Mexico Attains a Securitization Milestone

The precedent for mortgage-backed securitization in Mexico was set in 2001, when the sofol Hipotecaria Su Casita issued a $10 million offering backed by a pool of residential mortgage loans to middle-income borrowers. But this issue was not a “true” mortgage-backed security (MBS); MBSs are typically backed by an existing pool of mortgages, but the funds raised by Su Casita’s bond issuance were placed in a trust account to purchase future eligible mortgages that Su Casita would originate. In preparing the bond issue, which yielded an 8.5 percent real return and sold out quickly, Su Casita took steps to ensure that the institutional and infrastructure requirements—including standardization, credit checks, and clear rules about foreclosure—were met.

Mexico’s first true MBS offering took place in December 2003, when the sofoles Su Casita and GMAC Hipotecaria originated a mortgage-backed security underwritten by Credit Suisse First Boston (since 2001, sofol securitizations had consisted of construction bridge loans). The $53 million dollar deal was priced at a real inflation-adjusted rate of 5 percent and found buyers among mutual funds, pension funds, insurance companies, and banks. The security was issued in inflation-indexed units, uses an inflation-linked currency, and has a final legal maturity of 16 years, with an average maturity of 5.7 years. The Dutch state-controlled development bank Netherlands Development Finance Co. supported the MBS deal with a 3 percent credit enhancement in the form of subordination of the residual certificates and a liquidity facility.

The arrival of the market
Standard and Poor’s analyst Juan Pablo de Mollein enthusiastically declared that the successful transaction signified that “Mexico’s residential mortgage-backed securities market has finally arrived.” He gave credit to the sofoles’ mortgage origination policies, their strong relationship with regulatory entities, and the standardization of credit origination criteria. The emergence of institutional investors like pension funds no doubt played a role as well; as Mexican pension funds looked to diversify their portfolios away from government bonds—spurred on by reforms issued after the Argentine sovereign default in 2002—mortgage-backed securities became an especially attractive option. For this reason, the Su Casita-GMAC securitization is a milestone in the evolution of Mexico’s financial markets. Given Mexico’s housing shortage and strong investor demand, the potential for the expansion of the MBS market is very high.

Moving forward
The next major step in the development of an MBS market in Mexico will come when the massive National Workers Housing Fund (INFONAVIT), the largest loan agency in Mexico and holder of 65 percent of Mexico’s $50 billion in outstanding mortgages, issues its first-ever MBS transaction. The $90 million deal is reportedly being put together by UBS Warburg and BBVA Bancomer. If it is well received, it could mark the beginning of a new source of financing for housing in Mexico, since INFONAVIT would likely find eager buyers for mortgage-backed securities among Mexico’s burgeoning pension funds, which face a shortage of investment-grade paper. INFONAVIT recently received investment-grade ratings for both peso- and foreign currency–denominated debt issuance, which will facilitate the sale of these securities.

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