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					Mortgage Market in Mexico



          mayo de 2012
Contents

I.     Introduction


II.    Demographic Dynamics, Housing Demand and Financing Needs


III.   The Mexican Mortgage Market including FOVI/ SHF role


IV.    Securitization Model for Mexico and Current Strategy


V.     Pension Funds & BORHIS


VI.    Low-Income Mortgage Alternatives


VII.   Challenges ahead in Housing Finance




                                                                  2
SHF: Mandate & activities, Mission & Vision
  SHF was created in 2001 as a government financial
 institution oriented to foster the development of the primary
 and secondary mortgage markets.                                 Mission:
                                                                 Lead the development of
  As a Mortgage bank: SHF grants long term financing to          a competitive market in
                                                                 order to allow all Mexicans
 financial intermediaries and covers their interest rate risk.
                                                                 be able to acquire a
 SHF does not lend directly to individuals.                      residence.
  As a Guarantor: SHF offers products like mortgage
 insurance and financial guaranties.                             Vision:
 Until 2013, SHF will have the 100% guarantee from the             To be an innovative
                                                                   institution in solutions to
 Federal Government. After 2009 SHF will not be able to            develop social housing.
 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 housing financing.
                                                                                          3
Contents
I.     Introduction


II.    Demographic Dynamics, Housing Demand and Financing Needs


III.   The Mexican Mortgage Market including FOVI/ SHF role


IV.    Securitization Model for Mexico and Current Strategy


V.     Pension Funds & BORHIS


VI.    Low-Income Mortgage Alternatives


VII.   Challenges ahead in Housing Finance




                                                                  4
             Over the next 25 years, the number of households will grow at an
             annual rate of 2% and the year of 2012 will have the larger number of
             household formation.

                       From 2000 to 2030 the number of               According to official estimates, 672,018
                     households in Mexico will grow 83%.           new households were formed during 2005
                     These favorable population dynamics is        throughout the country. This figure will
                     coupled with an annual per capita             rise up until 2012, when 691,242 new
                     income of approximately USD $9,500*           households will be formed.

                           Number of Households in Mexico                                    Population by Age Groups in 2004
Million Households




                      45                                    41.8                       700                                                     691
                                                                                                                                                                                              36.3
                                                                                                                                                                                                     38




                                                                                                                                                                                                          Million of Households
                                                                                       690                                                                                                           36




                                                                    Thousands of New
                      40                                                               680                                                                                                           34
                                                                                              667




                                                                       Households
                      35                                                               670                                                                                                           32
                                                                                       660
                      30                                                               650
                                                                                                                                                                                                     30

                      25                        22.8                                   640
                                                                                                                                                                                               636   28
                                                                                       630                                                                                                           26
                      20                                                                       25.5
                                                                                       620                                                                                                           24
                      15               9.8                                             610                                                                                                           22
                                                                                       600                                                                                                           20
                      10      4.8

                                                                                         04

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                                                                                                                                                                                         20
                       0                                                                                 New Households                               Total Number of Households
                             1940      1970     2000     2030 e/

             Source: CONAPO                                                             Source: CONAPO


              /* PPP Methodology

                                                                                                                                                                                                     5
 Housing Demand
    In Mexico, there are 26.7 million families of which:
             17.2 million already have an adequate house.
             9.4 million families do not have an adequate house and haven’t been attended
             yet.
             Annually, around 500,000 new families are generated, of which approximately
             60% are in conditions of demanding a mortgage loan.
             In addition to the families that do not have an adequate house, there are 4
             components that together generate the annual housing demand.

                                     Estimation of the Housing Demand in 2008
                                       Component                            Number of Houses      %
                                       New Families                             299,977        25.8%
                                 Families without a House                       765,113        65.9%
                           Families demanding a Better House                    71,565          6.3%
                 Families who are Granted a Loan after a Former Rejection       22,724          2.0%
                                           Total                               1,159,379       100.0%

Source: INEGI.

