1 Colombia: Rule of Law, Creditor Rights and the Crisis of Housing Finance Mauricio Cárdenas Alejandro Badel

2 Outline 1.Macroeconomic relevance 2.Overview of the mortgage sector 3.Perils of indexation 4.Other causes (and consequences) of the crisis 5.Creditor rights 6.Econometric analysis 7.Fiscal costs

3 Macro relevance

4 Cyclical Components of Mortgage Disbursements, Construction GDP and Total GDP

5 Granger Causality between GDP and mortgage origination LagsSampleStatistic FProbability GDP Cycle Causes Construction GDP Cycle 21977:1 2002:2 3,5830,032 Construction GDP Cycle Causes GDP Cycle 0,9760,381 GDP Cycle Causes Disbursements of Mortgage Loans Cycle 21977: :2 0,8590,427 Disbursements of Mortgage Loans Cycle Causes GDP Cycle 2,4740,090 GDP Construction Cycle Causes Disbursements of Mortgage Loans Cycle 21977: :2 3,7010,028 Disbursements of Mortgage Loans Cycle Causes GDP Construction Cycle 3,6540,030 GDP Cycle Causes GDP Construction Cycle 11990: :2 0,0500,824 GDP Construction Cycle Causes GDP Cycle 4,4180,041 GDP Cycle Causes Disbursements of Mortgage Loans Cycle 21990: :2 0,0080,992 Disbursements of Mortgage Loans Cycle Causes GDP Cycle 3,2220,049 GDP Construction Cycle Causes Disbursements of Mortgage Loans Cycle 21990: :2 3,4050,042 Disbursements of Mortgage Loans Cycle Causes GDP Construction Cycle 16,9790,000 Causality

6 Granger Causality between Cyclical Components ( ) Construction GDP Disbursements of Mortgage Loans Construction GDP Total GDP Disbursements of Mortgage Loans (all but the 90s) (Only the 90s)

7 Correlation with the Disbursements of Mortgage Loans Cycle Correlation between Total GDP and Construction GDP Cycles *"Rolling Correlation" using a 10 year window of data Rolling Correlation

8 OVERVIEW OF THE MORTGAGE SECTOR

9 Mortgage Banks in % 12% 59% 35% 53% 43% 57% AV VILLASBANCAFECOLMENACOLPATRIACONAVIDAVIVIENDAGRANAH US$ M Mortgage Loans% Total assets

10 Disbursements of Mortgage Loans Billions of 1998 pesos

11 Outstanding mortgage loans (1998 pesos, % of GPD, and % of total credit)

12 Non-performing mortgage loans (as % of total mortgage loans) Dic-94 Jun-95 Dic-95 Jun-96 Dic-96 Jun-97 Dic-97 Jun-98 Dic-98 Jun-99 Dic-99 Jun-00 Dic-00 Jun-01 Dic-01 Jun-02 % Debt restructuring

13 Mortgage Banks Composition of Assets

14 Mortgage Banks Composition of Liabilities

15 Mortgage Banks Composition of Deposits

16 Summary 1)Disbursements currently at their historically lowest point. 2)21.5% of the mortgage portfolio was delinquent by February )Interest rate and maturity mismatch.

17 The perils of indexation

18 Yearly Growth Rates: UPAC and CPI 8% 13% 18% 23% 28% 33% 38% Oct-73Oct-74Oct-75Oct-76Oct-77Oct-78Oct-79Oct-80Oct-81Oct-82Oct-83Oct-84Oct-85Oct-86Oct-87Oct-88Oct-89Oct-90Oct-91Oct-92 Oct-93Oct-94Oct-95Oct-96Oct-97Oct-98Oct-99 UPAC CPI

19 Real UPAC (UPAC / CPI) Sep-72Sep-73Sep-74Sep-75Sep-76Sep-77Sep-78Sep-79 Sep-80Sep-81Sep-82Sep-83Sep-84Sep-85Sep-86Sep-87Sep-88Sep-89Sep-90Sep-91Sep-92 Sep-93Sep-94 Sep-95 Sep-96Sep-97Sep-98Sep-99 Sep = 100 Real UPAC New UPAC for “restructured” loans

