The regulatory experience of Colombia after the mortgage crisis Mauricio Cárdenas Director,...
-
Upload
meghan-hensley -
Category
Documents
-
view
214 -
download
0
Transcript of The regulatory experience of Colombia after the mortgage crisis Mauricio Cárdenas Director,...
The regulatory experience of Colombia after the mortgage
crisis
Mauricio Cárdenas
Director, Fundación para la Educación Superior y el Desarrollo (Fedesarrollo),
Colombia
Housing Finance Systems in Emerging Economies
Session 6 Regulations and EducationWorld Bank Group Conference, March 15-17,
2006
Outline
1. The Colombian housing finance crisis2. Immediate response: Law 546 of
19993. Increase in minimum capital
requirements: Laws 510/1999 and 795/2003
4. Upgrading risk management standards
5. Foreclosures6. Results and challenges
Outline
1. The Colombian housing finance crisis
2. Immediate response: Law 546 of 19993. Increase in minimum capital
requirements: Laws 510/1999 and 795/2003
4. Upgrading risk management standards5. Foreclosures6. Results and challenges
UPAC (indexation unit) and CPICumulative growth rates
Source: Banco de la República and DANE.
8%
13%
18%
23%
28%
33%
38%
Oct
-73
Oct
-74
Oct
-75
Oct
-76
Oct
-77
Oct
-78
Oct
-79
Oct
-80
Oct
-81
Oct
-82
Oct
-83
Oct
-84
Oct
-85
Oct
-86
Oct
-87
Oct
-88
Oct
-89
Oct
-90
Oct
-91
Oct
-92
Oct
-93
Oct
-94
Oct
-95
Oct
-96
Oct
-97
Oct
-98
Oct
-99
UPAC
IPC
UPAC (indexation unit) / Housing prices
- Annual change -
-10%
-5%
0%
5%
10%
15%
20%
25%
En
e-95
Mar
-95
May
-95
Jul-9
5S
ep-
95N
ov-9
5E
ne-
96M
ar-9
6M
ay-9
6Ju
l-96
Se
p-96
Nov
-96
En
e-97
Mar
-97
May
-97
Jul-9
7S
ep-
97N
ov-9
7E
ne-
98M
ar-9
8M
ay-9
8Ju
l-98
Se
p-98
Nov
-98
En
e-99
Mar
-99
May
-99
Jul-9
9S
ep-
99N
ov-9
9
Average (Weighted) IPV for Bogotá. Source: DNP and Banco de la República
Source: ICAV. Calculations made by Fedesarrollo.
0
5
10
15
20
25
30
Mar
-85
Dec-
85Se
p-86
Jun-
87M
ar-8
8De
c-88
Sep-
89Ju
n-90
Mar
-91
Dec-
91Se
p-92
Jun-
93M
ar-9
4De
c-94
Sep-
95Ju
n-96
Mar
-97
Dec-
97Se
p-98
Jun-
99M
ar-0
0De
c-00
Sep-
01Ju
n-02
Mar
-03
Dec-
03Se
p-04
Jun-
05
%Real interest rate on mortgages
MORTGAGE CRISIS
Source: Superintendencia Bancaria.
