CHILE MORTGAGE MARKET World Bank

					CHILE’S MORTGAGE MARKET




          Gustavo Rosselot
   Head of Treasury & International


              March 2002
OUTLINE
 • General Considerations
 • The Chilean Capital Markets
    – Key Reforms
    – Structure and Participants
    – Assets under Management
 • The Mortgage Market
 • A Chilean Mortgage Securitization Example
 • Conclusions
GENERAL INFORMATION
Chile is situated in the southwest of South America; it
extends to the South Pole in the Antartic Continent and its
westernmost territory is Eastern Island in Polynesia.

Area: 469.816 sq. miles
Population: 13.689.000 (1994)
Urbanization: 92 % (population access to basic services)
GDP per Capita: US$4.122
Number of cars: 1.323.808 (1999)
Number of Phone Lines: 3.108.799 (1999)
Number of Cell Phones: 2.260.687 (1999)
Life Expectancy: 75,96 years (2000)
Literacy Rate: 95,5% (2000)
Currency: Chilean Peso (aprox. 1 dollar = 670 Pesos)
CHILE’S MONETIZATION
FINANCIAL SYSTEM DEPTH (M3/GDP)


  Degree of Monetization of the Economy (1999)
   Germany                                        78%
   USA                                            62%
   Chile                                          52%
   Brazil                                         32%
   Mexico                                         29%
  Source: World Bank, World Development Report 2001, “Financial
  Depth and Efficiency” P. 284
 ECONOMIC STATISTICS

                                 1997     1998     1999     2000     2001
Nominal GDP (current CLP $bn)    33.113   34.614   35.704   40.099   41.662
Nominal GDP (current US$bn)       75,3     73,1     67,7     70,0     63,5
Real GDP Growth (%)               7,4      3,9      -1,1     5,4      3,0
Unemployment (INE, avg,%)         6,1      6,2      9,7      9,2      9,2
Consumer Price Inflation (%)      6,0      4,7      2,3      4,5      2,6
Exports (FOB, US$mm)             16.663   14.830   15.616   18.158   17.440
Imports (FOB, US$mm)             18.220   17.346   13.951   16.731   15.877
International Reserves (US$bn)    17,8     16,0     14,7     14,7     14,2
Total External Debt (US$bn)       26,7    31,69    34,17    36,85    37,79
   ECONOMIC SECTORS
                       SECTOR CONTRIBUTION TO GDP 2000
                                         % by value (1986 pesos)
                                                  Public
                                  Personal
                                               Administration    Agriculture
                                  services
                                     6%             2%          and Forestry

                              House
                                                                    7%
                                                                               Fishing
                             ownership
                                  4%                                            2%

                           Financial                                           Mining
                           services
                                                                               11%
                             15%
                       Transport and                                     Manufacturing
                       comunications                                           16%
                              10%
                                                                      Electricity, gas
                                                                        and water
                                             Retail                         3%
                                          restaurants           Construction
Source: Business Monitor International     and hotels
                                                                    5%
                                             19%
IMPORTANT REFORMS
 KEY CAPITAL MARKET REFORM (MAY 1981)

 • Establishment of Private Pensions Funds
    – Creates a funded system, with individual
      accounts      and     defined     contribution
      (7% salary), as an option to the state owned
      pay as you go system
    – Main source of Savings in the Economy
    – Today largest group of Institutional Investors

 • Development of Life Insurance Companies
    – Second largest institutional investors in
      terms of volume
IMPORTANT REFORMS
CAPITAL MARKET REFORMS (2001 - 2002)
• Elimination of the Capital Gains Tax on the sale of
  highly traded stocks
• New Regulations regarding
   – Commercial Paper market
   – Private placements
   – Qualified Institutional investors
• Different alternatives for voluntary pension savings
• Allowance of multiple Pension Funds
• Liberalization of investment regulations for insurance
  and mutual funds
• Creation of a New Market for emerging companies
   – New alternative for investment funds.
CAPITAL MARKET PARTICIPANTS
STATE REGULATORS                         INSTITUTIONAL INVESTORS
  Superintendency of Securities and        Pension Funds
  Insurance
                                           Insurance Companies
  Superintendency of Pension Funds
  Administrators                           Mutual Funds
  Superintendency of       Banks and       Banks and Financial Institutions
  Financial Institutions                   Investment Funds
  Central Bank                           PRIVATE INVESTORS
RATING AGENCIES
                                         BROKER AND TRADING INSTITUTIONS
AUDITORS                                   Stock Brokers
                                           Banks and Financial Institutions
ISSUERS
  Joint-stock Companies                  TRADING FACILITIES
  Banks (its subsidiaries) and Finance     Santiago Stock Exchanges
  Institutions                             Electronic Stock Exchange
  State (Central Bank and Treasury)        Over the Counter Market
  State Enterprises
  Securitization Companies               TRADING SUPPORT FACILITIES
  Infrastructure Concessions               Depositary Trust Company
CAPITAL MARKET
 EXCHANGE TRADED DEBT INSTRUMENTS
• CDs
• Central Bank Instruments:
   – Issued in Chilean Pesos
   – Issued in Chilean Pesos Indexed to UF and USD
   – With terms of 30 days to 20 years (coupons and bullets)
• Republic of Chile:
   – Sovereign Bonds in US$
• Senior Bonds:
    – Issued by banks, state enterprises        and   private
       companies
• Commercial Paper
• Mortgage Bonds (issued by banks)
• Subordinated Bonds (issued by banks)
• Mortgage Backed Securities
• Infrastructure Bonds
CAPITAL MARKET
      FINANCIAL ASSETS UNDER MANAGEMENT
                       (US$ Million)