20 UPAC, UVR and CPI: Monthly percent changes -1% 0% 1% 2% 3% 4% 5% 6% 7% Oct-72Oct-73Oct-74Oct-75Oct-76Oct-77Oct-78Oct-79Oct-80Oct-81 Oct-82Oct-83Oct-84Oct-85Oct-86Oct-87Oct-88Oct-89Oct-90Oct-91Oct-92Oct-93Oct-94 Oct-95Oct-96 Oct-97 Oct-98Oct-99Oct-00Oct-01 % UPAC - UVR% CPI

21 OTHER CAUSES (AND CONSEQUENCES)

22 Housing Price Index (HPI) Deflated by CPI

23 17,8% 16,6% 18,0% 5% 10% 15% 20% Mar-90Mar-91Mar-92Mar-93 Mar-94Mar-95Mar-96Mar-97Mar-98Mar-99 Mar-00 Mar-01Mar-02 Unemployment (keeping the December 1997 construction employment constant) Unemployment (keeping the September 95) Observed unemployment rate Unemployment rate (observed and simulated) *Unemployment rate in 13 metropolitan areas (Jan 00 – Jun-02) applying growth to seven areas (Mar 90 – Dec 99) employees employees

24 The role of creditor protection

25 Foreclosure Proceedings LAWSUIT Due Notified to the defendant (20 days) Presentation of the defendants pleadings (10 days) Request of embargo and sequestration of assets Non acceptance (30 days) Correction (5 days) Non corrections Rejection (Delay 2 months) ESTIMATE OF ASSETS PRICE Liquidation of credits and expenses by the plaintiff (10 days and 3 of notice for the defendant) SENTENCE: -Orders to continue the proceedings of the lawsuit. -Orders to estimate the price and the sale by auction of the assets under embargo -Orders to liquidate the credit. Order of sale by auction (No dateline) (Embargo, sequestration and estimated) PUBLICATION OF ADS (5 days before the auction) Sale by auction (1 day) (BID, AWARD, NO DATELINES FOR BIDDERS) LEGALIZATION AND DELIVER OF THE ASSET SOLD BY AUCTION Approved by the Judge Liquidation of credit and expenses by the defendant if is not done by the plaintiff (10 days and 3 of notice for the plaintiff) Definitive Liquidation by the court (It has no dateline) No presentation of the defendants pleadings Acceptance (30 days) Order of embargo (30 d) and sequestration (90d)

26 Average Time of Foreclosure CEJ (1998) CSJ (1998) Normative time ICAV (2002) # of calendar days

27 Foreclosure proceedings Dic-01Mar-02Jun-02 Number Millions of Pesos NumberBalance

28 Probability of property being foreclosed 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Months in delinquency Cumulative probability Bank 1 Bank 3 Bank 2

29 ECONOMETRIC ANALYSIS

30 Data Aggregation Level: Individual Loans. Number of banks: 2. Scope: Approx. 30% of housing credit. Sample: January June Size: 240,350 loans, with an outstanding balance of 2.3 billions pesos (June 2002) and an original balance of 8.8 billions pesos.

31 Mortgage Loans by Origination Year

32 VIS Loans by Original LTV Range

33 Non VIS Loans by Original LTV Range

34 Mortgage Loans by Rate Range

35 Origination Rate for VIS and Non VIS Mortgage loans* *Origination Rate = Value of Originated Loans in t / Value of Outstanding loans in t-1.

36 Determinants of the Origination Rate

37 Origination Rate: Observed, Fitted and Forecasted with and without Legal Instability

38 Determinants of Delinquency Levels

39 Months in Delinquency: Observed, Fitted y Forecasted without Legal Instability

40 Determinants of the Default Probability

41 Marginal Effect Over the Default Probability

42 Default Probability as a Function of Original LTV

43 THE COSTS OF THE CRISIS

44 Financial Sector Bailout Cost