                                                                                                        6
           Housing Demand: Strengthening of the Middle Class
                                                                                DISTRIBUTION OF FAMILIES ACCORDING TO THEIR
                                                                                                 INCOME (%)
                                                                        34.4 and more
     A gradual increase of the middle class is
                                                                                30.1-34.4
     expected. This will allow a strengthening of                                                                                                  In 2006,
     the housing demand from financially                                                                                                           80.2% of




                                                       Dollars Earned per Day
                                                                                25.8-30.1
                                                                                                                                                   the families
     healthy families.                                                          21.5-25.8
                                                                                                                                                   received
                                                                                                                                                   more than
                                                                                                                                                   12.9 dollars
           Between the year 2000 and 2006,                                     17.2-21.5                                                          a day
            the percentage of families that
                                                                                12.9-17.2
            received more than 12.9 dollars a
            day increased from 72.8% to 80.2%.                                   8.6-12.9


           The low income sectors are the ones                                   6.5-8.6

            that have experienced greater                                         4.3-6.5
                                                                                                                                   2006
                                                                                                                                   2000
            increases in their income per family
                                                                                    0-4.3
            between the years 2000 and 2006.
                                                                                            0            10            20            30             40
                   STRENGTHENING OF THE PURCHASING POWER OF THE LOW AND MIDDLE CLASSES
                                       Quarterly Income per Family (Dollars)
                          I       II       III        IV                           V              VI            VII         VIII            IX           X
        2000             $462    $793    $1,080     $1,376                       $1,708         $2,135        $2,677    $3,407            $4,934     $12,526
        2006             $791   $1,177   $1,382     $1,742                       $2,050         $2,388        $3,085    $3,805            $5,084     $11,330
    Total Change         $329    $384     $301       $366                         $342           $253          $408      $398              $150      -$1,196
     % Change           71.1%   48.5%    27.9%      26.6%                        20.1%          11.8%         15.3%     11.7%              3.0%       -9.6%
Source: INEGI.

                                                                                                                                                         7
  Demographic dynamics: a challenge and opportunity in
  the mortgage market
                                                                                                 MORTGAGE PORTFOLIO IN MEXICO

 Even under very conservative assumptions,
                                                                      400,000




                                                    Million Dollars
                                                                      350,000
 SHF estimates that the residential mortgage                          300,000
 portfolio will grow from USD $80,724 millions                        250,000

 in 2007 to USD $338,300 millions 2020.                               200,000
                                                                      150,000
                                                                      100,000
                                                                      50,000

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

                                                                                            INFONAVIT and FOVISSSTE                        SOFOLS and Banks
                                                                             The projections of the mortgage portfolio are based on potential estimated demand assuming an 3%
                                                                             annual growth rate for GDP and the same levels for mortgage rates than those of 2006.

 The flow of financial savings available in the                                ACCUMULATED NET FLOW NEEDED TO FINANCE
 country will not be sufficient to finance the     2500                                  MORTGAGE LOANS
 growth of mortgage portfolios. The sale of        2000                                                       2006 Billion Pesos

 mortgage portfolios to domestic institutional     1500

 investors as well as foreign investors is an      1000

 absolute must to maintain the growth of the        500

 mortgage sector.                                              0
                                                                       2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
                                                                       Private Mortgages              Siefores Savings       Savings from banks

To attend the growing demand of mortgage loans in the following years, it was necessary to develop a
Residential Mortgage Backed Securities market.
                                                                                                                                                                  8
Contents
I.     Introduction


II.    Demographic Dynamics, Housing Demand and Financing Needs


III.   The Mexican Mortgage Market including FOVI/ SHF role


IV.    Securitization Model for Mexico and Current Strategy


V.     Pension Funds & BORHIS


VI.    Low-Income Mortgage Alternatives


VII.   Challenges ahead in Housing Finance




                                                                  9
The industry is still dominated by the two Federal Housing Funds,
INFONAVIT and FOVISSSTE.

   About ¾ of loan originations still do not involve a private intermediary undertaking
at least part of the risk inherent to the transaction. FOVI/SHF has greatly diminished
its importance as the funding source for mortgages originated by private
intermediaries thanks to the development of the market.