• Pension Funds (AFP)                US$ 34.628 (Jan-02)
• Banks and Financial Institutions       11.097 (Nov-01)
• Life Insurance Companies               10.103 (Sep-01)
• Mutual Funds                            5.402 (Jun-01)
• Investment Funds                         616   (Sep-01)
• General Insurance Companies              224   (Sep-01)


         Memo Item: GDP =       US$ 70.020 million
CAPITAL MARKET
  INVESTMENTS BY PENSION FUNDS

                                        TOTAL                          INFLOWS                      SINCE

                              end 2000                 monthly US$               annual flow as %
                                            % GDP                    annually
                              US$billion                 million                    of assets
Large mature systems
Brazil                           73,9           13,2       NA         3.300           5,0est        1960s
Chile                            35,9           51,3       200        2.400            6,7          1981
Intermediate growth systems
Argentina                        20,4           7,2        140        1.680            8,2          1994
Peru                             3,0            5,5        40          480             16,0         1993
Rapid growth systems
Colombia                         5,2            6,4       120,0       1.440            27,7         1994
Mexico                           16,7           2,9       330,0       4.000            24,0         1997
Hungary                          1,4            3,1       30,0         375             26,8         1998
Poland                           2,4            2,0       235,0       2.800           116,7         1999
Total                           158,9           8,9      1.095,0     16.485            10,4

Source: JP Morgan
CAPITAL MARKET
     PRIVATE PENSION FUNDS ASSET ALLOCATION
                                                                    FOREIGN                FINANCIAL
                                       SOVEREIGN DEBT                                                           LOCAL EQUITIES
                                                                   SECURITIES               ENTITIES
                                         limit      actual       limit   actual          limit    actual          limit      actual      As of
Large mature systems
Brazil                                   100%       40-45%        0%          (1)         (2)        3,2%         50%        35,0%      Dec-00
Chile                                    45%        35,7%        16%        10,9%         50%        35,1%        30%        11,6%      Dec-00
Intermediate growth systems
Argentina                                50%        48,8%        10%         4,5%         28%        15,6%        49%        12,2%      Jul-01
Peru                                     30%        10,7%        7,5%        4,2%         65%        39,1%        35%        24,8%      Nov-01
Rapid growth systems
Colombia                                 50%        47,2%        10%         7,0%         80%        21,4%        30%        4,4%       Aug-01
Mexico                                   100%       89,0%       10% (3)      0,1%         10%        2,0%         0%         0,0%       Jul-01
Hungary                                  100%       74,9%       20% (4)      1,9%         (4)        1,5%         50%        12,1%      Dec-00
Poland                                   100%       68,3%       5% (5)       0,0%         20%        3,1%         50%        26,2%      Jun-01

Source: JP Morgan
1.   No Formal limit but funds are tax free if no foreign holding; a small amount of FC debt may be held indirectly via FIEX funds for which
     10% limit exits.
2.   80% limit for all fixed income instruments.
3.   Only UMS and investment-grade Mexican corporate debt permitted in foreign limit.
4.   Limit for foreign securities rises to 30% on 1/1/2002; no formal limit for financial sector, but portfolio class #2, which includes most
     domestic securities (equities, bonds and bank deposits) has a 60% limit.
5.   Polish Brady debt does not count against this limit
CAPITAL MARKET
TYPES OF MORTGAGE LOANS
1) Loans funded with Mortgage Bonds (Letras de Crédito, LCHR)
     Bank loans with terms ranging from 5 to 22 years
     Domestic currency indexed to Unidad de Fomento (Inflation indexed unit)
     Financing real estate mainly for housing and commercial activities
2) Loans funded with own resources (Mutuos Hipotecarios Endosables, MHE)
     Maturity up to 30 years
     Domestic currency indexed to Unidad de Fomento
     Financing real estate mainly for housing and commercial activities
     Endorsable and tradable

           MORTGAGE LOANS        1998       1999        2000     2001(*)
         1) LCHR (US$mm)         10.191     9.789       9.652     9.197
         2) MHE (US$mm)           1.676     2.114       2.105     1.676
         Total (US$mm)           11.867     11.903      11.757   10.873
         Total (CLP$ bn)          5.622     6.281       6.733     7.135
    Total amounts outstanding in the banking system of the end of each year
    (*) November
CAPITAL MARKET
CHILE’S YIELD CURVE BASED ON CENTRAL BANK INSTRUMENTS
                            6,09%


