L.A. Times Special Section: Mexico's Housing Debacle

SUNDAY, NOVEMBER 26, 2017

MEXICO’S HOUSING DEBACLE

The goal was to provide affordable homes to the masses. But bad planning, flimsy construction, crumbling infrastructure, risky mortgages and official neglect set off a slow-motion disaster.

Don Bartletti Los Angeles Times

SCHOOLCHILDREN WALK along a trash-strewn, rutted alley between row houses in the blighted Cañadas del Florido neighborhood in Tijuana.

A FAILED VISION

S

By Richard Marosi

reporting from veracruz, mexico

ixteen years ago, Mexico embarked on a monumental campaign to elevate living standards for its working-class masses.

The government teamed with private developers to launch the largest residential construction boom in Latin American history. Global investors — the World Bank, big foundations, Wall Street firms — poured billions of dollars into the effort.

Vast housing tracts sprang up across cow pastures, farms and old haciendas. From 2001 to 2012, an estimated 20 million people — onesixth of Mexico’s population — left cities, shantytowns and rural ranchos for the promise of a better life.

It was a Levittown moment for Mexico — a test of the increasingly prosperous nation’s first-world ambitions. But Mexico fell disastrously short of creating that orderly suburbia.

The program has devolved into a slow-motion social and financial catastrophe, inflicting daily hardships and hazards on millions in troubled developments across the country, a Los Angeles Times investigation has found.

Homeowners toting buckets scrounge for water delivered by trucks.

Gutters run with raw sewage from burst pipes. Streets sink, sidewalks crumble, and broken-down water treatment plants rust. In some developments, blackouts hit for days at a time.

Inside many homes, roofs leak, walls crack and electrical systems short circuit, blowing out appliances and in some cases sparking fires that send families fleeing.

The program cost more than $100 billion, and some investors and construction executives reaped enormous profits, hailing themselves as “nation builders” as they joined the ranks of Mexico’s richest citizens.

Meanwhile, the factory workers, small-business owners, retirees and civil servants who bought the homes got stuck with complex loans featur-

ing mortgage payments that rose even as their neighborhoods deteriorated into slums.

The Times visited 50 of the affordable-housing developments from Tijuana to the Gulf of Mexico. It also reviewed thousands of pages of government and industry documents, and interviewed hundreds of homeowners, municipal leaders, housing experts, civil engineers, construction workers and government officials.

The program, plagued by poor planning, corruption and a lack of oversight from the start, has reached crisis levels amid government indifference and impunity. Authorities have rarely investigated widespread allegations of fraud. And developers in some cases have tried to obstruct homeowners’ efforts to get problems fixed.

The American housing crisis and recession a decade ago also were marked by regulatory failures, and the U.S. economy eventually recovered.

But the crisis in Mexico has been deepening.

Conditions at the developments vary widely. While some meet basic standards, rapid decay is evident at developments in or near every major city: Failed water systems. Unfinished electrical grids, wastewater systems and other infrastructure. Parks and schools that were promised but never materialized.

Many developments were built far from employment centers on marginal land — wetlands, riverbanks and unstable hillsides — with scarce access to water. Local officials rewrote zoning laws and approved developments with little or no review.

Developers downsized homes — building about 1 million one-bedroom units as small as 325 square feet, which is smaller than a typical two-car garage in the U.S. Many families of six, seven or more live in these postagestamp dwellings, sleeping in laundry nooks and [See Housing, AA2]

LATIMES.COM/mexicohousing >>> Videos, additional stories and photos, plus interactive graphics for these stories, are online.

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MEXICO’S HOUSING DEBACLE

Brian van der Brug Los Angeles Times

A GULLY has been carved into the dirt by heavy rains, claiming a portion of the side-

walk and asphalt street in the Puerto Azul development in Ensenada, Mexico.

Brian van der Brug Los Angeles Times

WATER TRUCK driver Juan Mondregon Ruiz, left, and Isuaro Zurita fill barrels

with potable water in the Santa Teresa development in Huehuetoca, Mexico.

Brian van der Brug Los Angeles Times Brian van der Brug Los Angeles Times

MINI-CASAS LINE a street in an affordable housing development in eastern Tijuana. Many units squeeze a bedroom, bathroom, living room and kitchen into roughly 325

[Housing, from AA1] hallways.

Builders have all but abandoned hundreds of developments without completing infrastructure, resulting in a patchwork of public services.

In developments without working streetlights, youngsters wield flashlights to navigate pitch-black streets. In those without trashhauling, people burn garbage in vacant lots to deter rats.

Tree stumps are placed in open manholes to alert children to the hazards of poorly maintained streets. Residents of water-parched neighborhoods lock the lids of rooftop cisterns to keep thieves from siphoning water.

The unfinished developments blight cities across the country. An estimated 300,000 people live in more than 40 incomplete tracts in the fast-growing Baja California cities of Tijuana and Ensenada.

In Mexico state, which surrounds Mexico City, developers have completed only 36 of the 235 developments started between 2005 and 2012, leaving 200,000 to 500,000 people in limbo, according to state records.

“It was a world of corruption,” said Alberto Uribe, the mayor of Tlajomulco, a suburb of Guadalajara. His predecessors in the city approved developments where the well water has run low for an estimated 300,000 people, he said. Water is now rationed, and many families receive water only every other day.

Much of the flimsy construction remains vulnerable to harsh weather.

In September, hundreds of homes and streets in poorly graded developments flooded in Mexico state. Hundreds of homes in Ciudad Juarez have flooded so often that they are going to be torn down.

In the Cabo San Lucas area, an August storm toppled two four-story buildings that were built in separate affordable home developments only eight years ago.

Residents of blighted developments over the years have marched on city halls, blocked highways, pelted sales offices with rocks, held sales agents hostage, even set fire to model homes.

“Homeowners protest for running water. Police respond with

Don Bartletti Los Angeles Times

A FENCED-IN CAR sits in the frontyard of a home in the

Cañadas del Florido development in eastern Tijuana.

Homex developments

In 2009, Homex had developments across 34 cities in Mexico including three in Mexico state.

U.S.A.

MEXICO Gulf of Mexico

Mexico City Pacific Ocean

Sources: Mapzen, Openstreetmap, Los Angeles Times reporting Swetha Kannan Los Angeles Times

punches,” read a headline in June about police breaking up a freeway blockade at a development in the state of Veracruz.

Hundreds of thousands of people have walked away from their homes, allowing squatters and gangs to take over many neighborhoods.

Stay or go, many homeowners

are saddled with mortgages tied to an inflation index. Because monthly payments — typically about 25% of a worker’s salary — are deducted from paychecks, the only way for many Mexicans to escape the rising debt is to quit their jobs and work in the underground economy.

The homeowner unrest has

been largely ineffective; authorities have failed to hold anyone accountable for the problems.

Tens of miIlions of dollars’ worth of construction bonds intended to make repairs and finish infrastructure remain unused or unaccounted for. There have been no congressional hearings or factfinding commissions in Mexico.

However, the U.S. Securities and Exchange Commission in March accused Homex, once Mexico’s biggest developer, of reporting “fake” sales of100,000 homes, which inflated revenues by $3.3 billion. It is believed to be the largest fraud in Mexican history.

The SEC eventually settled with Homex, without assessing a fine, and filed similar civil charges against former Homex executives.

Those remain pending. (Homex declined to comment on the SEC allegations.)

Mexico’s National Banking and Securities Commission assessed Homex a $1.2 million fine. There’s no evidence that Mexican authorities are investigating any criminal wrongdoing.

Instead, local prosecutors have pursued cases against activists who accuse developers of fraud and of shortchanging homeowners to boost profits.

The country’s most prominent homeowner leader has been imprisoned for two years without trial on armed robbery charges that several judges have thrown out.

Other homeowner leaders seeking repairs to their developments say they have been harassed, threatened, even bribed to drop their protests.

Bearing the brunt are millions of first-time homeowners — people such as Lucia Lopez, 66.

When she toured the model homes at a new development called Colinas de Santa Fe, near the historic port city of Veracruz, she appreciated the modern touches: sparkling faucets, running water, electrical outlets in every room.

Lopez had raised her children in a shack with dirt floors and a roof made of palm fronds. She sold flowers and cleaned floors for a living.

She had no savings.

Yet under the housing program, she was able to buy a tiny, two-bedroom house for $20,000 with a gov-

square feet of space. The government stopped subsidizing the homes in 2013.

ANAHID FIGUEROA , 35, hoists a bucket of water, delivered by truck, in her postage-

stamp frontyard with her daughter Valeria, 8, and friend Aria Merlos, 7, right.

ernment-backed loan.

Her excitement was shortlived. The roof of her new home leaked. Frequent power outages plunged the neighborhood into darkness. Faucets went dry for days at a time.

Today, Lopez sidesteps crumbling asphalt and puddles of sewage when she goes out to shop or visit neighbors. She holds a lemon to her nose to block the stench from the broken-down water treatment plant.

One day last year she fell into an uncovered manhole. She managed to brace herself against the sides and climb out, badly bruised and covered in excrement.