                                 Mortgages by Financing Source

        INFONAVIT +
         FOVISSSTE                                     INFONA VIT + FOVISSSTE
            84%                                                 75%




   SOFOLS                                            SOFOLS                         B A NKS and
  FOVI Funding                       BANKS
                                                    SHF Funding                      SOFOLS
     13%                              3%
                                                        5%                          Own Funding
                      2002                                                 2006         20%


           Total 341,939 Loans                                    Total 675,041 Loans


                                                                                             10
INFONAVIT

   The board of directors is represented by workers, employers and the Federal
   Government.
   INFONAVIT receives on a monthly basis, 5% of the formal private sector workers
   payroll, and credits to personal accounts.
   INFONAVIT loans, interest rates and payments are indexed to the minimum wage
   (MW)*.
   INFONAVIT interest rates are not market rates, there is an implicit interest rate
   subsidy on all its lending.
   INFONAVIT relies on payroll deduction for its collections when borrowers are
   employed by firms in the private sector. Collection mechanisms for unemployed
   borrowers or those migrating to the public or the informal sectors still need to
   improve.
   Average dollar amount of their loans: $22,000
    * MW= usd$ 148.4 per month


                                                                                   11
FOVISSSTE

  Similar to the objective and sources of funding from INFONAVIT, FOVISSSTE is a
  wage-based housing fund for federal employees, and is the institution in charge of
  providing housing financing to over two million of federal government employees.
  The board of directors is represented by different government agencies and by
  ISSSTE (the public pension fund for federal employees).
  FOVISSSTE receives on a monthly basis, 5% of the federal employees payroll, and
  also collects through a pay-roll deduction mechanism.
  FOVISSSTE loans, like those of INFONAVIT, are indexed to the minimum wage and
  pay lower than market interest rates; however to a greater extent.
  FOVISSSTE lags behind INFONAVIT on revamping its operating procedures,
  particularly regarding the servicing of the loan portfolio.




                                                                                 12
BANKS

Until 1994, banks were the only private intermediaries doing mortgages in Mexico.

 In 1995, the “Tequila Crisis” bankrupted the Mexican banking system and private
banks abandoned the mortgage market. Past-due loans became rampant,
specially in the mortgage portfolio of banks. Banks did not have efficient collection
mechanisms or foreclosure procedures.

 By 2004 it became clear to banks they had been out of a profitable market, and
they entered back aggressively by:
      Undercutting Sofoles in price
      Buying up the largest Sofoles
Banks originated approximately USD 7,300 millions of loans in 2007.


                                                                                   13
SOFOLES

  Sofoles were created in 1994 as a result of NAFTA. They are Non-bank banks
  similar to mortgage banks in US.

  They have two basic characteristics :
   Cannot take deposits from the public.
   Can only lend to a specific sector: housing, automobiles, education, etc.
  Since then, Sofoles have successfully been originating and servicing loans under
  FOVI & SHF programs:
     Relatively homogeneous originating and servicing standards, as well as
      standardized loan product.
     Sofoles will originate approximately USD 2,200 million of loans in 2007.




                                                                                 14
FOVI, which was manage by the Central Bank until the creation of
SHF, started funding SOFOLES in 1995.

  Collections on
   outstanding
    portfolio



Central Bank loans                                                             Construction
                                                                                 loans for
(guaranteed by the
     Federal
                                                 Sofoles                       homebuilders
   Government)                                                                and mortgages
                                                                              for individuals

                            Fovi’s funding to Sofoles was long term, fully
  World Bank and              matched and indexed to minimum wage
       IADB                      inflation. Under the macroeconomic
                     environment after de “Tequila Crisis” this was the only source
                                  of long term funding for mortgages.


                                                                                         15
SHF started operations in 2002, overtaking the activities of FOVI but
with a new capacity to get funding from the capital markets.

                                                              MI is offered to prepare
Local capital    SHF hedges market and prepayment risk
                                                              loans for securitization
     and          through debt and derivatives markets
international
 derivatives
   markets                          Mortgage Insurance

                                                                         MORTGAGE
  Central Bank                                      SOFOLES
     loans
                                                                          LENDING




World Bank &
   IADB                            SHF funds SOFOLES on a matched funds basis,
                                       absorbing market and prepayment risk


                                                                                    16
Contents
I.     Introduction


II.    Demographic Dynamics, Housing Demand and Financing Needs


III.   The Mexican Mortgage Market including FOVI/ SHF role


IV.    Securitization Model for Mexico and Current Strategy


V.     Pension Funds & BORHIS


VI.    Low-Income Mortgage Alternatives


VII.   Challenges ahead in Housing Finance




                                                                  17
Participation of SHF in the securitization model

SHF does not perform the same activities that Fannie Mae or Freddie Mac: it neither
purchases loan portfolios nor does it issue MBSs with its own Guarantee attached.
Instead:
    SHF offers Mortgage Insurance covering the first loss of up to 35% of loans,
    whether they are part of a pool of an MBS (BORHIS) or not.

