Despite economic hardships and ongoing guerrilla warfare, Colombia is attempting to step up the secondary mortgage market with the birth of a first-ever government-sponsored home mortgage agency that will be up and running by the end of the month. Local MBS transactions are expected to follow by summer.
The new institution, similar to Fannie Mae in the U.S., will quite simply buy mortgages from banks, build up a portfolio and securitize it on the on the other end. "This could be an interesting type of security for future international investors," said a source at the International Finance Corp. (IFC).
The IFC will own up to 25% of the new company, along with key financial groups in Colombia, including Grupo Bolivar, Grupo Suramericana, Grupo Social. Grupo Sarmiento and Grupo Colpatria. CAF, a multilateral institution, is also considering participating in the ownership of the company.
The Colombian government began taking steps to boost the secondary mortgage market more than a year ago when it injected funds into the existing mortgage lending system with the intention of increasing the system's stability. The plan forced financial institutions to buy government debt reduction notes (TRDs), a five-year zero coupon instrument. The revenue is then provided to Housing and Savings Corporations (CAVs) for them to lend as mortgages.
Last year, there were many heated debates and court rulings on Colombia's Housing Laws. The courts overturned the mortgage system that linked the CAVs to artificial units called Units of Constant Purchasing Power (UPACs) which were set in accordance to bank deposit rates. The system has now been replaced by Real Value Units (UVRs), meaning that mortgages are now pegged to a fixed-rate of return. Furthermore, this past summer, the highest court in Colombia also ruled interest rates on home and housing construction loans must be lower than all other rates.
The low interest rate ruling instigated an uncomfortable feeling among the financial institutions around the country, as Colombia has historically experienced significant default rates as a result of the economic problems.
However, the government has been working to improve the situation. The country is currently waiting on a second vote for the reform of revenue sharing, whereby the government transfers high portions of revenue over to the local government.
The reform is part of an ongoing effort to control spending and ease the pressure it has placed on public finances. It calls for a cap on the amount transferred to the local government. According to sources, the large deficit is in part a result of the revenue sharing. The first vote was successful and according to a source, a successful second vote would improve the sovereign creditworthiness.
Guerrilla warfare has also been a major deterrent for investors; however the government has also been taking the initiative to improve the situation. Last year, Plan Colombia was instilled, which has funds from the United States to help fight narcotics.