“I cry every time I think about it,” she said. “If I had drowned, they would have never found me.”

d The goal was to lift millions of Mexicans out of substandard and overcrowded housing, and fulfill Mexico’s constitutional guarantee of “a dignified and decent” home for all.

Families often rented cramped apartments that they shared with relatives. Poorer families claimed patches of land in shantytowns.

They spent years scraping together materials and building houses room by room, a few cinder blocks at a time. Electricity was often pirated, and running water was scarce.

In 2001, President Vicente Fox set out to tackle the problem with a massive public-private partnership.

He directed Mexico’s federal housing finance agency, the National Workers’ Housing Fund Institute, or Infonavit, to ramp up its mortgage lending dramatically.

Under Fox and his successor, Felipe Calderon, the number of loans issued each year by Infonavit increased from 205,000 in 2001 to 494,073 in 2008. The new loans from Infonavit and other government housing agencies were aimed largely at first-time buyers with modest incomes and little or no savings.

To augment the government’s efforts, the World Bank and the Inter-American Development Bank invested $2.8 billion in Mexico’s housing sector.

Don Bartletti Los Angeles Times

MARIA DE JESUS SILVA , a gas station attendant, second from left, fell behind on her subprime mortgage and has been fighting

the foreclosure action against her in the Cañadas del Florido development. She and her family say a blessing before a meal.

The torrent of mortgage money created a dream scenario for hundreds of developers, large and small. With a pipeline of pre-qualified customers, they would be able to sell homes as fast as they could build them, at prices ranging from $15,000 to $35,000.

Foreign investors sought to capitalize on the boom, buying stock in the Mexican construction companies that built the largest share of the homes. Among those giants were Casas Geo, Urbi and Homex, a family-owned business in the state of Sinaloa that grew into one of the largest home builders in North America.

Almost overnight, housing de-

velopments sprouted. And almost immediately, serious problems arose. While many developers delivered substandard tracts, some of the most troubled developments were built by the industry’s biggest players.

One Homex development is tucked against barren foothills in the city of Huehuetoca, 40 miles north of Mexico City. Its official name is Santa Teresa. Residents call it Santa Pobreza, which means poverty.

Elderly women stoop for water at curbside spigots. Children chase balls into the rubble of collapsed sidewalks. Raw sewage bubbles up from manholes.

“It’s like a war zone here,” said Jose Merin, Huehuetoca’s water system coordinator, as he walked through an especially blighted part of Santa Teresa where tangled pipes and cables jutted from crumbling streets.

An empty water tower rises above the sprawl of some 8,000 tiny homes. The well that served this section of Santa Teresa started running dry shortly after the development opened in 2007. Homex overestimated the amount of people it could serve and as the company continued to build more homes surging demand overwhelmed the well’s capacity, Merin said.

By the summer of 2016, the well had gone completely dry. Water is now delivered by truck — twice a week, sometimes less.

Anahid Figueroa, a 35-year-old dentist, moved to the development from Mexico City to be close to her mother, who lives next door. Now she regrets it.

The water truck fills two barrels of water that she leaves in her tiny frontyard. She and her 7-year-old daughter conserve every drop.

There’s enough for each of them to bathe twice a week — in a bathroom where the faucets and shower nozzle, Figueroa said, “are just ornaments.”

As dozens of new developments

went up in the towns outside Mexico City, Huehuetoca’s population grew more than threefold, to 130,000.

The officials overseeing local construction couldn’t keep up. The town had only two building inspectors.

With so few scrutinizing their work, Homex contractors skimped on asphalt when they paved the roads, which were quickly pounded into dust by construction trucks, according to homeowner activists.

Civil engineers approved faulty designs for storm drains. Heavy rains washed away curbs and sidewalks, and turned streets into rivers.

The failure of oversight was repeated in troubled developments across the country, said Marco Lopez Silva, a civil engineer who has researched the Mexican housing industry for the Inter-American Development Bank.

“The federal government assumed officials would do their job at the municipal level. That they would have attorneys to review the construction bonds. They assumed people would make good decisions. All of that failed,” Lopez said.

Builders are required to finish streets, sidewalks and other infrastructure. It then becomes the property of municipalities.

But in Huehuetoca, Homex left Santa Teresa unfinished, so the city has refused to assume responsibility.

“There’s no way I can accept this,” said Merin, the water system coordinator. “The city doesn’t have enough money to fix this mess.”

The city, Merin said, tries to provide enough basic services to keep a lid on protests, repaving a few roads at a time.

Irate residents have hijacked water trucks and attacked utility workers. Once, in 2014, they handcuffed Homex employees to a light post.

“The people wanted to hang them,” Merin said, and only the arrival of the police saved them.

d Ten miles away in the Mexico City suburb of Zumpango, many residents of a Homex project called [See Housing, AA4]

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MEXICO’S HOUSING DEBACLE [Housing, from AA3] La Esmeralda rely on diesel generators for electricity because the company didn’t connect large parts of the development to the electrical grid. The machines spew smoke and often break down or run out of fuel.

When streets flood because of inadequate grading — a common problem in the summer — fraying generator cables strewn across streets become submerged, sending electrical currents coursing through knee-high water.

That makes even a short walk home from elementary school treacherous for Sarai Ruby Montoya’s 7-year-old daughter, who cries when she sees the rising waters on her street.

“She knows she’s going to get shocked,” Montoya said.

When Dante Tapia, 8, sees cables sizzle and shoot sparks, he can’t run fast enough.

“It hurt real bad the time I got shocked,” he said. “I hate living here.”

Firefighters race from neighborhood to neighborhood during downpours, pumping out flooded streets. When the power goes out, paramedics rush to the homes of sick and elderly people dependent on electricity to operate medical devices or refrigerate insulin.

Pablo Rodriguez Mendez, a top Zumpango city official, likens the housing crisis to a natural disaster.

“We have emergency plans for hurricanes, but we also need an emergency plan for dealing with all the housing failures,” Rodriguez said.

Four years ago, after residents had gone three days without water or electricity, frustration boiled over.

Homex was in financial straits, having run out of working capital.

At La Esmeralda, most of the 3,000 planned homes had been built, but much of the electrical system and other infrastructure had not been completed. It was one of more than 30 developments, with a combined population of 150,000, that Homex and other builders had left unfinished in Zumpango alone, according to Rodriguez.

Marchers streamed out of the neighborhood and onto a busy sixlane highway. They erected barricades of chairs, rocks, bicycles and benches. For several hours they blocked traffic, chanting and waving signs. “We want answers from Homex,” one read.

“We exploded. Who lives without water? Without power?” recalled Maria Esther Cardenas, a mother of three. Still, the lights didn’t come on.

When night fell, the protesters headed to the sales complex, where brightly painted model homes stood behind a picket fence. Someone sneaked inside. A match was struck. Within minutes, flames devoured the complex.

“People were scared when they saw the fire get out of control. But we felt sad,” said Cardenas’ husband, Mario. “All we wanted was what they promised.”

d At Colinas de Santa Fe, partially built on a wetlands area on the northern outskirts of Veracruz, rainwater and sewage back up into streets and homes during the rainy season.

The underground drainage system collapsed years ago, leaving streets pocked with giant craters. The water treatment plant also broke down, compounding the health hazards.

Mosquitoes breed in stagnant puddles. City officials and residents say they have infected scores of residents with dengue fever and chikungunya virus.

During the dry season, sewage spills onto roads and dries into a fine dust. Heavy winds kick swirls of filth into the air.

“These people are trapped in their own homes,” said Salvador Barbes, a former director of public works in Veracruz. The Homex development is only 10 years old, he said, but the rapid decay of the infrastructure and homes makes it, in effect, among the oldest in the city.

“It has the kind of problems we see in developments that are 60 years old,” Barbes said.

To avoid sewage, neighbors step across makeshift paths of concrete blocks. Still, passing cars splash dirty water on children and the puddles obscure open manholes with 12-foot drops.

“We live in a pig pen,” said Adela Blanco, a 47-year-old homeowner activist at Colinas, “but we live worse than pigs, because we have to pay for it.”

In the upper reaches of the community, fires — not floods — are the problem.

Alberto Garcia, 33, and his family came home after a Sunday outing in July 2016 and saw smoke pouring from the living room window. A power surge had blown out a light switch and set a curtain on fire. It spread through the first floor.

It was the eighth electrical fire to hit the development that summer, residents said.

Garcia and other residents said they knew the power grid was unstable and the electrical wiring was faulty. His wife and children would use only two appliances at a time, fearing power surges. At night, he even disconnected the refrigerator.

Garcia said his family lost [See Housing, AA6]

Photographs by

ADELA BLANCO uses a broom to retrieve a basketball in a pit of sewage near her home in Colinas de Santa Fe in Veracruz, Mexico.

Brian van der Brug Los Angeles Times

At the development, which was partially built on a wetlands area, rainwater and raw sewage have backed up into homes and streets during the rainy season.

ALBERTO GARCIA’S friends help him clean up his home, one

of several that have suffered fires in the development.