    SHF offers Partial Financial Guarantees to structures that meet certain
    requirements. These usually do not cover more than 15% of MBS (BORHIS)
    outstanding balance.

    SHF supports the liquidity of the MBS (BORHIS) by continuously quoting bid-ask
    prices (with tight bid-ask spreads) for every issue in the market. All this activity is
    channelled through one of the eleven “BORHIS Market Makers”.

     However, the goal of SHF is similar that of the GSEs: to foster the liquidity to
     the mortgage markets as a means to promote the affordability of mortgages.

                                                                                        18
  How is the market organized to issue MBS (BORHIS)?
                                                                                                   Depends on the
                                                                                               =
                                                                                                   preferences of the issuer,
       Mortgage                              Financial Guarantee                                   but Mortgage Insurance
                                                                                                   is necessary unless a
      Insurance                                   Insurance                                        100% Financial
      Companies                              Company/Mezzanine                                     Guarantee Insurance on
                                                                                                   the MBS exists.
            Mortgage Insurance                                Total or Partial Financial
 PREMIUM    (First loss up to 30%)           PREMIUM           Guarantee Insurance
                                                                  and Mezzanine

                      Loan + Mtg.Insurance
                                                                              AAAmx rated MBS
       SOFOL or                                       SPV                        (BORHIS)
        BANK                                      (funded and                                              Debt Markets
                                $               administered by
                                                private entities)                          $
Mortgage     $
                                             SPV acquires mortgage
                                             portfolios, structures and
     BORROWER                                 issues MBS (BORHIS)


                                                                                                                     19
The securitization Model

Two type of structures are being placed in the market.
     Mortgage Insurance +
      Partial Enhancement                              Full Financial Guarantee Insurance
 (Partial Financial Guarantee or                         (without Mortgage Insurance)
        Mezzanine Bond)

      Assets             Liabilities                         Assets          Liabilities

      Mortgage           Senior Bond                         Mortgage        Senior Bond
       Portfolio                                          Portfolio (100%)      88%
                            87%
       (100%)
          +
  Mortgage Insurance


                                        Equivalent                                          May be
                       Mezzanine Bond   to a Partial                                        partially
                            10%         Financial                             Equity        substituted
                                        Guarantee                                           by a
                        Equity 3%                                              12%
                                                                                            Mezzanine
                                                                                            Bond

                                                                                             20
SHF has been actively seeking the entrance of private providers of
guarantees. The end-game is a market based system relying on private
providers of financial solutions.
                                                             Investor and market
                                                              maker in initial and
                                                              secondary markets
                                       SPV
                  Mortgage
                  Portfolios
Financial                          L                 $
Intermediaries                     O         MBS               Capital Markets
  • Banks                          A
                                   N               MBS
  • Sofoles                    $   S
                                                          Financial
                                             K           Guarantee
                 Mortgage                                Insurance
                 Insurance




                                                                               21
The number of participants in securitization has steadily increased, first
Sofoles, then banks by 2006 started to have an important participation

 The number of intermediaries                                                    Scotiabank

 participating in securitizations is
 also higher every year.                                      Bancomer           Bancomer

 In 2007, 3 banks have already                                  HSBC               HSBC
 securitized their mortgages, and
 we expect this number to keep              Banorte            Banorte            Banorte
                                              CyC                CyC                CyC
 growing.                                  Patrimonio         Patrimonio         Patrimonio
                                              ING                ING                ING
                                           FINCASA            FINCASA            FINCASA

                    GMAC (Patrimonio)   GMAC Patrimonio)   GMAC Patrimonio)   GMAC Patrimonio)
                      GMAC (CyC)          GMAC (CyC)         GMAC (CyC)         GMAC (CyC)

