Housing Finance in UruguayThe Role of the Public Sector

Presentation prepared for the IADB organized seminar

“Housing Finance : Latin American Issues and European Views”

Based on Gandelman and Gandelman (2003) “El Mercado Hipotecario Uruguayo”

Néstor Gandelman

Universidad ORT Uruguay

Background

The Uruguayan Constitution states: “Artículo 45.- Todo habitante de la República tiene derecho a

gozar de vivienda decorosa. La ley propenderá a asegurar la vivienda higiénica y económica, facilitando su adquisición y estimulando la inversión de capitales privados para ese fin”

Article 45. Every Uruguayan has the right to a decent house. The law will try to secure access to hygienic and accessible housing, facilitating its acquisition and stimulating capital investments with this goal.

Background

Uruguayan housing finance market has always been dominated by the Banco Hipotecario del Uruguay (BHU).

The BHU is a publicly owned financial institution whose goal is to foster people house ownership.

It was created by law in 1912.

Background

Its three member government body is designated by the Parliament, often following political quotas.

Over much of his history the BHU besides being a financial institution was directly involved in the building of houses.

Over the nineties several private institutions launched their our housing credit lines.

Background

Currently the BHU is facing a severe restructure following what was stated in the letter of agreement with the IMF in August 2002. – “The mortgage bank (BHU) will be transformed

immediately into a non-banking housing institution bringing forward the restructuring plan, which will be supported by accelerated disbursements form the World Bank. Its deposits will be transferred to the othe public bank, the Banco República (BROU)”

The Housing Mortgage Market

Data for the whole market is available only since July 1998.

At the end of 1998 Uruguay enter in a recession that will end up in 2003 with a cumulative GDP decline of 20%.

Naturally, housing credit decreased (measured in real terms, US$ or as a fraction of GDP). This phenomenon is part of tighter credit restrictions in the whole economy.

The Housing Mortgage Market

In millions Variation (as % of (as % of

of U$S (anualizated) M1) GDP)

Dic-98 2.119 158% 9,8%

Jun-99 2.106 -1,2% 172%

Dic-99 1.992 -10,5% 154% 9,7%

Jun-00 1.887 -10,3% 172%

Dic-00 1.610 -27,2% 141% 8,2%

Jun-01 1.361 -28,5% 139%

Dic-01 1.230 -18,4% 128% 7,0%

Jun-02 905 -45,8% 142%

Source:Superintendencia de Instituciones Financieras, INE and BCU.

Institutional Structure

The BHU concentrates more than 80% of total loans.

At least since 1998, the private sector market share increases continuously.

Institutional Structure

BHU Other Public Private Other Financial

Bank Banks Institutions

Dic-98 91,0% 0,3% 8,5% 0,2%

Jun-99 90,4% 0,2% 9,1% 0,3%

Dic-99 89,0% 0,2% 10,5% 0,3%

Jun-00 88,6% 0,2% 10,9% 0,3%

Dic-00 86,1% 0,2% 13,3% 0,4%

Jun-01 83,9% 0,2% 15,5% 0,5%

Dic-01 81,4% 0,2% 17,8% 0,5%

Jun-02 80,4% 0,3% 18,8% 0,6%

BHU Credit evolution Although we do not have a longer series for the whole market,

we do have this information for the main operator (BHU).

0

50

100

150

200

250

80 81 82 83 84 85 87 88 89 90 91 92 94 95 96 97 98 99 01

0%

2%

4%

6%

8%

10%

12%

14%

16%

constant pesos % of GDP

BHU loan’s characteristics

For our purposes the two main types of loans are: for construction and for acquisition.

Conditions vary:– For “ahorristas habilitados” (holding deposits at the

BHU) and others.– In terms of currency, interest rate, maximum loan,

location and type of house. In general:

– Long term loans (20 years).– Interest rates evolved from fixed to variable.