TRASH IS STREWN in an empty field in the hills overlooking an affordable housing development in Tijuana. Unlike the U.S. housing

crisis and recession of a decade ago, which was also marked by regulatory failures, the Mexican housing crisis has been deepening.

FRIENDS AND RELATIVES help clean up Alberto Garcia’s home, which caught fire because of an unstable electrical grid and faulty wiring at the Colinas de Santa Fe development in Veracruz.

WEEDS GROW among electric meters on a dusty street in the Santa Teresa development in Huehuetoca, Mexico.

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MEXICO’S HOUSING DEBACLE

A WATER treatment plant at Colinas de Santa Fe in Veracruz, Mexico, broke down shortly after it opened in 2007. Sewage flows into a creek outside the development.

ADELA BLANCO , 47, holds a lime to her nose to mask the odor of raw sewage, which flows through the streets of Colinas de Santa Fe.

Brian van der Brug Los Angeles Times

EMPTY SHELLS of homes in a development that was never finished in eastern Tijuana. A government effort to build housing produced slums riddled with defects.

A SUBPRIME HORROR As ‘fixed’ loans spiraled, tens of thousands were forced from their homes

By Richard Marosi reporting from tijuana

Photographs by

Brian van der Brug Los Angeles Times

ADELA BLANCO sidesteps crumbling asphalt and puddles of sewage at Colinas de Santa Fe. In the rainy season, raw sewage spills from the collapsed drainage system.

[Housing, from AA4] everything in the fire. With nowhere else to go, they still live in the two-bedroom home. Its walls are stained by soot.

“It’s so sad,” said Garcia, a cleaning products salesman. “We worked so hard for what we had.”

d Residents of Colinas de Santa Fe used to visit the Federal Consumer Protection Agency’s offices in downtown Veracruz, toting thick stacks of paperwork. They felt they had been misled by Homex, and they wanted something done about it.

But Inocencio Yanez, the agency’s former top official in the state of Veracruz, said that shortly after he arrived in 2013, he discovered that staff attorneys had been shelving homeowners’ complaints for years.

So he put up a sign at the reception desk telling visitors to talk to him directly. Yanez assembled dozens of cases into a class-action lawsuit and forwarded the file to his superiors in Mexico City. Nothing happened.

Yanez said he was forced to resign in 2014 after going public with corruption allegations.

“My office was just a place for people to come and cry,” Yanez said.

It was a similar story across Mexico as Homex and government agencies blocked homeowners’ efforts to get problems fixed.

After Aaron Montes protested outside Homex’s model homes at the Hacienda Santa Fe development near Guadalajara in 2005, investigators with the Jalisco state attorney general’s office paid him a visit.

“They said Homex was losing money on the stock exchange because of my actions,” said Montes, a homeowner activist. “They wanted me to pay millions of pesos.”

A year later, Montes was arrested after leading another protest. He was released a few days later and went home, only to discover that his key wouldn’t open the front door.

Homex had sold his house to another family, he said. He and other leaders of his homeowner group eventually moved out of the development.

“I couldn’t go on,” Montes said.

“It was like fighting a monster with a thousand heads.” Homex did not respond to a request for comment.

At the Lomas de Santa Fe development in Veracruz, attorney Miguel Varela said a Homex legal representative offered him a bribe to stop representing homeowners pushing Homex to finish the elec-

RESIDENTS of the Colinas de Santa Fe development used to visit the Federal Consumer Protection Agency’s offices in downtown Veracruz, feeling they had been misled by Homex.

trical system.

“He said, ‘How much do you want to just sit on this?’ ” Varela said, recounting a 2011 meeting at the Homex offices in the state capital of Xalapa.

Blanco, a homeowner leader from Colinas de Santa Fe who regularly organizes protest marches, said a Homex executive offered in 2010 to buy her a house in a different development, and that she refused.

“It’s not about money, it’s about lives,” Blanco said.

Veronica Barrientos, a homeowner activist from the Puerto Azul development in Ensenada, said in an interview that Homex representatives had dangled offers of money, cars and a home expansion in exchange for her dropping her effort to get problems addressed.

Emilio Salazar, the homeowner leader at the Barrio de la Solidaridad tract in Monterrey, said Homex representatives offered to pay off his mortgage.

Sergio Losoya, president of the homeowners association at the Chula Vista neighborhood in Cabo San Lucas, said a company representative offered to pay for therapy for his special-needs child.

The homeowner leaders said they rejected the offers. Taking a bribe, Barrientos said, would have meant betraying residents who haven’t had running water for five years.

“There are too many people that trust us,” she said.

A homeowner movement at the Vistas de Palmillas development in Tijuana fell apart after its leaders

in the mid-2000s accepted Homex’s offers of new houses in different neighborhoods, residents said.

Homex declined to comment on any of the bribery allegations.

Today, problems related to unstable soil conditions persist at Vistas de Palmillas. Some residents live in homes tagged with signs declaring them “high risk.”

“Stay alert for possible landslides and floods,” read the signs from Tijuana’s civil protection division.

d Eventually, complaints about shoddy workmanship, long commutes and broken infrastructure became too conspicuous to ignore.

Demand for the houses collapsed.

In 2011, the government started reducing the flow of mortgages. By 2014, Homex, Casas Geo and Urbi had filed for bankruptcy.

Defenders of the program say it was a justifiable, if imperfect, effort that created jobs, boosted the economy and built housing for people who desperately needed it.

But their arguments have at times been undercut in embarrassing ways.

Then-President Felipe Calderon recorded a promotional video in 2011 welcoming families to a new development called Paseos de la Pradera, in the state of Hidalgo.

By 2014, residents had resorted to scooping rainwater from gutters to meet their needs. They staged protests and blocked a freeway for several hours. Problems at the de-

velopment, built by a local company, persist today.

Homex declined to comment on conditions at its roughly 150 developments.

In a statement, the company said it has received a $20-million credit line from Infonavit to complete infrastructure. Experts say that’s enough to upgrade perhaps two of the company’s troubled developments.

“Homex continues to focus on building successful communities with a sustainable profile contributing to improve the quality of life of the Mexican population,” the statement said.

A spokesman for Infonavit said problems at the developments are exaggerated.

“Many residents say that things are bad, but it’s not true that they have no services,” said the official, Nezahualcoyotl Baños Hernandez.

When a Times reporter described conditions at some communities, Baños said Infonavit would look into it.

“Tell me the list of places you went … so we know where to investigate,” he said. “Maybe we can do something.” The Times provided a list but Infonavit did not respond to further requests for comment.

A comprehensive study commissioned by the agency in 2015 detailed severe conditions at the 36 projects inspected, according to the author, Alfonso Iracheta, a professor of urban development at El Colegio Mexiquense, a research institute near Mexico City.

In an interview, Iracheta said the report can be released only by

Infonavit. The agency did not respond to The Times’ request to make it available.

Mexican President Enrique Peña Nieto, in a speech last year, attempted to move past the previous housing policies, calling the building surge “absurd.”

He promoted his housing policy, which banned one-bedroom houses and shifted development to urban areas. But critics note that Peña Nieto was governor of the state of Mexico from 2005 to 2011, when builders broke ground on more than 200 developments, many of which now are problemplagued ghost towns that have been largely ignored by his administration.

Peña Nieto’s secretary of agricultural, territorial and urban development, Rosario Robles, in a speech last year noted the paradox of large numbers of abandoned homes in a country with a dire housing shortage.

“We have houses with no people,” she said, “and people with no houses.”

d When storm drains back up, pipes burst or streetlights go out at Santa Teresa, people turn to Jose Colon. The 37-year-old store owner and father of two collects pesos from neighbors to pay for repairs or buy supplies.

Such do-it-yourself efforts have become commonplace in abandoned developments. Residents say it’s their only option.

One day last year, Colon peered into a trench dug by workers that exposed a leak gushing from a faulty pipe seal. Water was puddling up, wasted, in a development where most homes lacked running water.

He set out to collect money for a new pipe seal, going door-to-door along the fractured streets.

Homex, having emerged from bankruptcy protection, had secured $240 million in new financing.

Colon was looking to raise $5. richard.marosi@latimes.com Times researcher Cecilia Sanchez in Mexico City contributed to this report.

Ask the reporter Have questions about this investigation? Send your questions to Richard Marosi, who will be hosting a Facebook Live event from Mexico on Wednesday, Dec. 6, at noon Pacific time.

Submit your questions online at lat.ms/mexico-housing.

Follow us on Facebook: @latimes

T

he eviction squads arrive in convoys, whisking attorneys, police officers, bank agents and teams of movers through the gates of the Cañadas del Florido housing development.

They eject the residents, seal the front doors with bricks and post signs warning against breakins. Abandoned units blight every block of this 2,000-home community. Squatters ignore the signs and take over, their flickering candles casting an eerie glow at night.

Maria De Jesus Silva’s turn came on a spring day in 2014, when she found a thick stack of foreclosure documents on her doorstep.

According to the documents, the Bank of New York Mellon, acting as trustee on behalf of bondholders, had started the long legal process to evict Silva from the twobedroom home she bought in 2006 and shared with her daughter, sonin-law and granddaughter.