NPLs / Total outstanding mortgages
Including securitizations
0,0%
5,0%
10,0%
15,0%
20,0%
25,0%
30,0%
Dic
-95
Dic
-96
Dic
-97
Dic
-98
Dic
-99
Dic
-00
Dic
-01
Dic
-02
Dic
-03
Dic
-04
Dic
-05
Foreclosures as % of total bank assets
0,0%
0,5%
1,0%
1,5%
2,0%
2,5%
3,0%19
95
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Source: Superfinanciera, November annual data
Total capitalizations made by Fogafín (1998-2004)
Millons of pesos and %
Source: Fogafin
TOTAL % of total
Total non- mortgage public financial sector
3,509,631 36.7
Total mortgage 2,547,785 26.6
- Public financial sector 1,740,881 18.2
- Private financial sector
806,904 8.4
Total non-mortgage private financial sector
956,747 10.0
TOTAL 9,561,948 100
Outline
1. The Colombian housing finance crisis2. Immediate response: Law 546 of 19993. Increase in minimum capital
requirements: Laws 510/1999 and 795/2003
4. Upgrading risk management standards• Credit risk• Market risk
5. Foreclosures6. Results and challenges
Law 546 of 1999
• Change in the system of indexation
• Transformation of S&Ls into banks• Cap on real interest rates on
mortgages • Securitization• New arrangements to deal with
mismatches
Conversion of S&Ls into banks
Share in Bank-CAV system
assets
Share in Bank-CAV system mortgage
loans
Share of mortgage
loans in total loans
Year of Conversion
Share in Bank system assets
Share in Bank system
mortgage loans
Share of mortgage
loans in total loans
Private institutions Private institutions
Davivienda 6.2 16.3 86.5 1999Davivienda + Bansuperior*
7.3 17.0 27.5
Red Multibanca 4.1 8.8 68.2 1998Red Multibanca
Colpatria3.6 9.2 23.1
Ahorramás 2.0 4.8 71.5
Las Villas-AV Villas 3.2 9.0 84.8 2002 AV Villas 3.2 12.2 45.8
Colmena 3.8 12.2 92.0 2000 BCSC 4.0 11.3 28.9
Conavi 5.2 14.3 82.2 2001 Bancolombia 20.0 20.7 10.9
BBVA+Granahorrar* 11.1 21.5 21.6
Public institutions Public institutions
Granahorrar 3.3 10.2 92.5 2000
BCH 5.0 10.2 80.2
* At that time the merger had been announced
(Closed)
December-99 January-06
(Acquired by Las Villas)
(Acquired by BBVA)
Real interest rates on mortgage loans (points over UVR)
8
9
10
11
12
13
14
01/0
5/20
02
01/0
8/20
02
01/1
1/20
02
01/0
2/20
03
01/0
5/20
03
01/0
8/20
03
01/1
1/20
03
01/0
2/20
04
01/0
5/20
04
01/0
8/20
04
01/1
1/20
04
01/0
2/20
05
01/0
5/20
05
01/0
8/20
05
Source: Superintendencia Bancaria
VIS
Non VIS
Maximum Non VIS (13.9p)
Maximum VIS (11p)
Securitization
Government guarantee RMBS (Social Housing Law)
Housing LaHousing Law w
(Law 546 1999)(Law 546 1999)
Additional tax exemptions: stamp tax, tax on financial transactions
Minimum capital requirements (US $20million)
Corporate Governance (Disclosure rules)
Mortgage loans assignment rules
RMBS issuances: Particular rules
Creation of a New SPV
Capital Adequacy
Securitization Securitization companiescompanies-- RulesRules
Tax Exemption for RMBS (Income tax)Tax issuesTax issues
Securitization companies: exclusive corporate purposeMain aspectsIssues addressed
Government guarantee RMBS (Social Housing Law)
Housing LaHousing Law w
(Law 546 1999)(Law 546 1999)
Additional tax exemptions: stamp tax, tax on financial transactions
Minimum capital requirements (US $20million)
Corporate Governance (Disclosure rules)
Mortgage loans assignment rules
RMBS issuances: Particular rules
Creation of a New SPV
Capital Adequacy
Securitization Securitization companiescompanies-- RulesRules
Tax Exemption for RMBS (Income tax)Tax issuesTax issues
Securitization companies: exclusive corporate purposeMain aspectsIssues addressed
• True Sale of mortgage loans. • Mortgage loans legally separated and
isolated from the equity of the issuer and the originators.
• No legal possibility for issuers or mortgage originators´ creditors to claim rights on the mortgage loans even in case of bankruptcy or liquidation.
• Complete bankruptcy remote instrument.• Independent accounting information.• No intermediaries between the underlying
assets and the bondholders• Bondholders´ rights and obligations are
determined exclusively by the rules of issuance.