Metrofinanciera      Metrofinanciera    Metrofinanciera    Metrofinanciera    Metrofinanciera
GMAC (HIPNAL)        GMAC (HIPNAL)      GMAC (HIPNAL)      GMAC (HIPNAL)      GMAC (HIPNAL)

    GMAC                 GMAC               GMAC               GMAC               GMAC
   Su Casita            Su Casita          Su Casita          Su Casita          Su Casita

     2004                 2005               2006               2007               2008

                                                                                          22
 Securitizing mortgages has proven to be a successful mechanism to
 originate mortgages recurrently and at competitive rates

 Through 2007, we have witnessed important progress on the issuance of mortgage backed
  securities:
     On 2007, $2,352 million USD were securitized, representing an increase of 107% of
      the amount observed in 2006.
     And also on 2006, banks started working towards securitizing their mortgage portfolios,
      managing to account for 33% of the issuance of BORHIs in 2007.

                                                                                          Amount                Securitized
                                                                                                      Issuances
                                                                                       (Million USD)            Mortgages
                                                                           Non-bank institutions (SOFOLES)
              Total MBS issuance per year                             2007                      1,263        12     49,326
                                                                      2006                        950        13     30,926
                  Amount                     Securitized              2005                        260         5      8,359
     Years                      Issuances
               (million USD)                 Mortgages                2004                        250         3      9,562
                                                                      2003                         54         1      1,979
      2003                54             1        1,979             Subtotal                    2,777        34    100,152
      2004               250             3        9,562
      2005               260             5        8,359                                 Banks
                                                                      2007                       777           3     10,025
      2006             1,136            14       34,857               2006                       186           1      3,931
      2007             2,352            17       59,351               2005                       -         -            -
      Total            4,052            40      114,108               2004                       -         -            -
                                                                      2003                       -         -            -
                                                                    Subtotal                     963           4     13,956

                                                           Other Types of Issuances (Cross Border, BORHIs Repackaging, HiTo
                                                                                        Bonds)
                                                                      2007                       312          3      7,927
                                                                                                  -         -           -
                                                                    Subtotal                     312          3      7,927

                                                                     Total                      4,052          41   114,108



                                                                                                                              23
 On 2007, the average size of issuances also increased, making BORHIs a
 more appropriate instrument for institutional investors

   Issuances increased their individual volume, averaging around $131 million
 USD in 2007.

                     Average per                                   Average per issuance (million USD)

                      issuance
            Year                   % of increase   140
                       (million
                        USD)
                                                   120
              2003           54       141%
              2004           83        57%
              2005           52       151%         100
              2006           81        61%
              2007          131         0%             80


Average 2003-2006            74       177%
                                                       60


                                                       40


                                                       20


                                                   -
                                                            2003       2004          2005          2006   2007




                                                                                                             24
BORHIS offer very attractive yields to Foreign Investors:
YTM: BORHIS* vs. “Mexican Government Real Rate Benchmark”, “TIP’s + EMBI+”, TIP’s
                               (Dic-2003 – YTD)
 7.0%



 6.0%



 5.0%                                                                                                                                                                                                  4.50%

 4.0%                                                                                                                                                                                                     3.59%

 3.0%
                                                                                                                                                                                                          3.35%
 2.0%
                                                                                                                                                                                                       2.23%
 1.0%
                                   Jun-04




                                                                                         Jun-05




                                                                                                                                               Jun-06




                                                                                                                                                                                                     Jun-07
        Dic-03

                 Feb-04

                          Abr-04



                                            Ago-04

                                                     Oct-04

                                                              Dic-04

                                                                       Feb-05

                                                                                Abr-05



                                                                                                  Ago-05

                                                                                                           Oct-05

                                                                                                                    Dic-05

                                                                                                                             Feb-06

                                                                                                                                      Abr-06



                                                                                                                                                        Ago-06

                                                                                                                                                                 Oct-06

                                                                                                                                                                          Dic-06

                                                                                                                                                                                   Feb-07

                                                                                                                                                                                            Abr-07



                                                                                                                                                                                                              Ago-07
                     BORHIS*                                              UDIBONOS**                                           TIP's 20 yr + EMBI+
                     TIP's 20 yr                                          TIP's 10 yr + EMBI+                                  TIP's 10 yr




             By the end of 2007, Borhis mantained the same YTM in average.
*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).

