Thanks to its tradition of political stability, lack of formal military forces, and relatively equitable income distribution Costa Rica has gained a reputation for being an oasis of calm in the midst of turbulent neighbors.

Yet, despite this comparatively positive outlook, securitization efforts remain sketchy. "Ours is a very incipient market," said Marco Quintana, financial director at Banco Banex. "MBS deals are being promoted by the government as a way to activate the housing industry but there are many hurdles in the way."

Housing is a priority for the government, which leads it to provide subsidized mortgages. Ironically, this policy has an unfavorable effect on MBS. "The government's efforts increase the number of homeowners and mortgages in the country," explained Quintana. "But the subsidized nature of the mortgages makes them less competitive and thus more difficult to securitize." Indeed, since the first mortgage securitization was structured by state-owned Banco Hipotecario de la Vivienda in 1997, no other deals have made it to the local market.

The lack of an appropriate legal framework - and no special securitization law - has not helped either. However, this is set to change as congress is currently working on a specific law, which is expected to be sanctioned in the next couple of months.

Though it will remain difficult, the forecast for securitization is not altogether negative. A few local banks - including Banco Banex - are working on structures similar to the Banco Hipotecario Nacional S.A. transactions out of Argentina.

In addition, international players such as the Commonwealth Development Corp. and the Netherlands Development Finance Co., are interested in getting the local mortgage market off the ground.

The development of the local capital market also bodes well for structured finance. "There have been some important changes in the local capital market that could help jump-start securitizations," said Guillermo Zuniga, an analyst at Duff & Phelps Credit Rating Co.'s subsidiary in Costa Rica. "Local pension funds are developing very rapidly and there is now an increasing appetite for different types of paper, including long-term notes."

In addition, a recently sanctioned law requires employers to contribute an additional 3% to their employee's retirement fund on a monthly basis.

"Pension funds will find themselves with larger sums to invest," explained Zuniga. "That is also likely to stimulate securitization."

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