How Citigroup stumbled in the Mexican housing market
By Elinor Comlay and David Henry
ZUMPANGO, Mexico/NEW YORK - (Reuters) - Just outside the town of Zumpango, about an hour from Mexico City, packs of stray dogs sniff around abandoned homes in a half-empty neighborhood.
The Santa Fe housing development, where power outages and flooding are the norm, is a casualty of Mexico's dysfunctional housing market. Work on the subdivision stalled before the sewer or the high school was finished. Water pipes and doors have been looted from homes.
The neighborhood has created heartache for its residents, but it is also disappointing for Citigroup Inc (C.N: Quote), which helped finance Desarrolladora Homex (HOMEX.MX: Quote), the site's developer and once Mexico's second-largest homebuilder.
Last year, the U.S. bank posted weaker-than-expected third-quarter earnings after effectively writing down more than a quarter of the value of loans made to Homex and two other struggling Mexican homebuilders, Corporación GEO (GEOB.MX: Quote) and Urbi Desarrollos Urbanos. URBI.MX And some banking analysts say they fear the loan losses could be a taste of further emerging market credit losses to come for Citigroup.
The $300 million in loans were made starting in 2009. Bank executives at Citigroup in New York turned down at least some of the business because it seemed too risky, two sources involved with the lending process said. The executives were reluctant to make real estate loans in emerging markets after losses from the U.S. housing bubble led to three government rescues for Citigroup in 2008 and 2009.
New York balked, but the bank's Mexican subsidiary, Banco Nacional de Mexico, better known as "Banamex," went ahead and lent to the homebuilders. Banamex, which is the second biggest bank in Mexico with 1,700 branches, has room to make some loans that do not get vetted by New York, as long as its overall portfolio is safe enough, the sources said.
"New York turned them down because they made no sense," said one of the sources, referring to loan applications by Mexican homebuilders at the time.
Citigroup spokesman Mark Costiglio said in a statement that "the origination and management of the homebuilder loans, as with all loans in Mexico, was conducted under the oversight and framework of Citi's independent risk management function, and any suggestion to the contrary is false." Continued...