                                                                                                                                                                                                                   25
Today there are 11 Market Makers participating in SHF’s program to
foster the liquidity of BORHIS in the secondary market.

  SHF acts through these institutions, and quotes prices both ways on every
security at very tight margins throughout the day.




                                                                              26
There is a lot of room for efficiencies being translated into more affordable
mortgages.

           FIXED RATE PESO POOL OF MORTGAGES SECURITIZATION

          25%
                                                              Average rate on
       First Loss                           +   14.00%       mortgage portfolio
   Mortgage Insurance
                                            -   1.25%          Servicing Fee

                                            -                        MI
                               87%              0.85%
                          Senior security                   P&C and Life insurance
                                            -   1.10%         + structuring and
       Mortgage
                                                             securitization costs
       Portfolio
                          10% Mezzanine     -    0.17%           Mezzanine
                              Piece

                          3% Subordinated
                                            -   8.34%
                                                            Funding rate for MBS
                              Security
                                            =   2.29%          Excess Spread



                                                                                   27
The BORHIs market is still on its early stages, so it is important to
correct and adjust some aspects in order to improve its efficiency


   Some aspects must be strengthened to continue providing this market with
   dynamism, sustained growth and security for the investor.
       Homologation and standardization of the periodic information reported by
        servicers and trustees, aiming to add transparency to the analysis and
        monitoring of the structures.
       Value the bonds in terms of prices instead of rates to provide simplicity to
        their valuation.
       Establish a standardized public calculator to price the structures.
       Make structures homogeneous.
       Adjust the rules that define the characteristics of BORHIs to line up the
        incentives and distribution of risks between participants.
       Adjust the operation rules of market makers.


                                                                                28
In order to satisfy the demand of institutional investors and widen
the range of BORHIs available, different types of issuances have
been promoted:


   We have worked to generate a great variety of types of BORHIs with the objective
   of attracting different investors through diverse tranches.
   Likewise, SHF participated in the creation of Hipotecaria Total (HiTo), a company
   that allows the securitization of mortgages at real time, in a similar way as the
   Danish model.
   We are supporting Covered Bonds as another securitization option.
   These schemes offer different options for both, investors and issuers.




                                                                                 29
Contents

I.     Introduction


II.    Demographic Dynamics, Housing Demand and Financing Needs


III.   The Mexican Mortgage Market including FOVI/ SHF role


IV.    Securitization Model for Mexico and Current Strategy


V.     Pension Funds & BORHIS|


VI.    Low-Income Mortgage Alternatives


VII.   Challenges ahead in Housing Finance




                                                                  30
Mexico Pension Funds System



                                      Individual
                                    Pension Fund
                                      Account*                        PRIVATE
                                                                     EMPOYER
    AFORES
Pension administrator
                                                                      PUBLIC
                                                                     EMPOYER
           $

               SIEFORES
                                           $$$

       Pension Investment Fund
                                                         * Mexican pension funds have
  Invests Pension Funds                                 an investment portfolio of
                                                         around $79,000 Million USD
  Regulated by CONSAR who defines investment policies
                                                         (8.21% of the GDP in Mexico)
                                                                               31
SIEFORES & BORHIS: matching necessities

   One of the aim objectives of the SIEFORES is to invest the income of pension
funds in order to obtain the best returns with financial instruments that comply with
the regulator investment policies.
   Taking into account that pension funds look for a long term basis investment, there
is a need for long term financial instruments to match the necessities of the pension
saving accounts.
   The regulator of SIEFORES establishes strict conditions for the type of financial
instruments that could comply with the pension funds portfolio.
 BORHIS are an attractive investment option for SIEFORES in terms of:
         Risk Level
         Term
         Quality of the bond & bond underlying
         Timing of the issuances

                                                                                     32
SIEFORES & BORHIS: matching necessities

  The 70% of BORHIS investors is distributed within SIEFORES, Banks and stock
exchange specialists.
 The participation of BORHIS within the SIEFORES portfolio represents the 1.7%

               BORHIS HOLDERS                              Although             the
                                                         participation of BORHIS in
                   7%   2%                               the SIEFORES portfolio is
                                       37%
         20%
                                                         important, the % of such
                                                         bonds is limited.
            19%                15%
                                                            SHF is working together
    SIEFORES                 BANKS
                                                         with CONSAR to increase
    SHF                      Stock Exchange specilists   the % of participation of
    INSURANCE CO             Others                      MBS.




