HOUSING Affordable Housing for Low-Income Civil Servants in Mexico through Payroll Deduction CLIENT FOMEPADE, S.A. de C.V. Sofom ENR is a leading private Mexican non-banking financial institution that leverages payroll deductions to offer loans and collect payments from state and municipal civil servants at the base of the pyramid (BOP). The institution was incorporated with the specific purpose of offering BOP civil servants financing for personal and housing loans, and has almost 80 agreements in 17 states for payroll loan deductions.
IDB SUPPORT The Inter-American Development Bank’s Opportunities for the Majority (OMJ) loan of up to MXN $84 million, or approximately US $6.7 million, will allow FOMEPADE to expand its existing portfolio for home improvements and new housing for the BoP. With the funds, FOMEPADE estimates it will provide 26,371 home improvement loans and 18,962 loans for new homes built by certified providers.
THE CHALLENGE
THE SOLUTION
Housing shortage is a large and growing problem in Latin America and the Caribbean, with one in three families living in unsuitable or poorly built structures or in homes that have no water, sewage or electricity. Mexico’s government estimates that the country needs 9 million homes given its housing shortage and the poor condition of existing homes. A new national policy and new laws to stimulate the housing sector through affordable loans and other incentives are hampered by poor coordination among housing market players. Much of the working population lives in unsuitable homes. Although Mexican civil servants with small salaries have stable jobs, many either have no credit history or have bad credit because they borrowed at high interest rates and defaulted on their loans. As a result, these public sector employees are considered high risk, low-profit borrowers and commercial banks do not lend or offer them affordable financing because it is too expensive to run credit checks and tailor small loans to a hardto reach population. In addition, many BOP civil servants do not qualify for a homebuyer mortgage through national programs, which offer 85 % of all mortgages in Mexico. Thus, many BOP workers build their homes themselves, even if they have no building expertise. It is slow and expensive and the houses are often poor quality.
FOMEPADE makes a dent in the shortage of low-income and decent housing in Mexico by offering BOP civil servants three financial instruments—all of them repayable through automatic payroll deduction. First, they offer mortgages for new low-income houses, second, they offer a lease-to-own program and third, they finance do-it-yourself home improvement projects and offer construction expertise. FOMEPADE assesses BOP civil servants’ creditworthiness. The company makes sure monthly payments never exceed a third of a borrower’s monthly salary. And it refinances existing debts for low-income civil servants so they can pay them off gradually and affordably. In 2012, when the program started, FOMEPADE financed 454 home improvements and 349 new housing solutions. It expects to increase those numbers by 2,500 and 800 correspondingly in 2013.
Above, a newly built house in the municipality of Rojas de Cuauhtémoc in Oaxaca, Mexico, thanks to a loan provided by FOMEPADE. Below to the right, a photo of the previous living conditions.
INNOVATION MAKES THE DIFFERENCE Building innovative strategic alliances is key to FOMEPADE’s success in lending to low-income homeowners and buyers. Agreements with state and local governments allow FOMEPADE to structure affordable and convenient payment plans for employees based on income, using payroll deduction. That lowers the company’s credit risk and cost. Coordination with a national program allows FOMEPADE borrowers to tap directly into a subsidy. Finally, agreements with certified homebuilders insure that BOP homeowners can afford a mortgage for a high-quality house built to code and delivered on time.
OMJ Portfolio 2013
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