To more and more people in the U.S., buying a place in Latin America is no longer an exotic option for retirement or a second home. This holds particularly true for parts of the region within a short flight - or drive - from the U.S.
Mortgages for these homes have already popped onto the radar screen of structured finance players, who see potential in an asset class that has plenty of room for growth. Indeed, Deutsche Bank is understood to have set up a warehousing facility for mortgages secured by properties in Mexico, Costa Rica, Panama, and the Dominican Republic, according to an industry source.
Meanwhile, WestLB is looking into this asset class, according to the bank's executive director of structured and corporate finance in Latin America, Scott Sucher, who spoke to ASR at the Securitization in Latin America Summit held earlier this month by Euromoney and LatinFinance.
A term deal from Deutsche could come as early as the first half of next year.
Standard & Poor's recently weighed in on the promise of the sector in a report penned by Gabriel Wieder and Juan Pablo de Mollein. The analysts pointed out that, for investors, an RMBS with this kind of collateral might provide an alternative to subprime. Latin American loans are similar to the beleaguered U.S. asset class because of their relatively high yields, but the borrowers are made of stronger stuff, with FICO scores often north of 700, and LTVs below 80%.
The kinds of mortgages being warehoused by Deutsche appear to be typical for the sector, with most borrowers exhibiting FICO scores of 680 and above, and falling into the Alt-A' category. The home values have a broad range, varying between $200,000 and $800,000.
Originators in this sector tend to be small and specialized, sources said. "There are a number of boutique originators, mortgage companies in the U.S. southwest and California," said one source. One such provider is Laredo National Bank, owned by Spain's Banco Bilbao Vizcaya Argentaria, according to a source.
There's also talk of Mexico's nonbank originators, the Sofols, getting in on the act. Two of the sector's innovators, Metrofinanciera and Su Casita, plan to start providing mortgages to U.S. buyers of Mexican homes this year, said sources at each originator.
With the owner potentially living over a thousand miles away and in a different jurisdiction, servicing can be a challenge. "For collection purposes you want to be close to the borrower, for liquidation purposes close to the property," said an industry source who has studied the sector.
Dealing with Mexico adds another ingredient, with owners banned by law from owning property within 50 kilometers (31 miles) of the coast, precisely where one would imagine most foreigners would want their second homes. The way around the law for a foreign buyer is to have beneficial security interests and ownership rights in a guarantee trust, which, in turn, directly owns the property. Should a mortgager default, these rights should automatically transfer to the servicer or trustee, the S&P report said. The foreclosure procedure, however, remains untested.
Even though the borrower resides in the U.S. - or is originally from the U.S. in the case of retirees - the fact that the properties are in Latin America jacks up the chances of a default, according to S&P. The reason is simple enough: "There's a higher probability that Latin American countries will experience economic and political instability," the agency said.
Economic crises in Latin America can send dollar-denominated home prices plummeting at astonishing rates. During the Tequila Crisis of 1994-1995, for example, the value of homes in some coastal areas tanked, losing nearly 50% before recovering.
The report also pointed out that U.S. borrowers would be more likely to sell homes in Latin America at a loss, pressuring prices down and LTVs up. All else being equal, a higher LTV makes a default more likely.
Geographic concentration is another risk. Many homes in Latin America that foreigners buy are in resorts. "Mortgages on homes in incomplete resort projects are more susceptible to losses, and the increased risk reflects the possibility that a developer could become bankrupt before the project is completed," S&P said. What is more, property values in the neighborhood could fall victim to a troubled developer hastily selling land.
A distressed scenario might dry up the pool of local buyers. In a crisis, the local currency might devalue sharply against the dollar, making dollar-denominated property too expensive for locals. As a result, a group of potential buyers - and presumably ones of last resort - become priced out of the market. "The local exchange rate and government policies, such as exchange controls, are key factors determining whether local buyers would be able to purchase the properties," S&P said.
Many of these risks, sources said, would be more quantifiable if this asset class had a more solid performance history, the standard challenge for dealmakers in emerging markets.
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