Hesitant to enter an unfavorable market, Titularizadora Colombia is shooting for October at the earliest to issue Colombia's second ever MBS, said a source on the deal. "We're hoping things will stabilize over the next couple of months," the source said. Effectively Colombia's version of Fannie Mae, Titularizadora aims to place another Ps500 billion (US$190.6 million) before year-end, on top of the initial Ps478.9 billion (US$182.3 million) priced in early May.

Domestic markets are reeling from currency volatility via Brazil, compounded by fears of intensified rebel violence under the tougher approach of Colombia's new President Alvaro Uribe, who took office early this month. The benchmark 2012 fixed-rate treasury is yielding 16% from 14% in early May, while the currency has plunged 9% since July 1. In addition, the next issue of TIPs, as the bonds are known locally, is unlikely to price at such a steep premium to treasuries as the first placement, sources say. On a weighted basis, the first issue - split into five-year (Ps229.5 billion), 10-year (Ps198.6 billion), and 15-year (Ps50.8 billion) tranches - came at 250 basis points inside the government curve.

What is more, Titularizadora may be having a tougher time collecting mortgages of the same credit quality as those that backed the first issue. "It's not that clear that they can find the same high quality," said Felipe Gomez, head of economic research at Medellin-based brokerage Suvalor. "They can get them from Conavi, but they haven't reached an agreement with that bank yet." Apart from Banco Conavi, potential mortgages for the deal will come from lenders Banco Colmena and Banco AV Villas, said the source on the deal. Titularizadora is also in talks with government deposit agency Fondo de Garantas de Instituciones Financieras (Fogafin) to purchase its entire mortgage portfolio, estimated at Ps200 billion (US$76.1 million).

Still, poorer credit quality in the underlying mortgages may not dunk the debt from the AAA' national-scale rating the first issue won from local risk agency Duff & Phelps. The government effectively guarantees those mortgages held by low-income borrowers, which comprised 28% of the last issue. The bonds also secured a 1% guarantee from the International Finance Corporation. The IFC holds a 21.5% stake in Titularizadora; Banco Davivienda has another 21.5%; Banco Conavi, 21%; Banco Colmena, 21%; Banco AV Villas, 10%; Banco Colpatria, 5%.

The stakes could be tweaked in the near future, as talk swirls that the Andean Development Corporation, known by its Spanish acronym CAF, may snap up shares from several investors and piece together a roughly 5% holding. "I expect a decision from CAF by the end of the year," said the source on the upcoming deal.

In order for a secondary MBS market to get moving in Colombia, the outstanding stock of TIPs must clear Ps1 trillion, sources say. "The problem with the first issue is that a lot of the buyers are banks holding to maturity," said a Bogota-based trader. "But there are efforts to create a program of market makers and that should stir things up."

Market participants are also waiting on government approval for more sophisticated trades with TIPs, such as swaps and repos. The official nod has been slow in coming, given the switchover to a new administration and the more pressing concern of national security occupying the minds of policymakers. According to one rough estimate, total MBS volume was about Ps100 billion (US$38.1 million) in the first three weeks of August.

By fostering an MBS market, Titularizadora aims to deepen and diversify the local offering of instruments and foment growth in housing construction. Before the first issue, banks were financing mortgages with short-term credits, throwing balance sheets off kilter.

In its first deal, the agency purchased 27,000 mortgages from Banco Conavi, Banco Colpatria, Banco Colmena, Banco Davivienda and AV Villas, and brokerage Corporacion Financiera Nacional y Suramericana. Since then, the company has substituted 27,000 mortgages, mostly due to problems with documentation. The replaced mortgages have a total value of Ps15.4 billion (US$5.8 million), with Ps13.4 billion from Banco Davivienda and Ps2 billion from Colpatria.

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