VZCZCXYZ0002
RR RUEHWEB

DE RUEHBU #0416/01 0981706
ZNR UUUUU ZZH
R 081706Z APR 09
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 3508
INFO RUCNMER/MERCOSUR COLLECTIVE

UNCLAS BUENOS AIRES 000416 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EIND EFIN PREL PGOV AR
SUBJECT: HUD SECRETARY DONOVAN MEETS WITH LEADING ARGENTINE HOUSING 
EXPERTS 
 
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Summary 
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¶1. (SBU)  A lunch hosted by the Ambassador in honor of Secretary of 
Housing and Urban Development Shaun Donovan  was attended by a range 
of notable Argentines representing the development, architectural, 
financial, business, and government sectors, as well as by the DCM. 
After prior meetings with official representatives, including 
Minister of Planning Julio de Vido and Mayor of Buenos Aires 
Mauricio Macri, this event was an opportunity for Secretary Donovan 
to hear the views of individuals who have been intimately involved 
with the history of housing real estate development and finance in 
Argentina over the past few decades.  The discussion tended to focus 
on the economic issues that drive housing development and the ways 
in which subsidies can be useful.  A major portion of the discussion 
focused on the current housing situation in the U.S. and its 
response to the crisis affecting single-family home mortgages.  It 
ended with Argentine guests agreeing that President Obama has the 
highest approval rating of any politician in Argentina.  End 
Summary. 
 
------------------- 
The U.S. Experience 
------------------- 
 
¶2. (SBU) In response to widespread curiosity about the situation in 
the U.S., the Secretary observed that the U.S. Government needs to 
be aggressive in garnering support for its solutions to the current 
crisis.  He noted that, with 45% of December 2008 home sales being 
distressed, mortgage solutions have the support of two-thirds of the 
population.  The Secretary said it was necessary to bring rates 
down, especially through Fannie Mae and Freddie Mac, which along 
with FHA, now guarantee over 90% of all new single-family home 
mortgages in the U.S.  He also noted that the current mortgage rate 
is at its lowest since data began being tracked in 1971.  Since 
mortgage spending in the U.S. typically represents 30% of a family's 
income, diminishing mortgage payments free up discretionary money, 
thus increasing consumer spending which can help the overall 
recovery. 
 
¶3. (SBU) The Secretary laid out a three-pronged U.S. government 
approach:  first, to keep interest rates low and provide incentives 
for first-time home buyers; second, to help financially sound 
existing mortgage-holders to refinance at more affordable rates, 
which could affect four to five million mortgages; third, for the 
USG to share 50/50 with banks for a reduction in interest rates, 
which could affect another three to four million mortgages. He said 
studies have shown that people will generally continue to pay their 
mortgage even though the amount is greater than the value of their 
homes, and he did not currently foresee the need to reduce the value 
of the mortgages themselves.  Only mortgages on primary residences, 
which represent about 80% of the total, are being supported by the 
above plan.  He also mentioned that it is very hard to develop a 
system to buy out commercial loans.  These will not be subsidized, 
he noted, but might be bought up, suggesting it could be an emerging 
long-term problem. 
------------------------ 
The Argentine Experience 
------------------------ 
 
¶4. (SBU) Eduardo Elsztain, Acting President of Banco Hipotecario 
(the leading mortgage lender in Argentina) and President of IRSA 
(one of the country's largest real estate investment and development 
firms), noted that mortgages in Argentina represent only 2% of GDP. 
One of the underlying problems, he said, is that there is no 
mechanism to adjust the value of the currency, which prevents the 
use of mortgages to preserve money.  He predicted that mortgages 
might increase over the next decade to 10% of GDP, which would at 
least move Argentina half-way to current levels in Chile and Brazil. 
 People in Argentina do not trust the system, he said, and not only 
are there virtually no mortgages, but also no second mortgages or 
mezzanines.  Hence, Argentines use their liquidity to purchase 
property in cash. 
 
¶5. (SBU) Secretary Donovan asked the roundtable how they would go 
about creating a mortgage market in Argentina.  Elsztain said it is 
in the hands of the state.  Referring to the nationalization of all 
private pension funds last year, he noted that the state is now the 
only place to get capital.  Daniel Artana, Director of FIEL (a 
private, independent, non-partisan and non-profit institution 
devoted to economic and social research on Argentina and Latin 
America), suggested linking mortgage rates to an index of salaries, 
which begs the question of who handles statistics, as the current 
official organization's figures are considered unreliable by all 
private sources.  The Secretary noted that it might be necessary to 
tap into capital markets to create securitization, and he gave the 
example of Denmark, which has unique a bond market linked to 
mortgages.  He mentioned the challenge of establishing land 
ownership as another problem underlying the difficulty in obtaining 
financing, particularly for the poor. 
 
------------- 
Local Lending 
------------- 
 
¶6. (SBU) Secretary Donovan asked about recent media reports 
suggesting that the nationalization of Banco Hipotecario was 
imminent.  Elsztain, its acting president, said he had heard many 
contradictory rumors over the last few months from different 
ministers.  Elsztain did not believe that the GoA would ultimately 
do anything and noted that despite all the rumors, he still made all 
decisions.  While he felt that better-quality solutions result from 
demand-side assistance, he pointed out that the key was in how to 
provide credit to families.  Banco Hipotecario has 120 years 
experience in the business, he said, and at least has the ability to 
place many mortgages, which is important to the Argentine economy. 
He noted that, over the last five years, construction had been one 
of the main engines of economic growth.  Pedro Nicholson, a partner 
in Estudio Beccar Varela (a main line law firm), noted that the real 
estate sector in Argentina provides work directly or indirectly to a 
million employees, and that GoA support of this sector is essential 
to the economic well-being of the county.  Jorge O'Reilly, a 
prominent developer and advisor to Presidential Chief of Cabinet 
Sergio Massa, also predicted a construction slowdown, should the 
government in Buenos Aires try to collect taxes too aggressively. 
Elsztain said that investment in housing is the number-one priority 
to maintain employment. 
 
