Peru: Housing Finance Development
The request for technical assistance was initially made by Fondo MIVIVIENDA (FMV) through the World Bank in February 2005. FMV sought support from FIRST to develop new products and strategies so that it could better tailor its approach to the needs of Peruvian lenders, stimulate increased lending to low-income families, and usher in a new stage in the development of the housing finance market in Peru. This assistance helped FMV to move beyond the initial capital funding that the Peruvian government provided when the institution was founded. This assistance contributed to FMV’s sustainability, and the sustainable provision of mortgage finance in Peru.
The Peruvian government created FMV in 1999 to promote the development of the private sector housing finance system in Peru and, in particular, to provide access to mortgages for moderate- and low-income households that have not traditionally been served by the formal private sector. FMV achieved these goals by: 1) funding lenders in the private sector, and 2) promoting targeted savings by households for home purchase. Since its creation and up to the launch of the FIRST project, FMV had provided a total of US$404 million in long-term funding for the primary mortgage markets.
FMV’s analysis of the market and its work with lenders led it to believe that there existed an opportunity to capitalize on its important advances in the Peruvian market. Larger lenders wished to continue to benefit from FMV’s mortgage credit insurance and good payer premium, but did not need liquidity from FMV. Smaller lenders needed liquidity and the guarantee, and could benefit from tapping capital markets via securitization. FMV believed that it could better leverage its capital and further extend its support to the development of the private sector by doing more with guarantees at both the loan level and at the level of securitization by smaller originators. FMV would also seek to use these mechanisms in support of increased local currency lending, thereby reducing the foreign exchange risk to borrowers.
FIRST consultants’ main role was to help FMV design new products based on the above objectives, improve and standardize mortgage underwriting in order to facilitate securitization for a product starved capital market, assist in developing mortgage credit scoring systems and provide training. Not much progress was made with the credit scoring model due to lack of sufficient data input from private sector mortgage lenders. Good results were obtained from the other components.
First Product: Credit Risk Insurance (CRC) coupled with the Premium for Good Payment (PBP):
This alternative provides a credit guarantee to lenders of up to one-third of the balance of the loan coupled with the PBP benefit of up to 15 percent of the loan for borrowers who pay on time. This product appeals particularly to larger, stronger institutions that have access to low-cost funding.
The principal characteristics of this product are:
- Mortgages are financed with funds distinct from FMV.
- Mortgages maintain PBP to cover penalty interest up to 15 percent of total balance, and CRC up to 33 percent of the balance. A good borrower pays the market rate of interest but once they default the penalty rate of 15 percent premium kicks in- this risk is covered by FMV in return for the premium of 2.25 percent specified below.
- Financial institutions pay a commission to FMV for each product: 2.25 percent for PBP and 0.25 percent for CRC, each calculated on the basis of the credit balance at the beginning of each month.
- FMV creates distinct reserve funds for each product, separately administered, each with its own investment policies to preserve the capacity to pay.
- If the borrower makes payments on a timely basis, FMV pays the proportional part of the good payer premium. If the borrower defaults, FMV honors the credit insurance claim.
Second Product: Standardization and Financing of Mortgage Portfolios
Through financial institutions, FMV facilitates the origination of FMV mortgages (i.e. with PBP and credit insurance), whose contract terms and financial features follows FMV standards, with the goal of serving as collateral for mortgage backed securities (MBS) to be sold in local capital markets. This mechanism is made available to lenders with more limited capital resources and to microfinance lenders. These institutions collect a commission for the origination and administration of FMV credits.
It is worth mentioning that these intermediaries are generally characterized by: 1) a limited ability to access low cost funding; 2) offering FMV mortgages as their principal mortgage product; and 3) face problems in standardizing mortgage portfolios, all of which results in their minimal participation in capital markets.
The principal characteristics of this product are:
- Requirement to originate standardised FMV mortgages, with PBP and CRC.
- FMV will monitor underwriting and servicing, contributing to the quality of the portfolio.
- The standardised cost of FMV credits will include: funding rate, servicing fee, origination fee, fee for CRC, fee for PBP, and a fee for FMV supervision.
- Issuance of MBS backed by standardised collateral.
- FMV credits are generated with financing from institutional investors via capital markets.
The dollarization of the mortgage market remains a source of risk for moderate and low-income households. FMV plans to provide incentives to originate mortgages in Soles adjusted for inflation (also referred to as Soles VAC). To this end, FMV is working with other governmental organizations to develop norms for Soles VAC lending, including t the BCRP, the Ministry of Economy and Finance – Ministerio de Econom¡a y Finanzas (MEF), and SBS.
Lessons learned
- The project in Peru is a good example of technical assistance to develop access to finance for lower income households by bringing support from the Government (FMV)to private sector providers.
- The project also demonstrates how FIRST can provide technical assistance towards poverty alleviation even in middle-income countries where large pockets of poverty may still exist.
- Development of some techniques to improve credit assessment, such as the mortgage credit scoring model, are at risk from inadequate data input from mortgage lenders. In future, better mechanisms for enforcing collection of such data should be considered – perhaps through the sector regulator.