Universalidad: SPV created by Law 546
Credit Enhancements (Law 546 of 1999)
• Government guarantee on MBS– Revolving facility– Complete principal and interest guarantee– Restricted to MBS backed exclusively by social
housing loans– Premium paid by the SPV
Outline
1. The Colombian housing finance crisis2. Immediate response: Law 546 of
19993. Increase in minimum capital
requirements: Laws 510/1999 and 795/2003
4. Upgrading risk management standards
5. Foreclosures6. Results and challenges
Minimum Capital Requirements
0
10,000
20,000
30,000
40,000
50,000
60,000
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
$ M
illi
on
s
Bancos
CAV
CF
CFC
3 years for adjustment
Outline
1. The Colombian housing finance crisis2. Immediate response: Law 546 of 19993. Increase in minimum capital
requirements: Laws 510/1999 and 795/2003
4. Upgrading risk management standards
• Credit risk• Market risk
5. Foreclosures6. Results and challenges
Upgrading risk management standards• Prior to the crisis, financial institutions had
weaknesses managing and administrating risk.• Under the new framework financial institutions
should do their own risk evaluation.• Self-determination of provisions and equity. • Implementation of a new system (SARC) to evaluate
and administer credit risk. • Determination of the value of the exposure to
market risk (interest rate, exchange rate, inflation, etc.). This value should be considered for complying with the solvency ratio (i.e. value at risk consumes capital)
Credit risk, SARC, and individual provisions
• Credit risk emerges from the possibility of losses from delinquent loans.
• The regulation established that financial institutions should develop internal models (SARC) to classify, evaluate, and cope with credit risk.
• In the future, provisions should be based on these models, which should also be used for credit analysis
• This is in a transitional phase. The models are ready for commercial loans. In the case of housing loans the system is still in its development stage.
Provisions
According to the regulation, provisions should be made according to:
1. Internal models approved by the Superfinanciera.
2. Benchmark model developed by Superfinanciera (available only for commercial loans, pending for the rest).
3. Alternatively, provisions can be made according to the regulations set by Superfinanciera.
Current Individual Provisions
• Loan classification by destination: commercial, consumption, housing and microcredit
• Categories: A, B, C, D y E , depending on the quality or the delinquency time.– Class A normal risk– Class B tolerable risk but above normal– Class C considerable risk– Class D significant risk– Class E nonperformance risk
Housing Portfolio Provisioning Regulation
(C.E. 052 of 2004 y C.E. 006 of 2006)category # of delinquency
monthsProvision
percentage over
guaranteed portion
Provision percentage over non-guaranteed
portion
A 1% 1%
B Between 2 and 5 3.2% 100%
C Between 5 and 12 10% 100%
D Between 12 and 18 20% 100%
E More than 18 30% (60% for two additional years) (100%
for any additional year
100%
Provisions
• The regulators required in 1999 credit institutions to keep a general provision of 1% of their gross portfolio.
• In 2004 regulators exempted entities with adequate SARC models from constituting the general provision.
Source: Superfinanciera.
BECH: Provisions/NPL
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Dec
-94
Jun-
95
Dec
-95
Jun-
96
Dec
-96
Jun-
97
Dec
-97
Jun-
98
Dec
-98
Jun-
99
Dec
-99
Jun-
00
Dec
-00
Jun-
01
Dec
-01
Jun-
02
Dec
-02
Jun-
03
Dec
-03
Jun-
04
Dec
-04
Jun-
05
Dec
-05
More progress ..
• Precise definition of housing loans• Update of the guarantee value. For new
loans internal valuation methodologies approved by the SF. If the entity does not its own internal methodology, the value of the guarantee will be adjusted using the housing price index (IPV) calculated by the DNP.
• The Superfinanciera and the Central Bank (BR) are working on bringing up to date the indicators that value guarantees.
Market Risk
• Solvency ratio (technical equity / assets weighted by risk) equal to 9%
• Financial institutions should measure the value of the portfolio exposed to market risks.
• They can use their own methodologies or the benchmark model developed by the Superfinanciera
• Greater risk exposure requires more capital.
