Less than a year since Titularizadora Colombiana inaugurated the country's mortgage-backed market, this quasi-Fannie Mae is feeling out a risky new asset class: non-performing loans. Making up 22% of Colombia's total residential mortgage pool, this bad stuff is a millstone around the neck of the banking sector.

But if Titularizadora's past success is any indication, the agency may be up to the challenge. Already it has begun declawing the industry's other beast: a lopsided balance sheet. In Colombia, half of all mortgage loans are in inflation-indexed UVRs, while liabilities are in short-term pesos, leading to some steep gaps in both liquidity and duration.

Last year, Titularizadora issued Ps1.07 trillion (US$364 million) of regular RMBS (see ASR 11/25, p.1). The agency aims to securitize about the same volume this year, covering nearly 20% of the domestic pool of residential mortgages by the end of 2003. If all goes well, Titularizadora will have securitized 37% of the total volume by the end of 2007. And that doesn't count individual banks potentially going out on their own.

Ever since the Argentine default, foreign investors have eschewed Latin American MBS, with scattered exceptions from Central America. The currency mismatch between the securities and their underlying collateral became much scarier after Argentina pesified debts. There is talk that a Mexican MBS could cross the border in a year or two, but overall the regional prospects for dollar paper look dim. Colombia is an example of a country that both debuted and built a domestic MBS market in the wake of the Argentine crisis. Rising liquidity in the pension fund sector, the urgent need from banks and tax-exemption status for the paper all helped.

At a recent conference sponsored by the World Bank, "Housing Finance in Emerging Markets," ASR took the opportunity to chat with Titularizadora President Mauricio Cardenas. The man helping coax the sector from its brief childhood to maturity discussed future plans and the enticement of non-performing loans. Holding a Ph.D in economics from the University of California at Berkeley, Cardenas has held cabinet posts in the Colombian government.

ASR: What are the plans for your next placement?

Cardenas: Right now we're working on our third issue of mortgage-backed securities, planned for mid-year. The structure is going to be similar to the second transaction; that's to say, a senior piece with maturities of 5, 10, and 15 years. Volume will be about Ps500 billion [US$170 million]. We're working with three originators: Granahorrar, a federal bank that's the biggest in terms of mortgage portfolio, Davivienda, and a third that has yet to be determined.

ASR: In the last issue, 28% of the underlying pool was comprised of social-interest mortgages, which hold an implicit guarantee from the government. Of the rest of the pool, 1% was a subordinated piece holding an A' rating on the national scale and an additional 1% was guaranteed by the International Finance Corporation (IFC), which has a 21.25% stake in your agency. Will the enhancements be the same the next time?

Cardenas: We'll continue to use the government guarantee implicit in the social-interest mortgages, a subordinated tranche and a guarantee from the IFC. We can still tinker with the structure in terms of the percentages. At the end of the day, we're looking for a roughly 30% enhancement.

There is also a third class of series: the C class, which amounted to about 4% of the last issue. This is a series that pays the excess between the yield on the bond and the return on the pool after expenses have been paid. This tranche debuted with the second issue. The originators hold it, while we keep the higher-rated subordinated piece.

ASR: In the last issue, demand from companies soared, thanks largely to the tax-exemption status. Will appetite in this sector hold?

Cardenas: It will go up. After the tax reform of last December, a good number of tax exemptions were eliminated, while the income-tax rate was jacked up from 35% to 38.5%. So our paper gains value. Now it's one of the few tax-free investments in Colombia. I think [tax exemptions] are a good alternative for governments to stimulate [MBS]. It's cheaper than what, for example, the U.S. does, which is essentially subsidizing these activities more directly, like in the case of Fannie Mae, Freddie Mac, home loan banks. The U.S. has been much more interventionist than Colombia in that sense. Our approach is more market-friendly.

ASR: Colombia's Banco Colpatria placed a mortgage bond recently with a partial guarantee from the Inter-American Development Bank (IDB) (see ASR 1/6, p. 23). Are you in talks with guarantors besides the International Finance Corporation?

Cardenas: The IDB has offered backing for us. Essentially we have that option.

ASR: Are there other plans you're pursuing in the realm of housing finance?

Cardenas: Right now we're exploring non-performing loans. To date, we've only securitized the cream of the crop; those loans with the lowest LTVs. Now we're looking into distressed assets. We'd probably do it with a very small senior piece and then a subordinated piece that would go to the originators. If we were to do this, we'd only be structurers and not carry any residual risk, like we have with the 1% subordinated piece we've bought in the recent issue.

There is interest in securitizing non-performing loans, because 22% of outstanding residential mortgages or about US$1 billion are non-performing. It would be a great way to get these off banks' balance sheets.

In terms of structuring, has Titularizadora worked with any other banks or law firms in the past? How about down the road?

We have a very good team and haven't found the need for outsourcing to a bank. In terms of law firms, we do work actively with them at both the international and domestic levels. For the guarantee, the IFC worked with Chadbourne & Parke. At the local level, we work with Galvis y Asociados, while Cardenas y Cardenas helps review our documents. We're sticking with these firms.

Copyright 2003 Thomson Media Inc. All Rights Reserved.


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