While Titularizadora Colombiana launched an MBS program in May 2002, the agency earned a runner-up award this year for its steadfast commitment to building up this asset class in Colombia's domestic market. Maneuvering through such market stresses as spiking interest rates and political uncertainty, Titularizadora has stuck to its twice-yearly timetable with enough flexibility to strike in periods of calm. "We've hit the goals we set for ourselves when this started," said Mauricio Amador, who has been with the entity as vice president of finance since it started early last year.

Perhaps the greatest achievement of this quasi-Fannie Mae is the slow but seemingly inexorable drift of investors into this asset class. In each of the four placements, the originating banks took the bulk of the paper, but they have been gradually filtering the bonds into the market. Originators, for example, bought 71.5% of the first issue, which amounted to Ps478.9 billion (US$169 million). The group now holds 45% of the issue. Subsequent placements have been likewise trickling into the hands of investors, including pension funds, investment funds, trusts and even private sector companies.

The story of Titularizadora is in many ways the story of the Colombian mortgage market. Following a brutal crisis in 1998-1999, defaults soared and lending virtually evaporated. Origination slumped to a meager Ps20 billion (US$7 million) a month and stayed that way for years. Non-performing loans skyrocketed to over 20% of the total resident mortgage pool. It's when things more or less bottomed out that Titularizadora launched its operation. Since then, origination has picked up. In October, banks wrote Ps180 billion (US$64 million) in mortgages, up from a monthly average of Ps75 billion (US$26 million) earlier this year. That growth will have to hold for Titularizadora to have enough raw material after 2005, Amador said. Otherwise, prepayments and amortizations will continue to exceed origination.

There are good signs however. Apart from the October figure, rates appear to be falling, as evinced by the offers put out by private banks like BBVA Banco Ganadero.

To date, Titularizadora has issued Ps1.85 trillion (US$652 million) in MBS. All four placements have been rated triple-A' on the national scale by Fitch Ratings affiliate Duff & Phelps. BRC Investor Services also rated the most recent issue, which closed Nov. 20. "We wanted to have two opinions this time around," said Nicolas Brezing, an analyst at Titularizadora. "It lends more confidence to the market."

Titularizadora officials recognize that one of the big sweeteners in the program is the tax-exempt status of the bonds. This has been key in compressing yields to well under that of local treasuries. But the tax exemption is set to expire next year, meaning all issuance in 2005 and thereafter will be treated like any other bond, unless the law changes. Growing demand from pension funds indicates that the tax perk may not be crucial in holding investor interest, as funds are not taxed anyway. At any rate, the profitability of the enterprise would only vanish if the yields jumped sharply. "You have to remember that the MBS is pricing at rates that are 300 basis points [tight to] the coupons right now," Amador said.

The International Finance Corporation has participated in the MBS program, furthering its acceptance. The agency has extended a nominal guaranty on the non-social interest loans backing each bond.

Finally, Titularizadora is committed to staying local. Currency volatility and the dearth of long-dated currency swaps preclude any moves towards the cross-border market.

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