Source: Superfinanciera.
Solvency ratio (includes market risk)
8
9
10
11
12
13
14
15
16
17
Jan-
00Ju
l-00
Jan-
01Ju
l-01
Jan-
02Ju
l-02
Jan-
03Ju
l-03
Jan-
04Ju
l-04
Jan-
05Ju
l-05
Jan-
06
%
Commercial Banks
Bech
Minimum required
Outline
1. The Colombian housing finance crisis2. Immediate response: Law 546 of
19993. Increase in minimum capital
requirements: Laws 510/1999 and 795/2003
4. Upgrading risk management standards
5. Foreclosures6. Results and challenges
Before After
Due notification to the defendant, through the Notifications Office (323
days)
Notification through certificate mail send by the Bank (116 days)
The sentence could be appeal if the defendant was
represented by a public attorney (273 days)
The appeal of the sentence was eliminated (63 days)
Assets appraisal carry out by experts appointed by the
court (111 days)
Bank presents assets appraisal (commercial value or value set by
the local tax authorities) (46 days) Foreclosure carry out solely
at court rooms (143 days)Foreclosure carry out by
commissioner (most used, auction in Chamber of Commerce and courts (second most used) (113
days)
Foreclosure Proceedings: Law 794 of 2003
Lawsuit (8 days)
Notice to the borrower
Preparation of documents
Sequestration(160 days)
Asset appraisal
(111 days)
Debt liquidation(Including legal
fees) (46 days)
Judgment(273 days)
Property assignment(58 days)
Property delivery
(138 days)
Judicial Payment Order
(46 days)
Garnishment (41 days)
Judicial foreclosure sale
(143 days)
Total time period of judicial foreclosure
(1.187 Working days)
JUDICIAL FORECLOSURE PROCESS JUDICIAL FORECLOSURE PROCESS BEFORE BEFORE C.P.CC.P.C. REFORM. REFORM
Rejection
Admitted
Not admitted
amended
Not Amended
Lawsuit response
No lawsuit response
Borrower's Pleadings - Information to the bank
Settlement meeting
Presentation of evidence
Closing arguments
323 days
Lawsuit(8 days)
Notice to the borrower
Preparation of documents
Sequestration(160 days)
Asset Appraisal (46 days)
Debt liquidation (including legal
fees)(46 days)
Judgment(63 days)
Property assignment(58 days)
Property delivery
(138 days)
Judicial Payment Order
(46 days)
Garnishment (41 days)
Judicial foreclosure sale
(113 days)
Total time period of judicial
foreclosure(675 working days)
JUDICIAL FORECLOSURE PROCESS AFTER JUDICIAL FORECLOSURE PROCESS AFTER C.P.CC.P.C. . REFORMREFORM
..
Rejection
Admitted
Not admitted
Amended
Not Amended
Lawsuit response
No lawsuit response
Borrower's Pleadings - Information to the bank
Presentation of evidence
Closing arguments
323 days
Outline
1. The Colombian housing finance crisis2. Immediate response: Law 546 of
19993. Increase in minimum capital
requirements: Laws 510/1999 and 795/2003
4. Upgrading risk management standards
5. Foreclosures6. Results and challenges
ROE (%)
-30
-20
-10
0
10
20
30
40
Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05
Commercial Banks
CAV-BECH
Source: Calculations Fedesarrollo
*Commercial Banks do not include public banks
*
0
200
400
600
800
1000
1200
1400
1600
1800
2000D
ic-8
4
Dic
-85
Dic
-86
Dic
-87
Dic
-88
Dic
-89
Dic
-90
Dic
-91
Dic
-92
Dic
-93
Dic
-94
Dic
-95
Dic
-96
Dic
-97
Dic
-98
Dic
-99
Dic
-00
Dic
-01
Dic
-02
Dic
-03
Dic
-04
Dic
-05
Mile
s d
e m
illo
ne
s d
e p
eso
s d
e 2
00
5
Source: ICAV, Banco de la República. Calculations made by Fedesarrollo.
