Mexican Mortgages: Structure and Default Incentives, Historical Simulation, 1982 to 1998

Joseph Lipscomb and Harold Hunt

Journal of Housing Research, 1999, vol. 10, issue 2, 235-265

Abstract: In 1995, the Mexican government sponsored a price-level adjusting credit system based on a unit of account called the UDI. This research examines the mechanics and behavior of UDI mortgages and compares them with dual-index mortgages (DIMs) in a simulation under the most volatile economic conditions in Mexico's recent history. We use Mexican economic data from February 1982 through January 1998 to simulate changes in payment-to-income ratios, equity-to-value ratios, and yields, both in pesos and dollars.Results indicate that UDI borrowers opting for the constant-amortization payment plan had low default incentives during most of the study period, reaching moderately high levels for a brief period of time for some borrowers. A comparison reveals that the DIMs used in Mexico resulted in greater incentives to default. We conclude that UDI mortgages are preferable to DIMs and offer greater potential for expansion of Mexico's mortgage markets.

Date: 1999
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DOI: 10.1080/10835547.1999.12091947

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