Financiamiento Azteca, a Mexican non-bank mortgage lender or Sofol (Sociedad Fianciera de Objeto Limitado) is in the market with P150 million ($16 million) deal through Banco Multicactivos.

Building projects commissioned by Infonavit (Instituto del Fondo Nacional de la Vivienda para los Trabajadores), a government-sponsored housing program that provides subsidized mortgage loans to lower-income household back the transaction.

The notes have a 3.5-year final maturity and were rated AA on the local scale by Fitch IBCA.

"We were looking for the best way to garner funds that will help finance Infonavit's building projects," said Pedro Rienoso, director general of Financiamiento Azteca. "We believe that accessing the capital markets is the best way to do that."

Though the notes have been well received by local institutional investors, Rienoso warned that market volatility created by the nearing Mexican presidential elections and the hike in interest rates in the U.S. mean that it is a difficult time to launch a deal.

Under Mexican federal law, employers are required to deposit a percentage of their employees' salaries in Infonavit accounts. Employees can later access these accounts in order to buy real estate. This means that workers can use their Infonavit savings to buy a home instead of making monthly mortgage payments out of their own pockets. In addition, homebuyers are not required to make down payments.

"Under this system, buyers have very little at stake and might decide to stop making payments more easily," explained Rienoso. "It is a risk that makes the mortgages less reliable. A risk that we avert through overcollateralization."

Another factor that needs to be taken into account is the building risk. "We will only finance builders who have experience building for Infonavit and who can demonstrate a track record," said Rienoso.

Other Sofoles have also been testing the ABS waters. Hipotecaria Nacional and Hipotecaria Mexicana recently closed deals for P100 million and P20 million, respectively. Two other Sofoles are working on wrapped MBS transactions. "There is a regulation that allows for Sofoles to lower their capitalization indices from 8% to 4.2% provided that they access the capital markets," said a banker. "It is a good incentive but structuring deals is not an easy task."

Indeed, the basic elements are in place for a secondary mortgage market: the government is keen to diversify funding for the housing sector and the country's 14 Sofoles, which are seen as key components for the development of the sector, are working on deals.

However, many impediments remain. The fact that most of the mortgages in the market are for low-income housing and are indexed to both inflation and the minimum wage makes their payment schedule erratic. Another difficulty is convincing the buy-side that MBS deals are worth investing in, with many in the pension sector pointing to macroeconomic volatility and the paper's lack of liquidity as reasons to be wary.

"Mexico's secondary mortgage market is still a work in progress," said Rienoso. "Investors still don't fully understand the advantages of asset-backed and mortgage-backed bonds. I think it is partly due to the fact that [until recently] there has been no MBS paper in the local market for the last 20 years and so the market is having a hard time understanding the value of what we are offering. Still, I think that as more Sofoles launch deals and the market sees that they perform well things will start picking up."

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