“I was shocked because New York Mellon is a very powerful bank, and I’m a very poor person,” said Silva, who makes $225 a month working at a gas station.

She has hired a lawyer to try to block her eviction.

One of the harsher aftershocks of Mexico’s housing collapse came from subprime-like mortgages given to the working poor, people who didn’t qualify for loans from Infonavit, Mexico’s giant housing finance agency.

Both types of loans featured rising monthly payments, and the total amount owed also increased.

But the subprime loans were structured to increase at a higher rate.

For investors, those escalating payments provided a hedge against inflation and currency fluctuations. But for homeowners, the onerous loan terms led to defaults on a massive scale.

Ten years later, a cyclone of foreclosures continues to cut a slowmotion path of financial destruction across Mexico. It’s the latest stage of a housing collapse that left developments plagued with infrastructure problems and abandoned homes. Now banks and bondholders are extending their reach into the decaying tracts to seize homes.

In Silva’s neighborhood in eastern Tijuana, mailboxes are stuffed with foreclosure notices. Cul-desac gates are locked in mostly vain attempts to keep out eviction crews. “Is the bank trying to take away your home?” reads a sign with a phone number to call, nailed to a teetering utility pole.

Silva’s mortgage came through Su Casita, a Mexican lender that received funding from an arm of the World Bank called the International Finance Corp., whose motto is “Reducing Poverty. Improving Lives.”

She delivered her payments in person, but after six years the burden became too great. The monthly payment had increased 32%. The amount she owed had ballooned 20%, to the equivalent of about $18,000 at the time.

She stopped paying, triggering

Don Bartletti Los Angeles Times

A TRASH-STREWN abandoned home in the Cañadas del Florido neighborhood in Tijuana. Banks

have foreclosed on many homes after owners fell behind on their subprime mortgages. foreclosure proceedings.

Silva said the builder and lenders “deceived us into buying these homes, and everybody left, or is waiting to be kicked out.”

The Bank of New York Mellon, which declined to comment, sold off its Mexican banking subsidiary in 2014.

d The subprime loans that led to the U.S. housing market collapse a decade ago had some guardrails against skyrocketing payments, including lifetime caps on interest rate increases; these Mexican loans had none.

The loans were offered by Mexican construction companies, banks and mortgage brokers — some backed by the World Bank, others by U.S.-based companies that had played a role in the American mortgage crisis.

Later, the loans in Mexico were pooled into mortgage-backed securities by Wall Street investment banks and sold to bondholders. Income from the bonds came from the mortgage payments made by home buyers. Once homeowners started falling behind on the payments, default rates skyrocketed and the bondholders launched massive foreclosure actions.

Financial institutions and the Mexican government promoted the so-called social interest loans as a means of extending homeownership to the taco cart vendors, swap meet peddlers, beauticians, house cleaners and others who scrape by in Mexico’s huge underground economy. They comprised about 10% of the mortgage market.

Buyers were assured that mortgage payments would remain stable. They were given amortization tables showing monthly payments and interest rates as fixed for 25 or 30 years.

But the tables omitted a key factor: those payments were tied to an index called unidades de inversion, or units of investment — UDIs for short — which tracks the Mexican Consumer Price index.

Each monthly installment was determined by multiplying the “fixed” amount due by the UDI rate, which grew slightly every month.

Between 2000 and 2010, those relentless monthly upticks mounted: The UDI rate surged about 70%.

And as the payments increased monthly, so did the total amount owed.

Financial analysts hired by debtor groups found that homeowners would have to pay the amount of the original loan up to seven times over to pay it off entirely over 30 years.

d Roberto Ramos, a former salesman for Homex, once Mexico’s largest homebuilder, sensed trouble about two years after people purchased homes. Some buyers at the El Laurel development in Tijuana wouldn’t wave hello to him anymore. Others shot him dirty looks.

“They’d stop by the sales office and tell me they couldn’t afford their homes anymore,” Ramos said. “They would say, ‘Either I feed my family, or I pay the mortgage.’ ” Salespeople typically helped buyers with their loan applications, and were responsible for ensuring that borrowers understood the loan terms. But that wasn’t possible, Ramos said, because even he didn’t understand them.

At training sessions, supervisors glossed over the loan details and told salespeople to downplay the risks, he said. Borrowers with loans from Su Casita, for example, received a pamphlet that minimized the financial perils.

“The social interest loan is provided on very accessible terms,” the pamphlet read. “In the long run it represents an important saving and a magnificent investment.”

Ramos, who made hundreds of loans, many of which ended up in foreclosure, said he eventually stopped steering borrowers to the financial instruments. “I thought I was helping people,” he said. “In-

stead I was killing their dreams.”

d A large source of funding for the UDI loans came from the World Bank and the Inter-American Development Bank, which provided about $3 billion to Mexico’s social development bank, the Federal Mortgage Society. The bank in turn funneled the money to mortgage lenders who made home loans.

Banks and mortgage lenders made about 850,000 loans from 2000 to 2013, most of them in UDIs, according to analyst estimates and Mexican government statistics.

Analysts gave the strong ratings based on the assumptions that borrowers’ salaries would keep pace with inflation, housing values would increase and loans were made to credit-worthy borrowers.

Instead, wages often remained stagnant, housing values dropped or stayed flat, and many loans were made to people who couldn’t afford them. Mortgage fraud and lax lending standards, as in the U.S., also played a role in the meltdown.

A 2008 internal report by the Federal Mortgage Society cited fabrication of documents and collusion between builders and mortgage lenders as factors in the sharp rise in defaults. Large construction companies, including Homex, were making sales without regard to borrowers’ long-term ability to pay, the report said.

The Mexican loan pipeline was hailed at a 2007 finance industry gala at the Ritz-Carlton in New York City. Credit Suisse won the “deal of the year award” for underwriting 1,876 UDI loans originated and underwritten by Su Casita and GMAC Financiera, the General Motors-affiliated financial services company. By 2016, the default rate on the “deal of the year” loan portfolio had reached 80%, according to Standard & Poors.

Mortgage lender after mortgage lender, burdened by bad loans, went bankrupt. There were so many defaults that some lenders formed mortgage servicing

companies to handle the bad loans their own industry had created.

An executive for one firm, Patrimonio, touted his approach at a finance conference in Miami in 2011.

“The region’s high yield, stressed and distressed deals — turning ticking time bombs into opportunity,” was the title of his PowerPoint presentation.

The executive, Ignacio Farias, in a phone interview, said the “ticking time bombs” weren’t caused by mortgage brokers like him, but by the government, which devised the UDI loans and failed to offer loan modifications when borrowers ran into trouble.

Mark Zaltzman, the former director of Su Casita, said his company did its best to weed out fraudulent loan applications submitted by construction companies.

“It’s not so much that the product was badly designed. It was just a very bad handling of the situation after the downturn of the economy,” Zaltzman said. “This was the manner to reach out and provide affordable housing to an underserved population in the lowest income bracket.”

But others blame the mortgage lenders and construction companies for eroding underwriting standards in pursuit of profits.

Mario Novelo, the Federal Mortgage Society’s director general of finance, said lenders and construction companies in large part caused the crisis because they made loans to unqualified buyers and passed the risk on to others.

There was no government oversight, and the industry took advantage, he said.

“The only thing construction companies cared about was getting people into houses. They didn’t care if borrowers could pay or not,” Novelo said in an interview.

The Federal Mortgage Society stopped funding UDI loans in 2013.

The World Bank declined repeated requests for an interview. In a statement, the bank said, “Similar to the experience in the U.S., the 2008 financial crisis restricted available financing for Mexico’s housing lenders and exposed poor credit practices in the home-loan industry.”

d Silva, the gas station attendant, used to hand-deliver her mortgage payment at her lenders’ storefront office. Her two-bedroom row home, built by Homex, was cramped, the ceiling leaked and pipes burst regularly, but it was still better than paying rent.

She paid 328,000 pesos (about $27,000 under the 2006 exchange rate), financing the purchase through a 25-year UDI loan and a smaller government loan.

Silva, who said the UDI loans were never explained to her, stayed current for several years. But by 2011, her monthly payment nearly equaled her monthly salary.

Since then, she has worried constantly about eviction. Outside, the crime-ridden neighborhood continues to deteriorate, its streets blighted with bonfires, garbage piles and busted mailboxes stuffed with foreclosure notices. “Every day,” Silva said, “I’m afraid they’ll coming knocking on my door.”

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MEXICO’S HOUSING DEBACLE

Don Bartletti Los Angeles Times

ABANDONED homes have been stripped of appliances, electrical wiring, copper

plumbing and other items in the Cañadas del Florido development in Tijuana.

Brian van der Brug Los Angeles Times

ANANIAS VELASQUEZ sifts through loan documents in his bedroom at the El

Laurel development in Tijuana. He says he can no longer afford his payments.

Brian van der Brug Los Angeles Times

VICTOR AMBROSIO , a chicken vendor, slices up poultry for a customer in the

Colinas de Santa Fe development in Veracruz, Mexico.

Brian van der Brug Los Angeles Times

BRENDA REYES , 9, right, and her sister Dana Reyes, 8, draw in their small bedroom.

