After having recently partnered in Mexico, GMAC-RFC and the International Finance Corp. are taking their relationship to the next level. The company and multilateral have now reached an agreement to buy a combined 40% stake in Brazilian real estate company Rio Bravo Securitizadora.

"We see the IFC as an important funding and guaranty provider for emerging markets," said Alessandro Vedrossi, head of Latin American business strategy at GMAC-RFC.

While the 40% stake is valued at a forgettable $4 million, it is a sign of larger things to come, sources said. But with Brazil's real estate securitization market somewhat stunted, the volumes that characterize more developed emerging markets like Mexico are not exactly around the corner.

What the new shareholders plan to do is help Rio Bravo reshape its business strategy. As a securitizing agent, Rio Bravo's main business line is to purchase securitizable real estate assets, structure transactions and issue bonds, known locally as CRIs, backed by these assets. Because of disincentives for banks to offload mortgages from their balance sheets, developers are the main providers of securitizable mortgages and other real estate assets. The problem, at least for volumes, is that the housing development industry in Brazil is highly segmented, so the mortgage transactions from a single developer tend to be tiny, often under R$10 million ($4.3 million).

GMAC-RFC and IFC plan to set up a warehousing facility for Rio Bravo to purchase receivables from different developers. Rio Bravo and GMAC-RFC would take on the risk, and attract local investors, by purchasing the subordinated tranche of the deals backed by the warehoused receivables, according to Vedrossi. This multi-seller conduit would yield transactions larger than the miniscule RMBS issued so far.

One hurdle that needs to be cleared, however, is inadequate standardization, according to sources. "One of the problems in putting mortgages together into one deal is that they are not standardized," said Standard & Poor's Director Sergio Garibian. "It's one of the reasons these deals are so small." The size would be less of an issue if banks engaged the market, but so far they've had little incentive to securitize.

Mortgages are not an attractive asset class for banks partly because interest rates are regulated in Brazil. "They're viewed as more of an opportunity cost," said Jayme Bartling, director at Fitch Ratings. Mortgage rates cannot be more than a spread over the savings rate and with benchmark interest rates in Brazil fluctuating near 20% for several years, mortgage origination is not a lucrative business for local institutions, sources said.

What's more, banks are obligated to allocate 65% of their portfolio to the housing sector, which must stay on their books. "It's different from the U.S., Chile or Colombia or other countries where banks securitize their portfolios," Bartling said. While CRIs can be included in the banks' real estate allocation within certain limits, the economics of the situation are still not attractive enough to draw banks into securitization.

Even Caixa Economica Federal, Brazil's largest mortgage originator with a portfolio of R$17.5 billion as of March 2005, is not a presence in the RMBS market, sources said.

While Vedrossi acknowledges that banks are unlikely to provide much grist for the RMBS mill in the near future, he sees potential further down the road. Should interest rates decline, there will be more of an incentive, he said. What also might prod banks to eventually take securitization more seriously is the duration mismatch that many of them face between assets and liabilities. Still, as long as that problem has festered, it hasn't proven compelling enough for banks to issue RMBS en mass.

Even with paltry bank participation, CRI issuance has nevertheless been growing. There has been R$451 million in deals from January through July, which already surpasses the R$403 million posted in all of 2005, according to data collected by S&P.

Mortgages are securitized in any stage of construction, as homeowners in Brazil typically agree to make payments before building is completed. While most CRIs are issued after the underlying project is completed, some are structured beforehand. Even when backed wholly or primarily by payments made after delivery, these pre-completion deals always incur some developer risk, said Fitch's Bartling. "Whether you buy the receivables pre-delivery or after delivery, you're still subject to the performance risk of the developer to some degree," he added. As a result, structurers often strap a performance bond onto the pre-completion portion of a transaction in order to mitigate risk.

In these kinds of CRIs, the bond proceeds are deposited in an escrow account, which is released to the originator, in steps, to fund the construction of the project.

Mortgages are not the only game in town for developers looking for securitization funding. The largest deals in Brazil's real estate market have been transactions backed by built-to-suit deals and sale lease-backs. These tend to mirror the corporate risk of the obligor, typically a big name company like Nestle Brazil or Volkswagen do Brasil.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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