Report No. PID1728 Project Name Mexico-FOVI Restructuring (@) Region Latin American and the Caribbean Sector Infrastructure Project ID MXPA7610 Borrower Government of Mexico Implementing Agency FOVI Ejercito Nacional 180 Col. Anzures 11590 Mexico, D.F. Tel. 525-255-3644 Fax; 525-203-5814 Date this PID prepared November 19, 1998 Appraisal April 15, 1998 Projected Board Date January 30, 1998 Main Sector Issues and Government Strategy 1. Mexico's social interest housing finance system dates from the 1970s, when inward looking economic strategies and strong directed credit policies led to the creation of specific institutions established for different market segments and income groups. Today, the social interest housing sector is characterised by pronounced segmentation and domination by government institutions running separate and uncoordinated direct mortgage lending programs at the federal and state levels. The housing finance system reaches only 45t of the population. Large and unpredictable subsidies dominate the present system. The primary market is weak, due to poor origination standards, lax collection procedures and a multiplicity of mortgage products, all making standardization and secondary market development extremely difficult. Moreover, there has been a virtual cessation of voluntary lending by private lenders following the 1994-95 crisis. 2. Since it initiated the liberalization and privatization of the financial sector in the mid-1990s, the Government has been implementing housing reforms slowly. The 1994-95 crisis obligated the Government to focus more on housing finance, and in particular the integration of social interest housing finance with the capital markets. In this context, the Government now plans to implement a series of reforms, one element of which is a strengthening of FOVI, to (i) improve the primary market; (ii) support secondary market development; (iii) develop transparent subsidy programs; and (iv) improve internal management and (v) develop access to longer term sources of finance. Project Objectives 3. The project seeks to support the sound development of the social interest housing sector through greater private sector participation in its financing. 4. The proposed Project consists of three components; institutional strengthening, to improve origination standards, strengthen mortgage insurance, develop information systems, monitor and evaluate the implementation of subsidy policies, develop a FOVI bond issuance program and strengthen the management structure by adding credit risk, funding, policy planning and control, and administrative functions. loan in support of FOVI's borrowing plan, which in turn will be used to finance social interest home mortgages. provision of subsidies for participants in the FOVI social interest housing programs. Under the project the subsidies will be removed from the financing and provided separately to eligible borrowers. The World Bank is not providing funding for this component. Costs and Financing 5. The estimated total project costs are US$7,310 million, of which 7t would be financed by the World Bank, 60t by the Government of Mexico and 33t by FOVI. Implementation 6. The implementing agency will be FOVI, a Banco de Mexico trust fund that has implemented two previous World Bank loans. To ensure the likelihood of success, under the project, FOVI will receive technical assistance for its institutional development program. Benefits and Environmental Impact 7. The principal beneficiaries of this project are low income household borrowers, from the expanded availability of mortgage loans and through reductions in the cost of mortgage loans. FOVI expects to fund about 490,000 mortgages during the project period, about half of which would be for the lowest income borrowers. Lenders will also benefit, from the reduction of credit risk, interest rate risk and liquidity risk associated with providing housing loans. 8. The project will not have any adverse impact on the environment and would be classified as C. Program Objective Categories 9. This project consists of activities in the economic management category. Project Risks 10. The main projects risks are associated with (i) maintenance of a stable marcoeconomic environment; (ii) market acceptance of new FOVI loans; (iii) possible distortions from INOFNAVIT, another government housing agency, and (iv) FOVI's own ability to absorb this assistance and undertake a major restructuring program. Contact Point: The InfoShop The World Bank 1818 H Street, N.W. - 2 - Washington, D.C. 20433 Telephone No. (202)458 5454 Fax No. (202) 522 1500 Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending November 27, 1998. Social interest housing is generally defined as housing for households earning 3-8 times the monthly minimum wage that is now equivalent to about US$ 100 per month. Person in this target group constitute the urban, working poor. -3 -