The sisters share the space with their parents. Construction firm Homex claimed to have perfected the mass production of affordable housing in the $15,000-$35,000 range.

THE HOMEX STORY: A BOOM ANDA BUST

Investors were told they could earn huge returns while helping solve housing shortages on a global scale. Critical financial players were on board, committing billions to the company. But then it turned south. opments littering cities across Mexico, Homex is one of the country’s most despised companies.

Dubbed “Robex” by some, the company is mocked on blogs and billboards, in punk rock songs and a Hitler-in-the-bunker internet spoof.

Long before it all came crashing down, there was one group that already knew how bad things were: the people who had to live in the houses Homex built.

Victor Ambrosio, a 27-year-old chicken vendor, and his parents bought a two-bedroom house in the Colinas de Santa Fe development, which opened in 2007 in Veracruz, on the Gulf of Mexico.

As the stock price soared, homeowners were suffering power outages and water shortages so acute that they once tried to flip over the sales office trailer where Homex employees had barricaded themselves.

“When I saw the model homes, I said ‘Wow,’ ” Ambrosio recalled.

“But it was all smoke and mirrors.

There were defects everywhere, like ticking time bombs.”

By Richard Marosi

S

reporting from mexico city am Zell was looking for opportunities, and he found a winner in Mexico.

The government was working with developers to build massive housing complexes for poor and workingclass families outside every major city. With billions in government funds flowing into the housing market, builders stood to reap a bonanza.

Zell, a Chicago real estate billionaire, spotted a prospect in 2002 in the northern state of Sinaloa — a small construction company called Homex owned by four brothers of the De Nicolas family.

The brothers possessed the ambition. Zell, through his Equity International Investment Fund I, provided a boost of capital: $32 million.

Over the next six years, Homex went from building 5,000 homes a year to building 57,000. It joined the ranks of North America’s largest home builders, broke ground on projects in Brazil and opened offices in Egypt and India.

The Homex story tugged at both the wallet and the heartstrings: Investors could earn big returns while helping solve global housing shortages. The World Bank, Wall Street investment banks, university endowments, foundations and U.S. pension funds invested billions in the company.

Homex’s valuation, $100 million when it went public in 2004, soared to $3 billion. Company executives went to the New York Stock Exchange to ring the closing bell, chanting “Homex!

Homex!

Mark Boster Los Angeles Times

SAM ZELL , a real estate billionaire from Chicago, purchased a

stake in Homex worth about 26.5% of the company in 2002.

Homex!” The De Nicolas brothers traveled the world as ambassadors for Mexican entrepreneurship.

The big returns, however, masked the flaws that eventually gutted Mexico’s ambitious effort to house the masses. The developments were riddled with infrastructure and construction defects, and residents abandoned them by the thousands, helping trigger the collapse of the housing industry.

In 2014, six years after Zell’s fund

sold off its shares, Homex fell into bankruptcy. This year, the U.S. Securities and Exchange Commission accused Homex of committing what is believed to be the largest fraud in Mexican history, saying it had reported “fake” sales of more than 100,000 homes. The allegations concerned activity that occurred after Zell’s fund divested, and Zell was not named in the complaint.

Today, with its broken-down, blighted and half-finished devel-

d “Homex is listed on the New York Stock Exchange. We’re a serious company.”

— Homex sales pitch to home buyers

The company’s rise was powered by then-President Vicente Fox’s promise to succeed where his predecessors had failed in fulfilling the Mexican Constitution’s guarantee of “a dignified and decent” home for all citizens.

Fox unleashed Infonavit, Mexico’s giant housing-finance agency, which was flush with cash from em-

ployer contributions that workers could tap for home loans. Fox set lofty goals for the agency, pushing it to make hundreds of thousands of home loans every year.

Developers, guaranteed a pipeline of pre-qualified customers, would be able to sell homes as fast as they could build them.

Homex claimed to have perfected the mass production of affordable housing priced from $15,000 to $35,000. Executives boasted that construction crews could put up an entire house in one day.

It was an investor’s dream.

Zell’s bets on U.S. properties — everything from office towers to trailer parks — had made him one of America’s wealthiest real estate magnates.

By 1999, Zell had turned his sights beyond the U.S., establishing Equity International Properties Ltd., a private equity firm focusing on real estate in emerging markets.

The company’s Equity International Investment Fund I concentrated on Mexico and aimed for a 20% annual rate of return for its U.S. investors, according to a fund profile by Preqin, a data company that tracks private equity funds.

The investors included General Motors Investment Management Corp. and the John D. and Catherine T. MacArthur Foundation. The fund raised $368 million.

With $32 million of that money, Zell in 2002 purchased a stake in Homex worth about 26.5% of the company.

Equity International executives groomed the Mexican company for an initial public offering on the New York Stock Exchange. Homex adopted U.S. accounting stand-

comment. Zell makes no mention of Homex in his 2017 book, “Am I Being Too Subtle?,” an account of his investment strategies through the years. (Zell was chairman of Tribune Co. from 2007 to 2012, when it owned the Los Angeles Times.)

d

Brian van der Brug Los Angeles Times

CRUMBLING STREETS can be seen in the Santa Teresa development in Huehuetoca, Mexico. Many sections of the development

north of Mexico City started experiencing water shortages and infrastructure problems shortly after opening in 2006. ards, and its executives polished their English.

Equity International, which touts “proactive involvement in key business decisions” of its portfolio companies, expanded its role in Homex.

The fund’s chief executive, Gary Garrabrant, became Homex’s vice chairman. Zell traveled to Boston and New York to pitch Homex to investors, according to a 2005 story in the Wall Street Journal.

Homex’s housing starts jumped from 7,000 in 2002 to 13,000 a year later. Revenue tripled to $260 million. On June 29, 2004, Homex went public, raising $141 million.

The building spree went into

overdrive. Already at work on projects in 16 cities, Homex broke ground on17 more over the next few years.

In 2004, Fox attended a ceremony celebrating the construction of the 9,000th home at the Hacienda de Santa Fe development near Guadalajara.

Paul Wolfowitz, then president of the World Bank, lauded Homex in 2006 after company executives escorted him around the Real de San Jose development of 4,212 homes on the outskirts of Monterrey.

The bank invested more than $1 billion in Mexican housing, providing funds for the country’s development bank and taking equity

stakes in mortgage lenders and construction companies, including Homex.

“I saw many compelling examples of the importance of the private sector’s role in offering opportunity for poor people to transform their lives and to give their children a better future,” Wolfowitz said in the bank’s annual report in 2006.

By 2009, an estimated 1 million people lived in Homex housing.

“We believe that a house is very, very important, and everybody needs a house,” then-Homex Chief Executive Gerardo De Nicolas said at an Anthony Robbins motivational seminar.

As the cheers for Homex reached a crescendo, Zell was

pulling out. In 2006, he started selling off big chunks of the fund’s holdings, and by 2008 Equity International had divested the last of its Homex shares.

Equity International boasted publicly of its success in Mexico.

Profits from Homex topped $500 million for the fund’s investors, Garrabrant told Private Equity Real Estate Magazine in July 2009.

In 2010, two years after the fund divested from Homex, Zell wrote in a Mexican real estate magazine that he had brought U.S. standards of transparency to the Mexican company with his investment, “and we were paid for it.”

Zell and Garrabrant declined to

Cracks in Homex’s business model had been forming as early as 2004.

The company began work that year on the Las Almeras development in Ciudad Juarez, across the border from El Paso. It consisted of 1,303 homes in a dry lake bed — a site geologists had warned was prone to flooding.

A year later, Homex broke ground on the 4,000-home Costa Dorada development in a wetlands area of Acapulco — again failing to heed the warnings of geologists.

Both developments flooded repeatedly.

In 2007, Mexico’s Federal Consumer Protection Agency criticized Homex for construction failures at a Monterrey development called Barrio de la Industria.

The builder failed to properly grade the land, causing soil erosion and instability, according to an agency report that cited a study of the tract from the Autonomous University of Nuevo Leon. Walls cracked, concrete slab floors ruptured, sidewalks sank and rainwater puddled in patios and streets, the study found.

The agency also cited Homex for reneging on its promise of schools, underground utilities and high-quality materials at the development of 1,100 homes.

“The construction company deceived the consumers from the moment they bought the homes,” the report said.

The agency fined Homex about $500,000. The money was supposed to be used for repairs, but Cesar Salazar, the Monterrey development’s homeowner leader, said he didn’t see any were made.

Homex and the consumer [See Homex, AA10]

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MEXICO’S HOUSING DEBACLE

Photographs by

Brian van der Brug Los Angeles Times

MANY HOMES in the Colinas de Santa Fe development in Veracruz, Mexico, have experienced water shortages due to infrastructure failures.

[Homex, from AA9] agency declined to comment.

It was only the beginning of the unraveling. At Homex developments across Mexico, defects revealed themselves with the first rains or turn of a faucet. Water systems failed. Pumps malfunctioned.

Sewage treatment plants broke down. Poorly graded streets washed away.

From the mid- to late 2000s, homeowner protests and waves of complaints broke out in almost all the cities where Homex was operating.

