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Box 12: MEXICO: LOW INCOME HOUSING PROJECT (LOAN 2612-ME) Background: Mextco's housing problems are rooted In the Project Impact: A Housing Finance Study carried out rapid growth (2.5% p.a.) of Its large demographic base under the project focussed Government attentlon on the (76 millon), the pace of Its urbanizatlon (over 5% fiscal Importance of housing subsidles durlng a perlod of p.a.), and the uneven financial capacity of consumers, severe financlal and economic adjustment. The Housing 70% of which earn Insufficlent Income to afford the price Pollcy Statement of February 1987 spelled out strategic of conventlonal housing on adequately sarviced land. goveriment commitments to sector reform, namely greater Therefore, about half of housing supply takes place on admlnistrative coordination, legislative changes, cost Illegally occupied and poorly serviced sites through the recovery targets and resource mobilizatlon for rental and initlative of clandestine developers iho lnfrlnge rural housing, paving the vey for subsequent Bank building codes and planning ordinances. This "Inlormal" operatlons In the sector. FONiAPO Improved Its property cannot be used as an acceptable collateral for operatlonal structure and financial capacity, home Improvement loans and buyers are forced to resort to contributing to the continuatlon of Its activity through the disadvantageous conditIons offered by of the the revenues of an already sizeable portfollo. The unregulated credit market. quantitative targets already achleved are Impressive, Including settlement of some 150,000 low Income families The critical Issues of the regulated housing supply are In over one hundred subprojects In 27 sTates, despite the (I) the generally low capital recovery of pubilc Inflatlon of constructlon costs and steady erosion of the Investments (traditlonally of the order of 30% In real beneficlaries ability to pay.

The critical Issues of the regulated housing supply are (I) the generally low capital recovery of pubilc Investments (traditlonally of the order of 30% In real terms); (11) the fragmentarlon of supply among disparate agencles, each practicing citfferent mortgage terms, Wiich renders It difficult to control and predlct the total public subsidy Involved; and (1i1) the Inequltable distrlbution of such subsidy among soclal groups. The rationale for the Bank loan approved on 08/06/85 es to strengthen capital recovery durlng the Initlal phase of operatlon of FON4APO, a natlonal trust fund established to finance land development and core housing for the urban poor.

On-lending Terms: The proceeds of the Bank loan are onlent by FOMNAPO to Sub-borrowars on terms and conditions Which vary with the type of Sub-Borrower and the unit cost of developments. As a first step In sector Improvement, a minimal level of cost recovery of 50% In real terms ves covenanted In view of FONiAPO' s rigorous targeting of Its productlon to benefticlarles of very low Income. The Loan Agreement cal led for revlews of the annual programs for commitment of loan funds and perlodic revislon of mortgage terms If needed. FONHAPO eventually agreed to a solutlon that: (a) malrtalns the level of mortgage payments In fixed proportlons to the real Income of beneficlaries (expressed In multiples of the prevalilng minimum wege rate); (b) charges an Interest rate equal to the level of domestic Inflatlon; (c) capitalizes Interest charges In excess of monthly payments, and (d) makes the fiscal subsidy explicit and budgetable, In form of an up-troni grant.

Project Objectives and Descriptlon: Following a housing sector revlew (IBRD **No.** 4993a-ME), Loan 2612-ME has concelved as a country-wlde operatlon, supporting FONiAPO's credits to States, Municipalltles and Bullding Assoclations. It es Intended to assist the Government of Mexico In Its objective to redirect an Increasing percentage of pubilc subsidies to the poorest and largest sagment of the housing market. The project also endorsed the Government's commitment to control and reduce the subsidy element of preferentlal credit, by making It explicit and moving tokerds Its gradual reductlon, Project Data: Total costs US$300 millon financed through a USS150 million loan of the Bank (50%), a US$40 millon equlty contrlbution by the Government (13.3%), USS35 million counterpart financing by Sub-Borrovers (11.7%) and USS75 millon (25%) by FONHAPO through ovn revenues. About 78% of total project costs are In civl' korks and 12% In land purchases with administrative, professional, and technical assistance costs accounting for another 10%. The forelgn component es estimated at about 25%. Project disbursement Is likely to be completed In a considerably shorter perlod (four years) than the originally anticipated seven years proflle.

Implementatlon: Subloans Include land preparatlon and baslc Infrastructure works, core dielilngs and technical assistance. The sub-borrowers prepare and Implement projects of a certaln size (minimum 500 units) wlthin estabilshed unit cost celilngs, participate In thelr financing, provide collateral guarantees, and allocate the facilltles bullt under mortgage arrangements to non-wage workers earning less than 2.5 times the minItaum salary.. One Important feature of the FONHAPO programs Is that beneficlarles' are pre-solec+ed and subloans are undervritten only ehen projects are completed and at least 80% occupled. Monitorlng and evaluation studles are conducted annually, verifying compilance wlth Income targoting, unit costs and cost recovery.

See IBRD ND. 5473c - MEXICO: Low Income Flousing Project, Staff Appralsal Report, July 18, 1985.