Origination of mortgages
20
120
220
320
420
520
620
720
820
920
Mar-
85
Dic-
85
Sep-
86
Jun-
87
Mar-
88
Dic-
88
Sep-
89
Jun-
90
Mar-
91
Dic-
91
Sep-
92
Jun-
93
Mar-
94
Dic-
94
Sep-
95
Jun-
96
Mar-
97
Dic-
97
Sep-
98
Jun-
99
Mar-
00
Dic-
00
Sep-
01
Jun-
02
Mar-
03
Dic-
03
Sep-
04
Jun-
05
Source: ICAV, DANE. Calculations made by Fedesarrollo.
Disbursements per squared meter licensed
Mortgage Portfolio as % of GDP in Colombia1976 – 2004 (FALTARÍA ACTUALIZAR)
Source: Clavijo, Janna, Múñoz (2005) . Revista Desarrollo y Sociedad, First Semester.
0%
2%
4%
6%
8%
10%
12%
dic
-76
dic
-77
dic
-78
dic
-79
dic
-80
dic
-81
dic
-82
dic
-83
dic
-84
dic
-85
dic
-86
dic
-87
dic
-88
dic
-89
dic
-90
dic
-91
dic
-92
dic
-93
dic
-94
dic
-95
dic
-96
dic
-97
dic
-98
dic
-99
dic
-00
dic
-01
dic
-02
dic
-03
dic
-04
ma
r-0
5
Take-off Stagnation Boom Untwist
3,7
Historic Average
2,9
With securitization
With out securitization
Relative size of the mortgage industry
Source: Superintendencia Bancaria.
0%
5%
10%
15%
20%
25%
30%
35%
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Housing loan porfolio/total loan portfolio
Mortgage loan porfolio/GDP
Challenges ahead
• Prudential regulations has moved forward, but more progress is needed in other areas.
• Legal stability is key.• Mixed results in the mortgage industry:
– Greater competition, lower interest rates– Large number of financial mergers– Active development of a peso
denominated fixed-rate primary mortgage market
– Slow recovery of the mortgage origination – More progress is needed in the social
housing sector
Securitization - Regulatory Framework1. Law 546 of 1999 (Housing Law-TIPS Tax Exemption)
2. Law 633 of 2000 ( Tax Reform – Stamp tax - Other Exemptions (GMF)
3. Decree 1719 of 2001 – Ministry of Finance (Securitization companies exclusive corporate purpose)
4. Decree 2782 of 2001(Fogafin Guarantee)- Decree 576 of 2004 (guarantee term extension)
5. Decree 304 of 2004 - Ministry of Finance (Resecuritization-TIPS Tax Exemption)
6. Resolution 117 of 2001 – Superintendency of Securities (Minimum capital requirements for securitization companies)
7. Resolution 775 of 2001 and 223 of 2002– Superintendency of Securities (MBS Rules- Universalidad-Applicable rules for Titularizadora)
8. Resolution 275 of 2001 – Superintendency of Securities (Corporate Governance)
9. Resolution 690 of August 12, 2004 (Capital Adequacy)
Provisions: recent changes
• Circular 20, 2005– Establishes the Benchmark Model for Commercial
Loan Portfolio, and the provision tables determined by the delinquency time are changed for statistical provisions based on countercyclical criteria.
– Banks are allowed to present Internal Models for their Commercial Loan Portfolio.
• Circular 4, 2006 – Establishes a change in the provision tables by
delinquency time – Establishes individual provisions for class A and B
loan portfolio
• The Superfinanciera is planning on having Benchmark Models for consumption and housing loans during the year 2006.
Provisions• Circular 88 de 2000 Determines the minimum
qualitative requirements for the management of market risk in trading
• Circular 42 del 2001 Establishes Benchmark Models and allows the use of Internal Models for the calculation of VaR, given the previous authorization of the Superbancaria.
• Circular 31 del 2004 Updates the Benchmark Models. Establece un consumo de capital regulatorio mínimo por riesgo de mercado para las Entidades Vigiladas.