But during quarterly earnings calls with Wall Street analysts, Homex executives did not mention the growing social unrest and downplayed the problems completing infrastructure.

In 2007, a Homex executive told analysts that the firm was scheduled to break ground on thousands of new homes at Santa Teresa, its giant development in Huehuetoca, north of Mexico City.

“We are upgrading the infrastructure to be able to deliver those homes in the beginning of next year,” said Alan Castellanos, Homex’s chief financial officer.

He didn’t mention the pervasive power outages in the parts of the development Homex had already built.

Every year, Homex filed disclosures with the SEC, and almost every year the agency raised questions about the firm’s accounting and reporting practices. It asked in 2006 why the company’s net income was reported differently under Mexican and U.S. accounting rules.

In 2008, the SEC asked for more information about the number of homes sold and unsold, and questioned the company’s practice of including inter-company loans as cash flow.

In 2011, the agency, after noting errors in Homex’s filings, questioned the effectiveness of the company’s disclosure procedures and ordered it not to make “unpermitted changes” on certification documents.

Homex representatives, in media reports, blamed problems on homeowners and local governments, saying their failure to maintain homes and streets contributed to the decay. The company was merely following local zoning laws that permitted development in high-risk zones, they said.

But housing experts and local officials said that Homex, boasting Wall Street credentials and a social mission backed by the Mexican president, was able to steamroll municipal regulators and local officials.

Even as the problems in Homex developments became evident, the company continued to receive fasttrack approvals. Existing projects were shortchanged so the company could get to work on new ones, said Jose Becerra O’Leary, a former top official at the Veracruz regional office of Mexico’s federal electric utility.

Instead of completing infrastructure, Homex “just took the money for other things … and left behind problems,” Becerra said.

“The problem lies in why authorities kept permitting this.”

d Homeowners’ complaints about shabby construction and unfinished infrastructure had gotten little attention. Then Homex and the government confronted a

d

JORGE RESENDIZ pours water into a toilet in his home, where

there is no running water, in the Puerto Azul tract in Ensenada.

Total mortgage loans granted from 2001-2013 (In thousands) Bank loans

Public sector/ government loans

800,000 loans

2008 790,759

600 400 200 0 ’01 ’03 ’05 ’07 ’09

’11 ’13

Source: Los Angeles Times reporting S we tha Kannan Los Angeles Times

more serious problem: Residents started packing up and moving out.

By the late 2000s, blocks of abandoned homes blighted developments across the country.

Squatters and gangs moved in.

Crime spiked, generating more departures.

A 2015 report by the Paris-based Organization for Economic Cooperation and Development estimated that as many as 500,000 homes built by Homex and other developers between 2006 and 2010 were vacant.

In response, Fox’s successor, President Felipe Calderon, began steering Infonavit loans away from the troubled suburban developments toward projects in big cities. The shift raised concern on Wall Street because urban developments called for high-rise buildings, which require more time and money to complete.

Homex executives reassured investors in a quarterly earnings call in May 2011, saying the company’s unique construction technology was adaptable to “vertical housing.”

“This is nothing new and does not present an obstacle for Homex,” said Gerardo de Nicolas, Homex’s chief executive officer.

In its 2011 annual filing with the SEC, Homex presented a picture of financial stability.

It reported selling 52,486 homes.

In fact, Homex sold 11,006 homes that year, the SEC said in March, asserting that the company had inflated revenue by counting sales of homes that were

never built.

The SEC, unbeknownst to investors, had been investigating Homex since at least July 2012, when the company was made aware of the probe. That same year, Homex secured a $75-million credit line from the World Bank and raised $400 million on the U.S. bond market.

“Homex’s capable management team executes strong internal controls, construction expertise and efficient practices,” Moody’s Investors Service said in a 2012 report that gave the company’s bonds a “stable rating outlook.”

Shortly after President Enrique Peña Nieto took office in late 2012, Homex’s troubles mounted. He announced that almost all future government housing loans would be for urban high-rises.

“Working together we can build dignified cities, houses with sufficient space and with basic infrastructure that elevates the quality of life of all Mexicans,” Peña Nieto said, in a swipe at the policies of his predecessors.

The shift was devastating for Homex.

Revenue dropped 46% in the first quarter of 2013, and 84% the next.

Quarterly earnings calls turned tense as some analysts accused Homex of misleading investors with overly optimistic profit estimates.

“Why would we believe you now after three years of just completely failing to come even remotely close to your guidance?” said Denis Parisien, an analyst with Deutsche Bank during a conference call in February, 2013. “I speak to a lot of investors, so this is … the frustration that I’m hearing.”

Desperate, Homex turned to Zell in April 2014, asking its former partner for a $135-million credit line from his Credit Opportunities Fund.

There’s no evidence that Homex received the credit line.

Homex’s stock price, which had peaked at $69 in 2008, fell to $1 per share.

In July 2014, the company filed one of the largest corporate debt restructurings in Mexican history.

It listed $8 million in cash and $2.5 billion in debt.

Executives slashed payroll, cut off suppliers and suspended payments to utility companies.

Like a rolling blackout, lights went out in one Homex development after another across Mexico.

Chaos descended on Culiacan, capital of the northern state of Sinaloa and the company’s hometown.

Outside Homex’s corporate offices on Boulevard Alfonso Zaragoza Maytorena, hundreds of fired employees protested over unpaid wages.

Across town in bankruptcy court, global investors who had purchased bonds from Homex and extended credit lines totaling more than $1 billion demanded payment.

They included Pacific Investment Management Co., the Newport Beach bond company commonly known as Pimco, which loaned Homex and other Mexican home builders tens of millions of dollars; the World Bank, which poured more than $1 billion into the Mexican housing sector; and Bank of America; according to bankruptcy documents filed by Homex in Mexican federal court.

The former bondholders and creditors agreed to forgive their debt in exchange for equity in the firm. They would own from 75% to 90% of the company’s shares under the restructuring agreement.

It is unclear which of Homex’s former bondholders remain as shareholders in the restructured company. Some of the original creditors sold their bonds at discounted prices to U.S. hedge funds that specialize in distressed-debt opportunities.

Among the hedge funds represented on the company’s bankruptcy restructuring committee were Alden Global Capital, River Birch Capital, BSOF Master Fund, which is managed by Blackstone Inc., and BlueCrest Capital, once the world’s largest hedge fund.

None of the firms would comment for this article.

In late 2015, Homex emerged from bankruptcy with what it said was a new approach “designed to meet its obligations and generate value to its stakeholders.” The new Homex would build upscale homes for middle-class buyers.

In March of this year, the company was jolted by U.S. regulators, who slapped the company with a securities fraud complaint. The evidence came from high above.

The SEC, announcing the conclusion of its investigation, released a satellite image of a Homex development in the central state of Guanajuato.

The Benevento development was billed as one of the company’s top-grossing projects. Homex said in its annual SEC filings that hundreds of units had been sold there in 2010 and 2011.

But the satellite image, taken in 2012, showed an empty patch of dirt streets.

The SEC said the ruse was part of a “massive fraud” by Homex to inflate revenue by $3.3 billion from 2010 to 2012. Top executives, including longtime CEO De Nicolas, kept two sets of financial records, according to the SEC complaint, and reported bogus revenue while Homex was listed on the New York Stock Exchange and raising $400 million from investors.

“Homex systematically and fraudulently reported revenue from the sale of tens of thousands of homes annually that it had neither built nor sold,” the complaint said.

The SEC said Homex had also defrauded Mexican banks in a $7.7billion Ponzi-like check-kiting

Brian van der Brug Los Angeles Times

SUPPORTERS of Humbertus Perez gather outside Chiconautla prison demanding the release of the homeowner activist. Perez was arrested in November 2015.

scheme.

Without admitting or denying wrongdoing, Homex settled the case in March with the SEC, agreeing to a five-year ban from U.S. stock markets. Mexico’s National Banking and Securities Commission fined the company $1.2 million.

It’s far from clear whether anyone will be held accountable.

The SEC, in a separate action in October, filed securities fraud charges against De Nicolas and three other former Homex executives who had already resigned from their posts. The agency is seeking unspecified civil penalties and the return of any ill-gotten gains.

But it’s uncertain whether any of the defendants will appear to address the charges in federal court in San Diego.

The company did not respond to requests for comment from the executives.

They are believed to be still living in Mexico, where federal authorities have declined to comment on whether they have launched an investigation.

d Homex is now on the comeback trail.

In October, Homex received $48 million in new capital from investors and is aiming to sell 1,800 homes this year.

“The housing industry in Mexico continues to be a key sector in the economy and development of the country due to the necessity of new housing,” Jose Baños Lopez, the company’s new general director, said in a news release.

The company promised to make repairs to existing developments, but there are few signs of fixes, even in tracts where people line up for water at spigots or flee their homes after they collapse in ruins.

In September, two four-story condominium buildings in separate Homex developments toppled during a tropical storm in the Cabo San Lucas area. Residents and civil engineering groups had complained for years that the structures, which were constructed in creek beds, were not safe.

The wreckage has turned into hazard-filled playgrounds picked through by children and looters.