                                                                                  33
Contents

I.     Introduction


II.    Demographic Dynamics, Housing Demand and Financing Needs


III.   The Mexican Mortgage Market including FOVI/ SHF role


IV.    Securitization Model for Mexico and Current Strategy


V.     Pension Funds & BORHIS|


VI.    Low-Income Mortgage Alternatives


VII.   Challenges ahead in Housing Finance




                                                                  34
In order to prevent the low-income population from living in irregularity or illegality and
in stark conditions, it is necessary to provide it of housing.
                                                                                                                    Historical Mortgage Loans1

                              The interest rates decrease observed
                              during the last years has benefited
                              the mortgage loan market.
                                               Housing Demand by Income Level2


                                                                Housing Demand
  Potential Market (Houses)




                                                                Target Segment
                                                                         Attended Segment
                                                                                                          This has traduced into an increase of the
                                                                                                          housing supply and demand, as well as of
                                                                                                          mortgage loans. However, the main
                                                                                                          beneficiaries have been the formal workers.
                                                                                                          The housing supply for informal and/or low-
                                                                                                          income workers is still too limited.
                                                         Familiar Income in Mimimum Wages



                              New mechanisms should be created in order to supply housing to this segment of the market,
                              which represents more than 80% of the population. To attend the low-income and informal
                              workers, this market should be provided of attractive characteristics to constructors.
                               1 Source:   Softec, “Mexican Housing Overview 2006”
                               2   Source; Softec, “Mexican Housing Overview 2006” and figures from SHF

                                                                                                                                                 35
In spite of the development of the mortgage market and of the diminish in the interest rates,
the increase in the prices of houses has not allowed the low-income sector to be benefited.
  The government has established the need to generate 6 million mortgage loans during the period
   2006-2012, which traduces in 339,762 acres of urban ground with the required infrastructure and
   equipment*.

  In Mexico, many urban development programs have been carried out. However, the following is
   necessary to benefit the low-income population:

             The State and Municipalities should influence the type of housing that the constructors
              build.

             Alternative financing sources for the development of infrastructure should be explored.

             The urbanization process – equipment of land, construction of housing, and individual sales
              - should be enhanced in order to reduce the cost of land and to give access to housing to
              the low-income population.
   To give access to quality houses to the low-income population, the participation of the States
   and Municipalities is needed, as well as the creation of attractive conditions for the
   investment of constructors in social housing.
   *Source: Softec, “Mexican Housing Overview 2006”

                                                                                                        36
Participation of Constructors in the Housing Market

  One of the problems regarding the lack of attention to the low-income market consists in the fact
  that the constructors found this segment less profitable and more risky. The typical cost structure
  for constructors according to the market segment is showed below. *



The costs of investing in
social and economical
                                          % with respect to sales


housing are duplicated with
respect to the residential
housing       costs.   The
contrary happens with the
profit margin.


                  Concept / Housing Type                            Social   Economical   Middle   Residential   Plus
                 Profit Margin (before taxes)                        10%        10%        15%        18%        20%
                 Unforeseen Expenses                                 5%         5%         5%          5%        5%
                 Financial Costs                                     8%         8%         6%          4%        4%
                 Sales and Merchandising                             5%         5%         5%          5%        5%
                Administrative Costs                                 4%         4%         4%          4%        4%
                Project and Supervision                              4%         4%         4%          4%        4%
                Processes and Licenses                               2%         2%         2%          2%        2%
                Construction                                         40%        40%        39%        38%        33%
                 Infrastructure                                      14%        12%        8%          5%        3%
                 Ground                                              8%         10%        12%        15%        20%



   *Source: Softec, “Mexican Housing Overview 2006”                                                                     37
SHF has, among its objectives, the promotion of accessibility to housing. As a result,
it has taken an active role in the development of ground that can be used for the
development of social housing.

