The volume and variety of instruments continue to grow on the back of the housing boom, while the woes of the country’s northern neighbour are seen as a source of market hiccups rather than a more serious contagion. Leticia Lozano reports.
AS MEXICAN CONSTRUCTION companies busy themselves catering for the country’s historic home-building boom, so financiers find themselves equally active, grappling with the intricacies of the new asset and deal types reaching the market to pay for all this endeavour. Over the past three years, Mexican structured finance, which has been developing dynamically in a burgeoning market for asset-backed and residential mortgage-backed securities, has been prompting a diversification of the types of assets going into securitizations.
Total Mexican structured finance issuance volume rose 15% to $7.1 billion in 2007. It is expected to maintain solid growth this year, despite the US sub-prime crisis, as fresh structured products and new investors come into the market, according to Standard & Poor’s. RMBS accounted for 35% ($2.5 billion) of last year’s overall issuance, with new issuance up 38% on 2006 and accumulated issuance up 90%. Residential property is very much the driver of structured finance, as Mexican president Felipe Calderón builds on the success of his predecessor Vicente Fox and pledges a goal of a million new mortgages a year by 2010. According to Fitch, accumulated investment in mortgages from 2001 until last year was about Ps850 billion ($78 billion), made up of more than 4.3 million mortgages. Lenders expect to grant about 1.1 million new mortgages in 2008.
While commercial banks such as HSBC and Mexico’s top state-run mortgage bank Infonavit will drive financing this year, new securitization models are in vogue, such as the successful Danish mortgage model, as well as covered bonds and time-tranching. For home finance companies, which cater mainly to the middle and working classes with loans for homes valued at about $50,000, the development of a liquid MBS market is critical for their long-term survival. Unlike banks, home finance companies cannot take deposits from the public and so rely on Mexico’s federal mortgage bank, Sociedad Hipotecaria Federal, bank loans and mortgage bonds for funding. However, SHF will cut off its funding in October next year as it develops into a mortgage insurance company.
One Mexican firm, backed by George Soros – Hipotecaria Total or Total Mortgage (HiTo) – has launched a weekly mortgage-backed debt auction that aims to use the Danish model to package and structure mortgages and sell them to investors in the form of Ps10 bonds with a triple-A credit rating. HiTo was set up by SHF, the Netherlands Development Finance Co, home finance company Hipotecaria Crédito y Casa and Geomex Investor, which is linked to the Soros Foundation. It kicked off the auction process in late December with a tiny issue worth Ps9.5 million with seven mortgages to the small, specialized lender Hipotecaria Vertice. HiTo sold 961,078 bonds with a fixed coupon of 8.7% maturing in 2031, which were rated by Standard & Poor’s.
With an initial capitalization of $17.5 million and a $5 million contribution in exchange for equity stakes from UK-based hedge fund Autonomy Capital and local home finance company Condesa Financiera, HiTo follows the Danish system, which is meant to minimize risks for investors. It issues prepayable mortgages to be matched by callable bonds with maturities and payments equal to the home loan. "Our first issue could be called a pilot issue," HiTo’s chief executive, Remco Polman, says. "It was very small, perhaps the smallest issue ever in Mexico. But it was also a very different type of issuance compared with the securitization we have seen so far in the country. Our system reverses the whole system. First we create a very large bond programme and then, on the month of origination by banks, we sell bonds to execute the financing of the only recently originated mortgage." HiTo’s seven mortgages securitized in December were originated only five days before the securitization.
Interesting model
HiTo now plans to reach $40 million a week in issuance by the end of this year and bring in such banks as Citi, Santander, HSBC and BBVA. Isidoro Sánchez, head of mortgage lending at BBVA in Mexico City, describes the auction as "a very interesting model". Reaching $40 million will be a gradual process, HiTo says. Its pilot, Ps9.5 million bond is part of a Ps50 billion programme, for instance, so it will keep adding to that, already taking it to Ps12.5 million at the start of the year. "We plan 30 to 35 issuances this year," Polman says. "During the first three weeks of the month there will be public auctions, and the bonds issued will be added to the existing programme. Each time there is an eligible mortgage, we will finance that mortgage by issuing a corresponding number of bonds."
Much of the motivation behind HiTo is about speed in an increasingly demanding business. Mexico is in the midst of a multi-year housing and mortgage boom that builds on 11 years of unprecedented economic stability, a shortage of more than 5 million homes and financing from private lenders and Infonavit. Although interest rates are falling, just 6% of Mexico’s 26 million homes are financed by mortgages, compared with almost 70% in the US, as many Mexicans save up to build their homes, a floor at a time, or inherit their properties.
HiTo has looked to Denmark for a model because there, home loans are originated and securitized within 24 hours. Under the system used by most Mexican lenders today, it can take up to two years to accumulate a sufficient number of mortgages for a traditional MBS issuance, which is capital-intensive and subject to interest-rate fluctuations. If benchmark rates fall or remain stable, lenders can securitize. However, if rates rise sharply, as they did in 2004 and early 2005, issuers are shut out of the market. Another disadvantage is that the structure of mortgage bonds varies depending on the lender and the bond series, which means investors have to spend time and money studying each deal. HiTo’s system issues standardized, triple-A-rated bonds five days after a mortgage is originated by a participating lender.