Meanwhile, at the Parque San Mateo development 30 miles north of Mexico City, Homex salespeople keep pitching dreams of homeownership. A wide avenue lined with fluttering banners leads to the sales office, which features a large mural of a smiling family enjoying a picnic.

But water shortages are a consistent problem, residents say, and rumbling diesel generators supply power to hundreds of residents — a noisy workaround for an unfinished electrical system.

Many residents have lived in the half-finished development for years but don’t have deeds to their homes. Homex never paid the escrow officer to complete the transactions, they say.

Yet sales agents greet potential buyers every day, handing them a brochure that says the homes, priced at $20,000 each, will increase in value as much as 40%.

“Your dreams,” the brochure reads, “are about to be transformed.”

Times researcher Cecilia Sanchez in Mexico City contributed to this report.

THE WHISTLEBLOWER

Humbertus Perez was Mexico’s leading homeowner activist, an academic turned fiery orator who railed against developers and investors reaping huge profits. Then the government threw him in prison without trial.

By Richard Marosi

reporting from chiconautla, mexico

A

ll is dark in the overcrowded cell, save for the dim light flickering from a threetiered bunk bed.

Humbertus Perez writes every night, his flashlight wrapped in cardboard so as not to disturb the accused car thief and the mugger with whom he shares a thin mattress.

The young men snore and occasionally throw a foot in Perez’s face, but it’s better than sleeping on the floor. There, dozens of inmates — alleged murderers, rapists, career criminals — lie sprawled on cots and planks, a malodorous tangle of arms and legs.

Perez, a 54-year-old academic, was Mexico’s leading homeowner activist — a fiery orator who railed against the Mexican housing developers and foreign investors who reaped enormous profits at the expense of working-class people.

To his supporters, he was an incorruptible one-man force. He saved thousands of homeowners from eviction. He led rowdy marches, battled Wall Street investment banks, called judges stubborn mules and publicly shamed governors and presidents — labeling the entire Mexican political system a criminal enterprise.

Scribbling legal briefs and letters every night while his fellow inmates sleep, Perez tries to keep his campaign alive from Chiconautla prison, 20 miles northeast of Mexico City.

Two years behind bars have taken a toll. Rashes cover his body.

Chronic diarrhea has forced him into diapers. He goes days without sleep.

“This is a hard place to do time,” Perez said by phone from the mess hall, where fellow inmates guard him so he won’t get stabbed. “I thought long ago they would kill me, but God has been very kind.”

Outside the prison walls, his homeowner movement, the Mexican Front in Defense of a Dignified Home — once thousands strong — is adrift without him.

Perez was arrested on Nov. 4, 2015, as he left a news conference where, in a characteristic burst of barbed oratory, he had accused top government officials of conspiring to destroy his movement. Authorities charged him with robbing two neighbors at gunpoint of a cellphone, a laptop and paint buckets because they owed membership dues to his Mexican Front.

Three sets of judges threw out the charges and ordered Perez’s immediate release, saying the witnesses’ testimony seemed scripted and contradictory. But the Mexico state attorney general’s office persuaded other judges to keep Perez

Brian van der Brug Los Angeles Times

PEREZ’S BACKERS , shown outside the prison, view him as an incorruptible one-man force who

exposed widespread fraud, shoddy building practices of developers and poor government oversight.

STATE OF MEXICO 57D

Chiconautla prison

85D

Mexico City

MEXICO CITY INTERNATIONAL AIRPORT 150D

9 MILES

U.S.A MEXICO Mexico City

Image from video

HUMBERTUS PEREZ exam-

Source: Mapzen, Openstreetmap

behind bars without bail.

Supporters of Perez say the relentless prosecution of a professor in a country where 95% of homicides go unsolved smacks of brutish retaliation.

In Perez’s saga, many of the nation’s entrenched problems converge: brazen corruption, official impunity and a rigged justice system that crushes those who raise a voice against powerful interests.

Perez’s only crime, as his supporters see it: calling out the greed that betrayed the homeownership dreams of millions of Mexicans.

“It’s pure revenge of businessmen and politicians,” said Arturo Chavarria, president of the College of Architects and Urban Planners, a professional association based in Mexico state. “Perez exposed all

the corruption in the affordable housing market and government housing policies over the past 20 years.”

ined infrastructure problems.

Swetha Kannan Los Angeles Times

d Perez’s spiral from first-time homeowner to prison inmate began when he turned on the kitchen faucet in his new home. Nothing came out.

Looking outside, he saw his neighbors in the Villa del Real development, in the Mexico City suburb of Tecamac, gathered around a burst water main.

Perez accused the developer, Urbi, of providing too few wells and pumping stations to serve the fastgrowing community. It was one of thousands of developments built

outside Mexico’s major cities from 2001 to 2012 in a governmentfunded effort to create affordable housing for millions of people.

The gaps in the Villa del Real’s water infrastructure overburdened the system, causing pipes to burst and pumping stations to malfunction.

Across Mexico, infrastructure problems were turning up in development after development, most of them far worse than Villa del Real.

No one appeared to be looking into the problems, so Perez decided to do it himself.

An economist and historian who lectured at the National Polytechnic Institute north of Mexico City, he knew his way around government archives.

“I was used to reviewing reports with thousands of pages. Imagine a mortgage contract. It only has 40,” said Perez, who spent years working on budgets as a legislative analyst for a Mexican senator.

Perez said he found evidence of collusion between builders and the government officials who approved developments despite inadequate water supplies. Of million-dollar infrastructure bonds disappearing. Of government officials ignoring reports warning of large-scale mortgage fraud.

He faced resistance at every turn. Officials ordered him out of their offices. Bureaucrats turned over documents only in response to formal transparency-law requests, which took time and money. Perez and fellow homeowners paid about $30,000 in copying fees alone.

Defenders of the housing pro-

gram say any flaws were outweighed by the benefits of providing affordable shelter for middleclass workers and people who would otherwise be in shantytowns.

Perez pushed a darker version, of crony capitalism run amok: Mexico’s biggest builders constructed flimsy homes with faulty public infrastructure, then sold the homes at inflated prices. Government officials, instead of acting on the problems, approved even more projects.

Foreign investors and bondholders reaped enormous returns.

In 2009, Perez asked the federal attorney general’s office to conduct a criminal investigation.

He presented a document alleging widespread fraud, accusing housing industry figures and government agencies of building defect-riddled infrastructure and systematically overvaluing substandard homes.

A year later, a financial crimes prosecutor concluded that there was enough evidence of wrongdoing to refer the case to a federal corruption unit and the Mexico state attorney general’s office.

There the cases sat.

d Homeowners at the Benevento development, 30 miles west of Mexico City, suffered from more than water shortages. The lights kept going out, sometimes for days.

Frustrated residents brawled with electrical utility workers and invaded the offices of the builder, Homex.

In 2015, residents turned to Perez for help.

His evidence file had grown to more than 14,000 pages, but the criminal investigations remained stalled. Perez had expanded his Mexican Front movement to developments across the country. Residents held marches, blocked evictions and paid dues to defray legal costs.

At Benevento, he targeted Infonavit, Mexico’s home financing agency, which had been sharply criticized for steering borrowers to problem developments.

When the New York Times reported in 2015 that Alejandro Murat, then director of Infonavit, and his family owned several properties in the U.S., including an upscale Manhattan condominium, Perez lashed out at Murat.

“It couldn’t be possible that while millions of Mexican families are condemned to live in housing without minimum standards for urban infrastructure … you continue living the high life of government officials,” Perez wrote to Murat.

Within a month, Infonavit allowed dozens of Benevento residents to stop making their mort[See Perez, AA12]

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S U N DAY, N OVE M B E R 2 6 , 2 017

L AT I ME S . CO M

MEXICO’S HOUSING DEBACLE

Photographs by

Brian van der Brug Los Angeles Times

BETTY PEREZ sends money to her husband, Humbertus Perez, so he can sleep on a bed in prison. She has lived with friends and relatives since his incarceration.

[Perez, from AA11] gage payments.

Such victories earned Perez intense loyalty from supporters. He saved many of them from foreclosure after they fell behind on highcost loans.

Perez found that banks were charging fees for insurance policies they never provided to borrowers.

Judge after judge declared the policies void, allowing overextended residents to avoid foreclosure.

In his biggest coup, he discovered that Mexico state had no law on the books allowing the foreclosure of homes.

Lenders seeking evictions had been citing a law typically used to repossess cars and furniture. Perez objected to the tactic, and judges sided with him.

Public interest attorneys say this probably saved thousands of homeowners from foreclosure.

“He revolutionized housing law defense in the state of Mexico,” said Jose Penaflor, a social justice attorney in Tijuana.

In protest marches and radio interviews, Perez portrayed the housing boom as little more than a criminal enterprise meant to enrich government and industry players at the expense of first-time homeowners.

He accused President Enrique Peña Nieto of mismanaging the building spree as governor of Mexico state from 2005 to 2011, when hundreds of thousands of homes were built.

Pena Nieto’s office did not reply to a request for comment.