¶7. (SBU) The Ambassador referred to earlier talks between the 
Secretary and the Vice-Mayor of Buenos Aires, which touched on the 
ways in which to use public money to fuel private sector lending. 
Secretary Donovan observed that mortgage capital is the key.  The 
question is how to get the private sector involved and the ways in 
which government can assist in helping to guarantee the risks.  The 
Ambassador noted that one of the challenges in accumulating lending 
capital in Argentina is that no one has the confidence to commit 
their money to a bank for more than 60-90 days.  Elsztain agreed. 
 
-------------------- 
Getting Good Results 
-------------------- 
 
¶8. (SBU) Nicholson pointed out that Argentina lacks 3.5 million 
units of housing, which led to a discussion about the physical and 
social quality of public housing projects. Daniel Becker, a partner 
in Becker & Ferrari Architects (an award-winning architectural firm 
in Buenos Aires), voiced his concern about the quality of housing 
being built, and noted that previously publicly supported mid- and 
high-rise projects such as Piedra Buenas and Fort Apache (a phrase 
borrowed from its namesake in The Bronx, NYC) are in terrible 
condition and should be torn down.  He referred to some well-known 
cases in which U.S. public housing projects had been demolished. 
 
¶9. (SBU) Secretary Donovan noted his preference for demand-side 
subsidies and mixed-income housing that have been shown to avoid 
many of the problems previously experienced by all low-income 
projects.  Although Artana had referred earlier to FONAVI, the main 
federal government housing agency which funds housing through IPV's 
(Provincial Housing Institutes), Secretary Donovan observed that all 
funds for this program were provided on the supply-side, which tends 
to yield substandard housing at high cost, and noted that 
administrative costs alone were 22% of program funds according to 
the Bank study.  (Note: A November 2006 World Bank/International 
Finance Corporation report reached similar conclusions.  End Note.) 
 
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Mixed-use projects 
------------------ 
 
¶10. (SBU) Noting Secretary Donovan's surprise that a project such as 
Puerto Madero could be developed without the type of municipal 
financing which is typical in the U.S., Nicholson pointed out that 
this fact actually limits local developers to developing projects 
only for the wealthy.  Becker noted that Puerto Madero is not a 
mixed-income area, hence not a real neighborhood.  The Secretary 
said many local zoning ordinances in the U.S. are required to 
support mixed-use of areas and described a voucher system which 
people can use to rent apartments on the open market. 
 
-------------------- 
Economics of Housing 
-------------------- 
 
¶11. (SBU) Issel Kiperszmid, President of DYPSA International (a 
major Developer with a strategy of "exporting apartments" by 
focusing on foreign buyers for its projects), noted that, while two 
years ago some 40-50% of the people buying apartments in his 
projects were foreigners, there are virtually none now.  Elsztain 
suggested that this might have been because many Argentines have a 
"foreign" identity for capital purposes. 
Secretary Donovan explained that NYC also used to have strong 
foreign investment in apartments, especially on the high end. 
 
¶12. (SBU) Getting back to an earlier question of whether the cost of 
construction in the U.S. exceeds the price of housing, Secretary 
Donovan said that there are indeed houses in Cleveland, for example, 
that have been sold by banks at far less than construction costs, 
but that typically the cost of construction is still less than 
current values.  O'Reilly pointed out that when the price of housing 
is higher than the cost of building, demand is not necessarily 
indicative of a bubble but rather of desirability, as in New York 
City and Buenos Aires.  The Secretary recalled the 1977 World Series 
in NYC, when famed sports broadcaster Howard Cosell pointed out to 
millions of viewers all the apartments burning in the background, 
subsequent to having been stripped of valuable construction material 
such as copper piping.  Secretary Donovan pointed out that the NYC 
Housing Agency at that time had taken over more than 100,000 
apartments, then renovatedand sold them for as low as a few hundred 
dollars.  Given the improvements in New York City neighborhoods over 
the past three decades, he said, some are now worth a million 
dollars, demonstrating the significant impact of these policies. 
 
---------------- 
Back to Politics 
---------------- 
 
¶13. (SBU) Turning to bilateral relations, Nicholson said that the 
Argentines are always optimistic about the relations between the two 
countries.  Secretary Donovan noted that he had heard that President 
Obama is the most popular politician in Argentina.  All of the 
Argentine participants agreed.  Nicholson pointed out that there are 
emerging politicians in Argentina, but that the system does not 
trust new blood and that it is difficult for new politicians to 
emerge.  In response to a question by the Secretary about the 
percentage of political vs. civil service appointment, Kiperszmid 
suggested that it was similar to the situation in the United States 
but noted that a professional civil service was lacking.  The 
Ambassador agreed that the civil service is not strong in Argentina 
and observed that agencies do not usually work well together. 
Secretary Donovan noted that inter-agency cooperation is also a 
challenge in the United States. 
 
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Comment 
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¶14. (SBU) This lunch provided an opportunity for Secretary Donovan 
to hear the views of individuals who have been intimately involved 
with the history of housing and finance in Argentina over the past 
few decades.  It also showed that, while some of the challenges, 
such as public housing, are similar in both countries, the absence 
of a vibrant mortgage market and bank financing in Argentina makes 
the situation quite different when it comes to middle-class housing 
and project development.  End Comment. 
¶15. (U) This cable has been cleared by HUD Secretary Donovan. 
 
WAYNE