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“The local mortgage-backed bond market makes up 42% of Mexico’s capital markets. That is comparable to Europe and the US” Maria Tapia, Standard & Poor’s |
FOR WEALTHY AMERICANS and Europeans, real estate in Mexico conjures up thoughts of stunning Caribbean beach houses and mountain-top retirement haciendas. For millions of working-class and middle-class Mexicans, though, four walls, a roof and a few tasteful furnishings are more than sufficient. However, for years obtaining even a simple home has been hugely difficult because of a lack of financing. Houses were built room by room, funded by hard-won savings and with luxuries such as plaster and tiled floors postponed almost indefinitely.
Things have changed for the better – now a fast-growing residential mortgage-backed securities (RMBS) market is generating an unprecedented flow of capital for an ever faster-growing housing market, giving Mexicans another way to construct their homes and opening a lucrative route into Latin America for international investors. Ever since Mexico’s first $54 million RMBS issuance in 2003, the market has flourished to become one of the biggest successes of the 2000-06 term of president Vicente Fox, who made the push for construction and financing of more affordable houses one of his flagship domestic policies.
Mexican special purpose mortgage lenders, known by their Spanish acronym as sofoles, are expected to issue $1.7 billion this year, more than double the 2005 level, and $2.6 billion in 2007 if investor appetite is sustained. In mid-November Mexico’s largest mortgage lender, government-run housing fund Infonavit, sold a $207 million RMBS issue in the domestic market, Latin America’s largest such deal to date. The 22-year paper, which carries a 4.5% yield, was heavily oversubscribed, attracting more than 20 institutions, including private Mexican pension funds (afores), insurance companies and banks. “Mexico is the leader in Latin America in this market,” says Maria Tapia, associate director of structured finance at Standard & Poor’s. “The local mortgage-backed bond market makes up 42% of Mexico’s capital markets. That is comparable to Europe with 50% and the United States with 60%, so Mexico is at developed country levels.”
Demographics are driving the RMBS boom. Mexico’s population pyramid is shifting, with 30- to 59-year-olds – the age range in which most people become homeowners – now making up the largest proportion of the population. “Many of us are at that age when we’re looking for a house or a bigger and better house,” says local businessman Raul Vidaurri in Monterrey, Mexico’s third-largest city, which is predicted to see some of the biggest housing demand in Mexico over the next decade. “I was offered a fixed-rate loan, and approval was almost immediate, so it was easier to go ahead with a mortgage,” says Vidaurri, who is selling his house and buying a larger one.
Mexico’s 100-million population is also growing overall and becoming more prosperous. Mexico’s National Population Council forecasts that the number of households will grow by 60% on 2000 levels to reach 36.3 million in 2020. Meanwhile, Mexico has a housing deficit of some 6 million homes, meaning demand is assured for at least five years to a decade into the future. Mexico’s state-run mortgage development bank, Sociedad Hipotecaria Federal, which helps sofoles with funding, predicts that the combined mortgage portfolio of banks and mortgage lenders will need to reach $180 billion in 2020 to meet that demand.
Secondary markets
Banks and mortgage houses can provide the vast supply of mortgages the country needs only through a developing secondary market with substantial private investor participation. Lenders provide about $20 billion a year and Infonavit has a loan book of about $40 billion. Mexican banks are expected to make up to 80,000 home loans this year, compared with almost 60,000 in 2005. Infonavit still dominates the market and made 375,000 loans in 2005. It plans to make up to 1 million loans over the next four years, funded via the RMBS market.
Today’s success is the fruit of almost 15 years of laying the groundwork by Mexico’s authorities. It was Argentina that initially led Latin America’s mortgage-backed securities development from 1995. As in Chile, the Argentine market remains buoyant, but demand for mortgages is slow, keeping the scene quiet. Mexico had plans to develop RMBS in the early 1990s but faced the peso devaluation in 1994, which put all plans on ice.
Since then, with Mexico’s financial system steady, the authorities have moved to revamp local laws for mortgage trading, adjust the procedure for repossessing homes and cut the time and red tape for transfer of deeds, while ensuring low inflation and strong macroeconomic fundamentals. Legal reforms to home ownership enabling lenders to obtain borrowers’ credit and default histories have been crucial to opening access to the housing market. Foreclosures have been speeded up dramatically from three years to two years in a worst-case scenario. Mortgage insurance, which was unheard of five years ago, is now widely available. Credit-rating agencies such as Fitch have published clearer guidelines on the rating of RMBS. Greater competition among lenders and falling benchmark interest rates have pulled average mortgage interest rates down to about 12% from above 14% at the end of 2004. Several banks, including Canada’s Scotiabank, offer mortgages at interest rates of less than 10%.
| RMBS issuance by year |
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| RMBS Growth Projections |
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| Source: S&P |
Investors and homebuilding companies that are benefiting from the real estate boom are hoping that the election of business-friendly president-elect Felipe Calderón, a member of Fox’s National Action Party, who takes power in December, will mean more of the kind of stability that enabled the RMBS market and its ensuing housing boom to develop. “With the election of Calderón, we should see continuity in the sector’s boom because it should strengthen financial institutions like Infonavit and the Sociedad Hipotecaria Federal,” says Eduardo Muñiz, head of investor relations at Mexico City-listed homebuilder Corporación Geo.