Last year, RMBS issuance in major markets of the U.S. and Europe plunged due to either sickly collateral, skittish investors or a combination of both. Colombia, meanwhile, put out a record volume of Ps1.6 trillion ($834 million) in RMBS domestically.

Activity this year has shown that the global crisis still has not seeped into this particular sector of activity, with issuance running at Ps1.4 trillion so far and expected to hit Ps1.7 trillion.

Slow, steady and conservative have been the operative words for Titularizadora Colombiana, the agency operating the country's RMBS machine. Analogous to Fannie Mae, Titularizadora is responsible for nearly all of the securitization of mortgages since the first one in 2002. Issuance has so far totaled Ps9.3 trillion and consisted of 25 deals, with three backed by nonperforming loans.

The secret to the country's ability to push ahead when the rest of the world pulled back lies in the lessons gleaned from a severe recession in 1998-1999.

"We've maintained the quality of our portfolios," said Titularizadora President Alberto Gutierrez. "To a high degree it's because we had our own crisis 10 years ago."

That crisis, which originated in Asia and then spread quickly to other emerging markets, thoroughly savaged the Colombian economy. Defaults took off, lending came to a near standstill and within a few years NPLs ballooned to 20% of outstanding loans. Mortgage origination all but disappeared, falling to Ps20 billion a month. Home prices, which had already been sliding in the years up to the crisis, fell much further (see Graph 1 on page 25). The decline was so steep that recent growth hasn't even brought prices back to the level of 1988. In addition to starting from this low point, a 77% rise in prices since 2000 has gone hand in hand with a jump in real GDP per capita of over 25%, providing additional comfort that the increase is sustainable.

The housing cataclysm nearly obliterated the mortgage sector (see Graph 2 on page 26). Following eight years of almost uninterrupted decline, origination began to outpace amortizations only in 2006. Still, the volume of outstanding loans is, at last count, 48% of what it was in September 1998.


Conservative LTVs

The sector's renaissance, while robust, has not fed into looser standards, and thanks to legislation introduced in 1999, borrower incomes are all but guaranteed to at least keep pace with mortgage rates. Loan-to-value ratios for VIS loans - those for lower-income borrowers - are capped at 80%, while those for non-VIS mortgages face a 70% ceiling. But LTVs in practice have actually been quite a bit lower, averaging around 50%, according to Gutierrez. Titularizadora's next issue has a pool with an LTV averaging below 41%.

It is not that Colombia's overall economy has shrugged off the global slowdown entirely. According to the International Monetary Fund's World Economic Outlook released in late October, Colombian GDP this year will dip by 0.3%. But this is sandwiched between 2.5% growth posted in 2008 and forecast for 2010.

Nonetheless, the slowdown has kicked unemployment up to 12.6% in July and even higher as an average of the major urban areas. But this has yet to impact the quality of portfolios (due largely to an economy that has had chronically high unemployment for some time.) Past-due loans as a percentage of the total stood at 4.01% in July, hovering near recent lows (see Graph 3 on page 26).

Consumer loans, however, have seen the same measure of quality deteriorate since early 2006. What is more, home building permits in August were down 6.8% from a year earlier. But this drop is far narrower than earlier in the summer, indicating that the housing market is soon to turn a corner. In addition, the figures are still short of the sector's boom a decade ago; only in 2007 did home building permits reach the level of 1995.


Cross-Border: Still Beyond Reach

While the global crisis hasn't reverberated in the country's RMBS sector in terms of quality or pace of issuance, it did nonetheless force Titularizadora to put off plans to issue abroad. Before liquidity worldwide retreated in 2007, the agency had trained its sights on a debut cross-border deal. "We had sent out RFPs," Gutierrez said. But those plans soon fell apart as foreign investors grew risk-averse. And naturally, with spreads where they are in developed countries' RMBS, a Colombian deal remains a tough sell, despite the sector's resilience. (Australia has been facing a version of the same problem; see p. 27.)

The agency will revisit a cross-border placement when there are signs that foreign appetite for such a product has returned. "It could be in pesos or in dollars with a swap," Gutierrez said.

"Due to the quality of the loans, a cross-border deal backed by Colombian mortgages could reach investment grade in our perspective," said Bernardo Costa, associate director at Fitch Ratings, which rates Titularizadora's RMBS triple-A on the national scale. But in the event that the deal were in foreign currency, he added, the obligatory swap would be even harder to come by than was the case before the crisis.


Peso Loans Gain vs. UVR

While local origination practices, nudged by regulators, have kept average LTVs unusually low by most standards, the character of mortgages in the country has been shifting over the past few years. Local loans bear fixed rates that are either nominal or tied to the UVR inflation index. UVR mortgages took off at the turn of this century as a 1999 law reintroduced them into the market. They had been replaced earlier with mortgages linked to an interest-rate instrument, a system that turned out to be a terrible idea when it led to widespread defaults precipitated by skyrocketing interest rates during the late 90s crisis.

But in the past couple of years, the percentage of straight peso loans is increasing as banks become more comfortable with taking on risk. In July 2009, for instance, 86% of originated loans were in pesos and the remainder in UVRs. The proportion three years earlier was 57/43 in favor of UVR loans.

A UVR mortgage tends to have a stable debt-to-income (DTI) ratio for the life of the loan, while a peso loan enjoys a diminishing DTI number, according to a report from Fitch. This is because, in Colombia, most incomes are adjusted by inflation on an annual basis.

The relative growth in peso mortgages has naturally led to more securitizations of that type. There are currently 12 outstanding peso RMBS and 10 UVR ones.

Another loan rubric, NPLs, is no longer viable thanks to their exceedingly low numbers. "We did three NPL-backed deals in 2004 and 2005," Gutierrez said. "But now there's not enough volume." The NPLs in those deals were throwbacks to the late 90s crisis.


End of Income Tax Exemption

Despite an expanding investor base locally, RMBS in the country will face new challenges next year, as an income-tax exemption for holders of the bonds expires at the end of this year. Gutierrez argues that the end of the exemption should not have too detrimental an impact on the bonds, as pension funds, which reap no particular benefit from the exemption, are leading buyers.

As a result, Gutierrez expects issuance next year to total Ps1.5 trillion, more or less the agency's annual average.

(c) 2009 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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