foreign investors and the rating agencies.

Reduce the funding rate and optimize credit enhancers.

SHF with SOROS and VPX, are working in the implementation of the infrastructure that supports the securitization systems of HiTo.

From November 2006, HiTo is a company focused in the Securitization services, with systems connected with INDEVAL and the banking systems that Sofols currently uses, in a very automated way (Straight Through Process, STP).

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Conceptually the technological solution is simpleConceptually the technological solution is simple

Indeval

Funcionality VPX

FundingXpert interface

• Clearing • Operations capture• Market information

• Investors and issuers account administration

• Investors• Payments• Administration

Banking System

“VPX Bond Management Interface”

• Client assistance• Credit score• Client management• Administration of

credits

• Investors • Payments• Administration

FuncionalityFundingXpert

FundingXpert VPX Bond Management System

• Payment administration

• Building appraisal• Prices and charges of

commissions and services

• Account management

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SmallSofole

Operation of HiTo in Mexico Operation of HiTo in Mexico

SmallSofol

MediumSofol

SmallBank

Large Bankor Sofol

Abanks +

FundingXpert

VPX

HiTo (VP Mexico)

Indeval

HiToTrust

OwnBrandTrust

Trust for independent Bank Brand

SecuritiesHiTo

SecuritiesSofol X

SecuritiesSofol Y

SecuritiesSofol Z

MultisofolTrust

• HiTo will be an open system to any interested participant in securitizing their mortgage portfolio.

• The participants in the Market could issue securities with their own brand (eg: Su Casita, Metrofinanciera, GMAC, etc.) or using a Multisofol brand (multisofol issuance).

• In both cases, the subordinated piece will be kept by the originating Sofol

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By securitizing through a vehicule like HiTo, the originators/administrators will obtain very important benefits:

The existence of a liquidity source and continuous and safe anchorage through capital markets.

A known interest rate to unload its credits off the balance, and that allows to eliminate the risk market that at the moment occurs between the origination of the mortgage and their securitization (it takes approximately 28 months in average between these two events).

The standardization does not imply rigidity in the type of mortgage since today the danish model supports several types: fixed rate, variable rate, with caps, etc.

ConclusionConclusion

These benefits allow the Sofol to be in conditions to offer a highly competitive mortgage product and increase their volume of mortgage originations

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ContentsContents

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• To build a market where investors, mainly local and foreign institutional investors, could feel comfortable regarding transparency and liquidity of the securities.

• To develop entities or vehicles specialized in the purchase of mortgage loans, Borhis issuance and investment on tranches of the structures.

• To assure the continuity of the business model, supporting liquidity during all the loan origination process.

• To maintain the loan portfolio growth, while keeping the same credit quality.

• To develop a more efficient and deeper secondary market in order to satisfy the potential credit demand during the next years, and to maintain the Sofols’ competitiveness against Banks.

• To transfer all benefits achieved in housing finance in more benefits to the borrowers, in terms of lower rates, down payments and monthly payments.

Challenges for the Borhis market development:Challenges for the Borhis market development:

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Development of the Secondary Mortgage Market in Mexico: Current Situation and Perspectives.

March, 2007

Documents

March 2007 Development of the Secondary Mortgage Market in Mexico: Current Situation and Perspectives