BHU loan’s characteristics

What is an “ahorrista habilitado”?– He is someone who has a (type of) savings account

on the BHU that allows him to accumulate “points” over time according to his saving balance.

– In March 2002, an “ahorrista habilitado” was able to take a maximum loan of US$ 40.000, 48.000, 58.000 or 64.000 for a house of 1, 2, 3 or 4 bedrooms respectively. The interest rate was Libor+4 over 20 years.

BHU loan’s characteristics Most of the BHU loans are nominated in pesos.

Share of BHU local currency credit

88%

92%

96%

100%

104%

80

81

83

84

86

87

89

91

92

94

95

97

99 0

BHU Sources of Funding

Debt

Government transfers

Private deposits (mostly in US$)

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Assets/Liabilites 155% 187% 193% 187% 187% 180% 175% 166% 132% 110%

Net Profi / Assets 24,8% 2,4% 2,0% 0,9% -1,0% 1,0% 0,1% -6,7% -14,2%

Gan.f in./Cred.interm.f in.vig. 54% 41% 36% 32% 26% 17% 13% 14% 24%

Per.Fin./Oblig. interm. f in. 29% 28% 27% 24% 19% 12% 10% 10% 18%

Razón de Solvencia 128% 127% 126% 126% 122% 119% 117% 117% 112% 110%

ROA 0,0% 0,7% 0,5% 1,4% 0,7% 0,3% 0,9% 1,0% 0,2% 0,1%

Gan.f in./Cred.interm.f in.vig. 48% 40% 39% 41% 35% 28% 23% 49% 38% 105%

Per.Fin./Oblig. interm. f in. 28% 24% 21% 21% 17% 14% 11% 37% 20% 59%

Razón de Solvencia 106% 107% 107% 107% 108% 107% 107% 108% 108% 106%

ROA 0,8% 1,0% 0,1% 0,5% 0,6% 0,7% 0,2% 1,0% 0,8% -0,3%

Gan.f in./Cred.interm.f in.vig. 46% 52% 79% 48% 41% 35% 33% 44% 30% 74%

Per.Fin./Oblig. interm. f in. 33% 36% 57% 34% 28% 23% 23% 33% 22% 60%

BROU

Private Banks

BHU

BHU Financial Difficulties

Solvency and Performance Ratios

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Assets(f.c) /Liabilities (f.c.). 1% 4% 4% 9% 7% 7% 7% 9% 11% 7%

Assets(l.c) /Liabilities (l.c.). 495% 508% 569% 506% 538% 552% 597% 615% 504% 591%

Current Assets / Current Liabilities0% 1% 0% 0% 0% 2% 1% 1% 1% 0%

Assets(f.c) /Liabilities (f.c.). 132% 130% 124% 125% 123% 115% 113% 111% 105% 102%

Assets(l.c) /Liabilities (l.c.). 116% 119% 134% 128% 119% 127% 130% 139% 142% 160%

Current Assets / Current Liabilities43% 46% 50% 46% 47% 50% 40% 41% 33% 28%

Assets(f.c) /Liabilities (f.c.). 103% 104% 105% 105% 105% 105% 105% 106% 106% 103%

Assets(l.c) /Liabilities (l.c.). 131% 124% 128% 125% 126% 123% 122% 130% 135% 146%

Current Assets / Current Liabilities69% 70% 67% 71% 72% 67% 67% 68% 71% 67%

BROU

Private Banks

BHU

BHU Financial Difficulties

Currency and Term Mismatches

A Special Unit of Measure

Actually, the peso denominated loans are measured in a special unit created by law in 1968.

The “Unidad Reajustable” (U.R. “adjustable unit”) varies up to 4 times per year following the evolution of the Mean Salary Index.

A Special Unit of Measure

024

68

1012

141618

68 70 71 73 75 76 78 79 81 82 84 86 87 89 90 92 94 95 97 98 00 01

0102030405060708090100

in US$ in real terms (Price Index)

U.R. relative evolution

More Financial Difficulties

BROU (f.c.) Private Banks (f.c.) BHU (l.c.)