Perez called state judges “stubborn mules,” slammed U.S.-based mortgage lenders and likened the Mexican government to organized crime.

“The story of Mexico is the story of a criminal economy,” Perez said in a radio interview. “Because in Mexico, the rule of law was never established. What was established was a criminal economy that works only for whoever gets power.”

d The years-long building boom sparked regular protests. Homeowners in tracts across Mexico would block roads, march on government buildings and invade developer offices. They were the desperate tactics of poor people who couldn’t afford legal representation.

Perez’s Mexican Front, by comparison, was a middle-class movement with the financial resources through membership dues to keep Perez investigating and traveling.

Over the years, signs emerged of its growing clout.

Industry and government officials on several occasions offered to cancel the mortgages of Perez’s leadership team — 18 in all — if he would disband the organization, Perez and several of his supporters said. One of his deputies was offered a home remodel and new furniture, Perez said.

In 2011, the unit of the Mexico state attorney general’s office that was supposed to investigate Perez’s complaint was enveloped in scandal.

Two prosecutors were fired, in part for failing to pursue the case, the Mexican newspaper La Jornada reported.

The head of the unit allegedly received $100,000 a month to make public corruption cases go away, La Jornada reported. The newspaper didn’t say who paid the bribes.

Surrounded by hundreds of supporters, Perez led noisy protests outside government buildings. He shouted the names of doz-

SUPPORTERS of Perez gather outside Chiconautla prison calling for his release. “This is a hard

place to do time,” Perez said in prison, where some fellow inmates protect him from attacks.

ens of suspect officials, lenders and banks, some of them U.S.-based.

He made public a government report showing evidence of mortgage fraud dating to 2008. Mexico’s National Commission on Human Rights, prodded by Perez, also urged prosecutors to investigate.

Perez became such an industry scold that, even as he sat in prison, his movement was considered a major barrier to foreclosure actions. A leading mortgage servicing company gave a PowerPoint presentation this year to a Mexican congressional committee labeling Perez’s movement a “latent risk” to the enforcement of defaulted loans across the country.

In 2013, a federal judge handed the Mexican Front a major victory.

Judge Carlos Martinez Hernandez ordered that the fraud case be resolved.

“It’s impermissible that the respective authority postpones indefinitely the integration and resolution under the law,” Martinez said in his ruling.

On a spring day in 2014, five years after Perez first presented evidence of criminal conduct to prosecutors, two investigators showed up at Villa del Real.

Perez and hundreds of his fellow homeowners greeted them. Perez wore a red cap over his blackrimmed glasses and unrolled a tract map of the development for the officials.

As far as anyone knew, government investigators had never shown up at one of the developments looking for criminal wrongdoing by the builder.

With homeowners recording him on video, lead investigator Mauricio Loeza visited the pump station and climbed atop a storage shed. He saw ruptured pipes and listened as a local water district official confirmed that the builder had never turned over the infrastructure to the agency.

Loeza likened the system’s defects to an embolism in a human body, which causes blood pressure to build.

In the development of 6,000 homes, the failure to finish the water flow network was putting too much stress on the existing system, causing the pipes to burst and pumps to break down.

In his report, Loeza confirmed what Perez had said all along: Urbi had failed to complete a well, pipes and a water treatment system, yet city officials gave $2 million of the

construction bond back to the developer.

Prosecutors returned a 320page indictment charging two Urbi executives with a type of fraud specific to developers who sell houses that fail to meet the terms of the contract. On Aug. 15, 2015, one of the men, Rene Jaime Mungarro, was detained by U.S. customs agents as he tried to cross the border into Texas. He was handed over to Mexican authorities.

“This is important news for thousands of families that were defrauded by Urbi,” Perez told his fellow homeowners. “Today I can tell you that we can see light after so many years of legal battles.”

Seven days later, Mungarro was released. Perez said his release was part of a settlement agreement requiring Urbi to complete the water system at Villa del Real.

But in a recent interview, Mungarro said he hadn’t worked at Urbi since 2003 and that his arrest was a terrible injustice.

Mungarro denied that the settlement included a promise to repair the development. He referred further questions to Urbi. Representatives for the developer agreed to an interview, then canceled. The company declined to comment.

The other Urbi executive named in the indictment was never arrested.

d “This home has been seized under a protective order related to a housing development crime.”

The signs started appearing in September 2015, nailed to abandoned homes and posted in empty lots in Villa del Real.

Perez was taking the fight to his own development, armed with a judge’s order declaring parts of it a crime scene.

Under the judge’s order affecting 6,200 homes, no properties could be bought, sold or taken over by squatters.

When local authorities failed to enforce the order, Perez again took matters into his own hands.

Escorted by dozens of Mexican Front members, Perez posted signs, nailed doors of abandoned homes shut and gave notices to people believed to have illegally inhabited more than 300 homes.

Perez, citing the court order, told them they would have to leave.

Perez said the tactic was aimed at forcing Urbi to either compen-

sate homeowners or complete the infrastructure. At the time, Urbi was seeking bankruptcy protection in a Baja California court.

Perez traveled there in a bid to block the proceedings.

Urbi, once Mexico’s third-largest builder, was awaiting a judge’s decision on a plan that would put the company under the control of its foreign creditors and bondholders. Those included the World Bank, Newport-Beach based Pacific Investment Management Co. and employee pension funds of Coca-Cola and Northrop Grumman.

By October 2015, Villa del Real had turned into a battleground of warring neighbors. Mexican Front supporters confronted squatters they said were being allowed to live in vacant units by local officials beholden to Urbi.

One video showed a man raging at Front supporters through a car window. Another showed Perez screaming at a squatter and calling him a criminal. Packs of barking security dogs roamed legally disputed vacant lots.

Front leaders said groups of men in unmarked cars started following them. Perez and his family moved out.

At a news conference in Toluca in November 2015, Perez accused the mayor and police chief of Tecamac of having links to violent criminal groups.

On his way out, Perez was arrested.

d Chiconautla prison lies at the end of a long dirt road, next to a garbage dump and the shantylined hill that gave the prison its name.

Its yellowed walls, built to house 900 inmates, hold about 3,000.

Perez shares his tiny cell with dozens of other inmates, along with bedbugs and cockroaches. Illnesses spread quickly.

One inmate recently had his leg amputated due to a bacterial infection, Perez said in a telephone interview. Another was beaten to death. Inmates urinate into soda bottles because sleeping bodies block access to the bathroom, where inmates rest atop overturned paint buckets or sprawl in the shower.

“Because we live near a garbage dump, they consider us garbage, but we’re not garbage,” Perez told a

judge in a prison courtroom, where he sat inside a glass-walled cell.

Perez, unlike most of his cellmates, could afford bail.

But prosecutors argued against it, saying he was dangerous.

They claim that Perez, while making the rounds in Villa del Real with his supporters, broke into three homes to take several items from residents. He allegedly hurled threats and pointed a gun at a woman’s chest.

Several judges who reviewed the case expressed serious doubts.

They questioned witness statements that seemed suspiciously similar, the lack of evidence that Perez had a gun, with one judge suggesting the claim was fabricated, and why, if Perez was such a threat, did it take almost a month for some witnesses to be questioned by police.

At a court hearing in April 2016, Perez exploded at judges and prosecutors. Aware that the proceedings were being video-recorded under Mexico’s judicial transparency laws, he went on for two minutes, a rare public airing of disgust with the country’s criminal justice system.

“You’re corrupt, that’s what you are,” Perez told the panel of three magistrate judges. “Amateurs, who come here to defend a network of criminals.”

Perez turned to the prosecutor, Fernando Ulises Cardenas, and threatened to detail a pattern of trumped-up charges and widespread brutality against him and other inmates.

“You have no shame at how you torture people and fabricate crimes,” Perez said. “You’re a coward.”

A few days later, a video was leaked to the Mexican media. It showed Cardenas appearing to tell fellow prosecutors at a staff meeting that innocent people are often jailed on trumped-up charges.

“Who says crimes aren’t made up?” Cardenas said. “That happens all the time.”

The attorney general’s office for Mexico state did not respond to requests for comment.

The leaked video boosted Perez’s image as a victim of prosecutorial abuse. A representative of the U.N. High Commissioner for Human Rights visited Perez last year, expressing concern that Perez was being persecuted for his defense of human rights.

But the attorney general’s office has continued filing appeals, even after another federal judge in January ordered his immediate release.

Cardenas, despite calls for his resignation, remains the attorney general’s top litigator.

Developments across Mexico, meanwhile, continue deteriorating, even while their builders launch new projects. At Villa del Real, Urbi never dug additional wells, and burst pipes still flood the street, residents say.

Perez isn’t giving up. “Everything we’ve said has been proven true, and that bothers builders like Urbi,” he said.

His supporters send him money, some of which goes to pay $1 per week for the privilege of sleeping on a bunk instead of the floor.

Windy days, he said, bring him inspiration. When it’s blowing hard, he can hear the chants of his supporters carried over the prison walls. Dozens have gathered in rowdy protests demanding his release.

“We are all Humbertus,” they yell.

Times researcher Cecilia Sanchez in Mexico City contributed to this report.