                            5,88%


            Nominal Rates   5,67%


                            5,46%


                            5,25%
                                        1       30   60         90      194        360   Days

                                                     Duration
                            5,50%

                            5,00%
            Real Rates




                            4,50%

                            4,00%

                            3,50%

                            3,00%
                                    1       2    3   4      5       6   8     13    20   Years
                                                         Duration
CAPITAL MARKET
MORTGAGE BONDS YIELDS vs CHILEAN TREASURIES
    20 Years Central Bank Bonds (PRC)

    20 Years Mortgage Bonds
MORTGAGE BACKED SECURITIES
  THE CHILEAN MARKET FOR LOCALLY ISSUED MBS


                   AMOUNT        NUMBER OF RATING AND SPREADS OVER
     YEAR
                   US$ mm          ISSUES         C.BANK (b.p)
      1997            37,2              3                  A (80 - 97)
      1998              0               0
      1999            31,0              2                 AA (132 - 149)
      2000            60,3              4                 AA (144 - 172)
      2001           285,93             8         AA (140 - 165) AAA (77 - 115)
All Issues denominated in Chilean Pesos (indexed to UF)
MORTGAGE BACKED SECURITIES
CASE STUDY: BANCO SANTIAGO MBS of 2001
 THE ASSETS (Loans)
 Number of Loans                  1.120
 Principal Outstanding (Jan 01)   US$ 51.148.104
 Average Amount per Loan          US$ 45.679
 Average interest rate            UF + 9,023%
 Loan to value (LTV)              71,7%
 Originator                       Banco Santiago

 THE BONDS
 Total Amount                     US$ 60.100.000
 Coupon Rates (2A, 2B y 2C)       UF + 5,50%; 5,75% and 5,75%
 Maturity                         10 and 20 years
 Rating                           Series 2A and 2B : AA
                                  Serie 2C : C
MORTGAGE BACKED SECURITIES
SECURITIZED BONDS:

2A (Duration 4.68 years)    Rate PRC10 +130 b.p.
                            Yield = UF + 6,70 %
2B (Duration 10.09 years)   Rate   PRC20 + 134 b.p.
                            Yield = UF + 6,98 %
2C (Duration 20 years)      Rate   PRC20 + 200 b.p.
                            Yield = UF + 7,64 %
MORTGAGE BACKED SECURITIES
PARTICIPANTS
                                MORTGAGE LOAN DEBTORS
                                MORTGAGE LOAN DEBTORS

                        Dividend Payment                       Contracts

                                        BANCO SANTIAGO
                                             ORIGINATOR
                                             PAYEE AGENT
                                      LOAN ADMINISTRATOR

                        Collects Payments
                                                           Pays for Assets
                          Sells Assets
                                                             Pays Fees
                         Administration                                           Issues
                                                                                    MBS
             Contract
                                          SPV
                                           SPV                                   Through
 RATING
  RATING                   “SECURITIZADORA LA CONSTRUCCIÓN”                     Stockbroker
AGENCIES
 AGENCIES
                            “SECURITIZADORA LA CONSTRUCCIÓN”
            Risk Rating         SEPARATELY CAPITALIZED
                                 SEPARATELY CAPITALIZED
                                                           Certification                      Pays Cupons
                               Information
                                                        Initial Payment MBS
                                                                             Collects
                                       BANCO DE CHILE
                                        BANCO DE CHILE                        Initial
                                                                             Payment    INVESTORS
                                                                                         INVESTORS
                                              TRUSTEE
MORTGAGE BACKED SECURITIES
 THE BONDS
                                                          Par
                                                         Par
                                                          Value
                                                         Value
                                                          US$ 3.250.000
                                                         US$ 3.250.000
                                                          Coupon 5,75%
                                                         Coupon 5,75%
                                                          20 years
                                                         20 years
Par                                                       Balloon (principal
                                                         Balloon (principal
 Par                                                      and
Value                                                    and
 Value                                                    interest).
US$ 27.450.000                                           interest).
 US$ 27.450.000                                           (5,4% of total)
                                                         (5,4% of total)
Coupon 5,50%
 Coupon 5,50%
10 years          COLLATERAL BOND (JUNIOR)
 10 years
Prepayable.
 Prepayable.
(45,6% of
 (45,6% of
total series)
 total series)
                                                       Par
                                                        Par
                    2A SERIES           2B SERIES Value Value
                              SENIOR BOND for Life US$ 29.400.000
                  Issued for Pension    Issued          US$ 29.400.000
                        Funds                          Coupon 5,75%
                                     Insurance CompaniesCoupon 5,75%
                                                       20 years
                                                        20 years
                                                       Prepayable.
                                                        Prepayable.
                                                       (48,9% of
                                                        (48,9% of
                                                       total series)
                                                        total series)
MAIN CONCLUSIONS
• Chile’s capital markets are competitive and
  sophisticated allowing issuers access to local
  institutional investors with different risk profiles.

• MBS allow banks to remove long term assets
  from their balance sheets.

• Securitization allows optimization of         capital
  allocation, improving bank profitability.

				
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