SHF, in coordination with BANOBRAS and several Financial Institutions, has defined and
implemented different projects known as “Macrodesarrollos”. These have the objective of
creating management and financing methodologies for the States and Municipalities in order
to generate low cost housing in a sustainable environment.

These “Macrodesarrollos” consider the creation of:

       A self-sustainable city, adjacent and complementary to the already existent one, that
        offer jobs and services to the population –health, education, diversion, transport, etc.-
        (avoiding to create dorm cities or isolate urban developments).
       Spaces that allow housing meant to all social classes (providing urbanized and well
        located grounds).
       Public spaces that allow to develop a communitarian life – centers and sport areas,
        among others-.
       Spaces for the environmental protection and enhancement.
       Open spaces for primary activities – agriculture and farming-.
       Legal and political certainty that will allow to offer housing at lower costs.


                                                                                            38
      To improve the access to mortgage loans, all participants and markets developed
      for the Residential Mortgage Backed Securities should be directed to the steps
      currently unattended and to the low-income population.
                 All the advances achieved in the market and the products developed by SHF to promote the
                 Residential Mortgage Backed Securities, should be used to attend the steps in the chain that are
                 actually unattractive.

Acquisition of                  Primary                      Sale of Urban   Construction   Sale of    Mainte-
   ground                                     Equipment                                     Houses
                             Infrastructure                     Ground        of houses                nance



                            Current Cover
                                                              Current Participation of SHF
Housing Demand




                      6 a- 25 Mimimum Wages
                                                              Securitization
                                                                  • Investors
                            Future Cover                          • Mortgage insurers
                       0 - 5 Mimimum Wages                        • Financial guarantors
                                                                  • Structuring agent




                                              Future Participation of SHF
                                                                                                          39
The advantages of this model can be observed in three
different directions:

States and Municipalities
        Obtain a financing source to promote an ordered urban development.
        Line up the constructors’ interests with the urban development planning.
        Stimulate the development of social housing projects.
        Is an important instrument to confront the illegal development of cities.
        Besides, the States and Municipalities might attend the low-income population,
         subsiding the land for social housing through the urbanization of ground.

Low-income population
        Urban developments with adequate equipment, services, employment sources, and
         infrastructure linked to public spaces.
        Access to houses with infrastructure, at regular prices and with the possibility of
         obtaining credits and subsidies.

Urban Developers
        The State or Municipality will guarantee the legal security of the project, as well as
         its basic infrastructure and urbanization.
        Permissions and licenses are previously granted. Urban design and
         individualization scheme with loan products of SHF, INFONAVIT, and other entities.
        Obtain financing for business lines that were previously unfeasible.

                                                                                           40
Contents

I.     Introduction


II.    Demographic Dynamics, Housing Demand and Financing Needs


III.   The Mexican Mortgage Market including FOVI/ SHF role


IV.    Securitization Model for Mexico and Current Strategy


V.     Pension Funds & BORHIS|


VI.    Low-Income Mortgage Alternatives


VII.   Challenges ahead in Housing Finance




                                                                  41
Challenges ahead in Housing Finance

  To attend the population that has not been attended, SHF has the
  following actions to achieve:

       Strengthening and consolidating the Residential Mortgage Backed
        Securities Market.
       Promoting the entrance of new specialized financial institutions in the
        unattended sectors: microfinance institutions, non-bank banks, and
        savings and credit institutions.
       Developing of adequate products for these markets: savings and
        leasing.
       In coordination with other housing institutions, adjust the Program of
        Subsidies to extend the access to mortgage loans.
       Development of financial markets to attend the financing of
        infrastructure, equipment, and maintenance of the production of
        sustainable housing.
       With respect to the previous point, SHF will take advantage of its
        experience in the development of securitization markets to securitize the
        franchises and flows of these Macrodesarollos.


                                                                                    42
               Contacts:

Paloma Silva        ‘msilva@shf.gob.mx
Edith Castro      ‘ecastro@shf.gob.mx

                mayo de 2012

				
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