Spurring the Secondary Market:
A Mexican Fannie Mae?

To fill the void left by banks in the Mexican housing market, limited purpose finance companies, known as sofoles (sociedades financieras de objeto limitado), came to play a critical role in financing housing after the peso crisis in the mid-1990s. Sofoles are financed via the Mexican government and the debt markets rather than by deposits, and they financed 80 percent of all residential mortgages by 2000. In 2001, the government created the Sociedad Hipotecaria Federal (SHF) to spur the development of the secondary mortgage market. The SHF’s mandate is to promote market entry of domestic and private firms, multilateral institutions, and specialized agents such as originators and underwriters.

The SHF is charged with fostering market development by granting guarantees and promoting the creation of a central mortgage information database that centralizes all information on securitizations, mortgages, borrowers, and bond issues. The SHF acts as both a credit enhancer and a bond insurer to encourage foreign and domestic private insurance companies to participate in this market. The SHF is gradually moving from its banking activities towards insurance-oriented ones.

By providing partial mortgage guarantees, the SHF is expected to boost the secondary mortgage market. Investors are likely to be encouraged by the government’s assumption of a significant amount of the credit risk, and issuers will face lower transaction costs. Since the SHF assumes the risk for the loan’s first loss, less overall credit enhancement will be needed to meet a given rating standard. These SHF guarantees are similar to those provided in the United States by the Veterans Administration or private mortgage insurers.

To qualify for insurance, the SHF has issued underwriting criteria that may establish needed standards for debt-to-income and loan-to-value requirements, property type and value, and reporting requirements for financial intermediaries. The Mexican government will provide an explicit guarantee of SHF obligations to third parties for the first 12 years of its existence. In standardizing mortgage approval requirements and raising funds for mortgage credit through issuing bonds, the SHF takes on a role similar to that of Fannie Mae or Freddie Mac in the United States.

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