Jun-92 14,5% 1,3% 12,7%

Jun-93 13,8% 1,2% 16,8%

Jun-94 12,4% 1,3% 17,3%

Jun-95 10,7% 1,2% 9,4%

Jun-96 8,0% 1,4% 9,9%

Jun-97 6,7% 1,0% 8,8%

Jun-98 4,3% 1,3% 9,1%

Jun-99 5,6% 1,9% 11,8%

Jun-00 23,3% 2,2% 22,6%

Jun-01 19,4% 2,6% 38,3%

Jun-02 25,4% 8,6%

Note: f.c.=foreign currency, l.c.=local currency

Loans Quality: Share of Non-Performing over Total Loans

BHU Double Role

House Construction– Public System– Private Entrepreneurs– Cooperatives– Others– Individual Construction

House Acquisition

BHU Double Role

Public Private Coope- Others Individual Sub Acquisition Total

System entrepreneurs ratives Construction Total

Dictatorship 1901 1190 2051 0 911 6053 4442 10495

1973-1984 18,1% 11,3% 19,5% 0,0% 8,7% 57,7% 42,3% 100,0%

Sanguinetti Adm. (I) 4003 374 4 0 810 5191 1812 7004

1985-1989 57,2% 5,3% 0,1% 0,0% 11,6% 74,1% 25,9% 100,0%

Lacalle Adm. 571 305 0 0 1045 1921 1391 3312

1990-1994 17,3% 9,2% 0,0% 0,0% 31,6% 58,0% 42,0% 100,0%

Sanguinetti Adm. (II) 696 512 17 134 636 1996 1799 3795

1995-1999 18,3% 13,5% 0,5% 3,5% 16,8% 52,6% 47,4% 100,0%

Batlle Adm. 927 412 0 280 569 2187 616 2803

2000-2001 33,1% 14,7% 0,0% 10,0% 20,3% 78,0% 22,0% 100,0%

BHU’s Housing Loans(annual average of houses)

The Private Sector

Why there is not a stronger private sector? Although there may be several

explanations, I would like to stress one: – DIFFERENT LEGAL TREATMENT

In case of default, to take over the collateral the BHU does not need to go through the courts while the private sector has.

The Private Sector

For a private institution, in the event of default,

How long does it take to take over the collateral?

Mean 601

Total Maximum 2191

Minimum 141

(Based on 2001 auctions in Montevideo)

The Private Sector

And how much does it cost?

Loan=Mortgage Costs Costos Total Costs Total Costs

(payed by the seller) (payed by the buyer) (%)

5.000 2.364 305 2.668 53,4%

10.000 3.974 610 4.584 45,8%

20.000 6.492 1.220 7.712 38,6%

50.000 13.157 3.049 16.206 32,4%

100.000 21.488 6.098 27.586 27,6%

200.000 42.416 12.195 54.611 27,3%

(Based on theoretical exercises)

(in US$)

Probability of Access to Mortgage Credit

We computed a qualitative response model and estimate the probabilities of access to a mortgage credit.

The probability increases with:– the amount of household members– household income– stability of the family nucleus – age of the household head– and the household head working for the public sector

Probability of Access to Mortgage Credit

Prob(=1/IPublic=1) - Prob(=1/IPublic=0)

Why the probability is higher for Public Employees? There is a law called “Ley de Empleados Públicos”

that basically implies that public servants can not be dismissed and have therefore they flow of income secured.

The BHU is able through the public system to eliminate Principal-Agent type of problems.

Final words

The publicly owned BHU is the main operator in the Uruguayan Mortgage Market

It suffers from large term and currency mismatches

Very high proportion of non-performing loans.

Final words

Behind BHU disastrous condition are probably the political pressures for specific actions and the designation of its authorities following political and not technical criteria.

The Private Sector market share increase in the last part of the nineties.

Its small size is at least partially associated to legal discrimination in favor of the BHU.