MBS in Colombia may receive a two-fold boost as an injection of funds into the mortgage lending system combines with new legislation intended to increase the system's stablilty, experts in the U.S. and Colombia said.
The new funds will come via a government scheme that will force financial institutions to buy government debt-reduction notes (TRDs), a five-year zero coupon instrument. The money raised will be passed to Housing and Savings Corporations (CAVs), for them to on-lend as mortgages.
Perhaps just as welcome to a mortgage system which has seen significant default rates thanks to Colombia's economic problems will be the new legislation currently before Congress to encourage stability.
At present, mortgages written by the CAVs are pegged to artificial units called Units of Constant Purchasing Power (UPACs), which are set according to bank deposit rates. In the future, these will be replaced with new inflation-pegged Real Value Units (UVRs) meaning that mortgages will have a fixed real rate of return and therefore should be more predictable for both borrowers and lenders.
The UPAC system was launched in 1972 as a way for the CAVs to take deposits and originate mortgages in UPACs instead of in pesos, with the intention of promoting lending to the poor and protecting CAVs from the mismatch of assets and liabilities derived from the market changes in interest rates.
Under the system, the borrower is not required to pay the whole yield of the loan in the first years, because the portion corresponding to the UPAC variation goes directly to the balance. The basic idea is to maintain the value of the unpaid balance of the mortgage in terms of constant purchasing power. Thus, balance increases reflect the variation of the value of the artificial UPAC currency in which the mortgage is originated.
Mainly due to macroeconomic difficulties experienced by the Colombian economy in particular sharp increases in interest rates caused by the government's attempts to defend its now defunct ban on foreign exchange trading the UPAC rates rose to 29% last year, producing a deterioration of credit quality and increasing the number of foreclosures and repossessions as the recession meant that people were forced to default on their loans.
A system using the inflation-pegged UVR rates, on the other hand, would have only rose to 13%. The switch to base repayments on UVRs would therefore ease the burden on borrowers by $1 billion.
Not only would a change to UVRs help borrowers and reduce the number of loan defaults, the consequent increase in stability would make structuring and selling mortgage-backed securities much easier.
Davivienda, the biggest CAV and the main mortgage originator in the country is the most likely candidate to lead the securitization efforts. The private company has issued a total of $165 million in MBS transactions since 1994 and is said to be working an another deal. Other players such as Colpatria, Colmena and Granahorrar are likely to follow suit.
However, sources noted that as local investors are being expected to buy the TRDs that the government is forcing on them, there may not be enough liquidity left for extra housing finance or to absorb any subsequent MBS deals.
"Requiring institutions to buy government debt can be positive, if it makes economic sense," explained Steven Bernstein from Cardiff Consulting. "But it can also be a political move that will eventually drain the banks and backfire."