Mexican MBS Struggles to Overcome Obstacles

After years of delay, Mexico's mortgage-backed securities market may finally be ready for launch as local non-bank mortgage lenders, the Sociedades Financieras de Objeto Limitado (Sofoles), are encouraged to issue MBS deals by a government keen to diversify funding for the housing sector, market experts said.

The country's 14 Sofoles are seen as key components for the development of a secondary mortgage market in Mexico, with several now developing mortgage-backed transactions ranging from Ps20 million to Ps1 billion ($2 million to $100 million), said Jose Ramon Tora, a director in Standard & Poor's structured finance ratings group.

"The whole idea is that they want to create a secondary mortgage market," Tora said. "So it's all pointed at securitization."

The first securitization from a Sofol is likely to be a 40 million peso inflation indexed bond sold by Hipotecario Nacional, the largest of the non-bank financial institutions. Although the deal will actually parcel government securities, such as Cetes, it will serve as a vehicle for Hipotecario Nacional to break into the local market and issue mortgage-backed paper in the future, Tora said. If it closes, the sale will also be the largest local debt issue by a Sofol.

The advent of a mortgage-backed market in Mexico was stymied throughout the 1990s due to a combination of legal and structural factors. While the complex filing procedure required by the government scuppered many transactions, the fact that most of the mortgages in the market were for low-income housing was an additional impediment, Tora said. Because these mortgage loans are subsidized by the government and indexed to both inflation and the minimum wage, their payment schedule is erratic and using them to calculate a future income stream is very difficult.

Another difficulty is convincing the buy-side of the market that MBS deals are worth investing in, with many in the pension sector pointing to macroeconomic volatility and mortgage-backed paper's likely lack of liquidity as reasons to be wary. In addition, interest fluctuations caused by market volatility make long-term fixed-rate debt risky.

"The government has been saying that it wants to diversify funding for the housing sector for the last five years, but so far they haven't come forward with a set plan," said an expert in mortgage securitizations in Latin America. "The mortgages are underwater, so there is not much to securitize. Besides, the economic and infrastructure [conditions] for securitization are just not there."

The source also noted that the likely application of U.S. standard risk-based capital to the Sofoles would require that they have reserves that can cover 100 percent of their issuance. "That makes no sense from a financial perspective," he said. "The Sofoles wouldn't be doing anything for their balance sheet. The only way to avert this issue is to develop a tranching structure in which the government assumes the riskiest tranche, but that is not likely to happen any time soon."