Pick your dream: a five-bedroom lakeside vacation home in fashionable Valle de Bravo? Your own business--say, a factory, complete with machinery, north of Mexico City? A pig farm in rural Tepotzotlan?
The catalogue of Mexican properties from La Salle Partners offers each of these, and more. All are broken dreams: 434 foreclosed properties set for auction at the end of this month.
La Salle ominously calls the catalogue “First Offer,” an indication that the $275 million worth of property being auctioned by five banks is just the start of the free-market solution to the mounting Mexican debt crisis: Debtors who cannot keep up with burgeoning interest rates and late-payment fees lose their property.
Fury at such a policy has united the political right and left with mortgagors and credit-card holders. Debtors who once ignored politics have become protesters, pouring into the streets of most major cities, blockading the Interior Ministry and crowding into legislative sessions to demand debt relief, insisting that the government and the banks share the cost of the debt crisis.
After the peso’s value was cut nearly in half in December, the government imposed a tight money policy to control inflation. That caused interest rates, which had been 20% to 30%, to rise above 100%, affecting nearly all debtors; Mexico has virtually no fixed-rate loans.
Over the past eight months, unpaid interest and late-payment fees have accumulated to amounts far more than the principal on many debts. Since April, the banks’ bad-loan portfolio has grown by one-fourth, to $17 billion--18% of outstanding loans.
“The bad-loan problem is not a time bomb but a problem that has already exploded,” warned Congressman Saul Escobar of the leftist Democratic Revolutionary Party, known as the PRD.
Recently, a local leader of the most radical debtors protest group was murdered, fueling the national debate over what to do about the skyrocketing interest rates and onerous late-payment penalties that have left an increasing number of cash-strapped Mexicans facing foreclosure. The problem cuts across social classes, geographic regions and economic sectors.
“If anything unites Mexicans in this moment, it is that we are all debtors,” said Congressman Mauro Gonzalez Luna of the PRD.
“At least one of every six indebted Mexican farmers cannot pay,” said Congressman Salvador Beltran of the rightist National Action Party, known as the PAN. “Among merchants, the number of insolvencies has increased from one in 16 to one in seven.”
One young financial whiz was shocked to learn after her father’s death earlier this year that the family farm in the Gulf state of Veracruz is heavily mortgaged. As interest rates rose, her father had sold cattle to keep up the mortgage payments until the crop that would pay off the loan was harvested. But the crop was lost to heavy rains. Then he ran out of cattle.
“My brother says we should sell,” she said, nearly in tears. “But that farm paid for our college tuition. It is our only patrimony. I am not selling.”
Frantic upper-middle-class Mexicans have flooded the rental market with homes whose mortgages they can no longer pay, said Deborah Pike, assistant director of International Relocation Services, a residential rental brokerage.
“The owners would never admit this,” she said. “A lot of young couples took out dollar-based mortgages, and when the devaluation came, they could not meet the mortgage and [now] have to put the house up for rent.”
Even homeowners with peso-denominated mortgages saw their interest rates quadruple and their monthly payments increase commensurately. Utility rates rose by one-third. They could no longer afford to live in their own homes.
Until now, bankers and debtors have been at a standoff, with the banks reluctant to foreclose as long as some hope of payment remained, and the borrowers unwilling to restructure loans under the terms banks offered.
What indebted companies need are lower interest rates and forgiveness of late-payment fees, said Medardo Mora, a lawyer whose clientele is mainly small businesses. The banks want to stretch payments out over 20 years or more, with no breaks on interest rates or late fees.
“That’s like going back to the old company store where you work your whole life just to pay the interest,” Mora said. “I have clients who have just said, ‘Here are the keys’ ” and turned over their homes and businesses to the banks.
Banks have traditionally been reluctant to accept those keys because they had no efficient way to sell the assets; auctions like the one this month are highly unusual.
“Mexican banks are not set up to handle non-performing loans,” said William B. Palm, a partner in the E & Y Kenneth Leventhol Real Estate Group of Dallas, which is taking bids for the sale.
About 40% of the inquiries about this month’s auction have come from the United States--a further cause of resentment here about the auction. “When we warned that the crisis and the policies of this government were leading us to a future of mortgaging the national territory, we never believed it would happen this quickly,” Escobar said dryly.
Escobar, Beltran and their constituents insist that the government has a responsibility to find an alternative to foreclosure auctions. In a recent congressional committee hearing on the debt crisis, legislators quoted from “The Merchant of Venice” and insisted that debt has become an issue of national security and sovereignty.
“The economic crisis occurred because the government lied about public finances, saying they had been administered well, that the reserves were sufficient, that the monetary and foreign exchange policies were based on sound technical bases,” said Congressman Gabriel Llamas of the PAN.
“The banks are responsible. The debtors also have their responsibility. But the government has to pay its share, and if it will not pay economically, let it pay at the polls,” he said.
But administration officials have insisted that the government will intervene only in cases where banks have committed fraud. If there are no regulatory problems, the solution will be left to the market.