A typical conversation went like this:
“Excuse me, do you offer home mortgages?”
“Well, yes.” She seems startled.
“What sort of customers borrow from your bank?”
“People who have no other choice.”
On April 25, 2001, the Tijuana daily La Frontera published a 54-page insert on the city’s construction industry. Among articles boasting the city’s strong economy were fretful titles like “Industry Leaders Agree: We Need More Credit for Houses” and “Bank Loans Aren’t Very Attractive.” Mexico, these articles stated, needed at least six million new homes, and Tijuana, the nation’s fastest-growing city, was especially short on housing.
“It’s kind of surreal,” said Gustavo del Angel last year on the chilly spring afternoon we met to talk about Mexican real estate. Del Angel, a Mexico City native and Stanford graduate, is the only academic in North America who specializes in the history of Mexican banking, and it happened that he was doing some research at UCSD’s Center for U.S.-Mexican Studies. Del Angel showed me a printout of mortgages, or hipotecas, then offered by six of Mexico’s largest banks. The loans really weren’t attractive. On average the banks required a 40 percent down payment and offered a 24 percent annual rate for a maximum of 15 years. (Under those terms the monthly payment on a $100,000 loan would be a little more than $2000.) Beside each loan and its terms was printed the word fija.
“Now, fija means ‘fixed,’ right?” I asked del Angel. “Just like in English. It means the interest rate won’t change. It means it’s a fixed-rate mortgage.”
“Well, no,” said del Angel. He sighed. “Well, yes. Of course. Fija does mean ‘fixed.’ Just like in English. Something that’s fixed is something that can’t or won’t move. ‘Fixed’ means the same thing in Spanish as it does in English. Except in this case. I mean, the banks say it’s a fixed-rate mortgage. But it really isn’t. The rate is actually linked to increases in the minimum wage, and a few other things. There’s really no such thing as a fixed-rate mortgage in Mexico.”
“So ‘fixed’ doesn’t really mean ‘fixed?’ ”
“Yes. You’ve got it. You have to understand, only in the past year or so have Mexican banks again started to offer mortgages. They really don’t have much experience in it. In 1982, President López Portillo nationalized all the banks, which was an enormous disaster for Mexico. While the rest of Latin America was moving ahead economically, the Mexican banking industry virtually went to sleep for ten years. Bank employees were suddenly state employees. Bank managers had no incentive to be competitive or to worry about things like profitability. And since they were state employees, their jobs were basically political, and so they were vulnerable to corruption, like giving loans to their friends. This went on for ten years. Mexico, which up to 1982 really had no significant tradition of credit, became even less familiar with it. When the banks were reprivatized in 1992, Mexican banks really had no experience in lending in a normal way. Suddenly, they were offering mortgages again, and they didn’t know what they were doing. They made a lot of bad loans. Things got out of control and in 1994 the entire system collapsed.
“The peso lost 138 percent of its value. Interest rates reached 150 percent. No one had a fixed-rate mortgage. So all across Mexico, you had thousands and thousands of people with mortgages who from one day to the next owed far more than their homes were worth. Their monthly mortgage payments were impossibly large. People were devastated. There were suicides. For Americans, such a situation can be difficult to understand. The American economy is very stable. No one expects any great fluctuations in the dollar’s worth. That’s why American banks can offer fixed-rate mortgages for 15, 30, as many as 40 years. American banks are confident that the economy isn’t going to change dramatically. Could Americans even imagine a 150 percent interest rate?”
Del Angel paused to let the information sink in. The implications were remarkable. Not long before Mexico’s collapse in 1994, Mexican banks were offering 15-year mortgages at around 38 percent. At that rate, the monthly payment on a $100,000 loan would have been around $3200. When interest rates jumped to 150 percent, the monthly payment on the same $100,000 loan would have soared to $13,000.
“In 1992, when the Mexican banks were reprivatized, the Mexican banking system and Mexican finance laws weren’t very sophisticated. There were people who figured out that they could, for a small amount of money, legally create a corporation and through it borrow money from a bank. Once the money had all been used for the corporation’s ‘expenses,’ the corporation would fold and the bank had no legal means of getting its loan back. The corruption was enormous. People made millions. It was like your savings and loan crisis in the United States, but the consequences were much greater. The whole system collapsed. Interest rates skyrocketed. The majority of people in Mexico’s small but growing middle class were in danger of losing their homes. If you’ll remember when Clinton agreed to loan Mexico $16 billion, that money went to restructure those loans. And now the citizens of Mexico will have to pay that $16 billion debt.
“I think the best way for Americans to understand some of the basic differences between the two economies would be to go to a lower-class, or even middle-class, neighborhood in Tijuana. Wherever you look, you see what appear to be half-built homes, or homes that seem to be in a continuous state of construction. This is a direct result of the inability of Mexican banks to give affordable loans. In Mexico, people save up their money and they buy a little piece of land. They save up a little more and they build a small home on it. Maybe a kitchen and a living room. Little by little, as they save money, they add another room and another. You know, pay as you go.”