As the subprime debacle keeps picking off victims in the U.S. and, more recently, the U.K., the question of Latin America's vulnerability won't go away. But for the region's domestic RMBS, the prevailing view hasn't changed much in a few months.
In countries such as Mexico, Argentina and Chile, players insist that RMBS is an entirely different animal from subprime-backed deals and that the main real estate markets have little in common with the bubbles that dotted the U.S. and parts of Europe.
Steering clear of a direct hit, though, is cold comfort when the credit crunch in global markets has choked domestic issuance and ratcheted up interest rates throughout the region.
While it may not end up as the last word on subprime's impact in Latin America's largest RMBS market, Standard & Poor's report on Mexican RMBS performance in the midst of the crisis up north is certainly the most exhaustive so far. The agency culled 200,000 mortgages backing 42 deals it has rated since 2003, originated by state agency Infonavit, the nonbank lenders known as Sofols and commercial banks. The agency found that delinquencies have climbed since November 2003, but that increase is expected with greater seasoning. They were still under 2% for the 61-to-90-day timeframe for all vintages. While the figure might go up as pools mature, S&P didn't expect it to reach troubling levels.
The agency's sanguine outlook is grounded in the fact that, in crucial ways, Mexico's mortgage market looks nothing like its U.S. counterpart. For starters, all securitized loans in Mexico carry a fixed rate. While the lion's share of loans is indexed to inflation, no Mexican will face the kind of dramatic jump in rates that will hit many U.S. borrowers whose mortgages are adjustable. Indeed, the payments are a function of a minimum wage index, with state agency Sociedad Hipotecaria Federal covering potential mismatches between that index and inflation. Mexican originators learned their lesson about floating rates in the Tequila Crisis, which sent the peso plummeting 70% against the dollar, caused far-ranging economic distress and compelled commercial banks to abandon mortgage lending altogether for a number of years.
Also distinguishing Mexico is its huge housing deficit, estimated at 6 million units. This ensures a steady stream of supply into the market, reducing the chances that pricing pressure will build. Currently, originators crank out 750,000 mortgages a year. That's "just enough to keep pace with new housing needs," S&P said.
Securitization has become a major source of funding for Mexican housing construction, with securitized portfolios rising at a compound annual rate of 193% between July 2004 and July 2007.
Also helping anchor Mexican RMBS are the deal structures and the comforting fact that low-income borrowers, while not having long credit histories, are unlikely to be as leveraged as their American counterparts. But this may change as new products become available to them, S&P said.
While nothing in Mexico looks anything like subprime, the domestic market is not a fortress, and the smackdown in global liquidity has caused pain there as well. As with other structured products, RMBS has had trouble finding a receptive audience over the past several weeks, and issuance has ground to a halt. Infonavit has an RMBS in the pipeline, as does GMAC Financiera, whose deal is wrapped by MBIA. One banker said the former issuer may come to market as soon as this week, giving the market an indication where pricing has settled.
Chile Stands Firm
Subprime doesn't appear to pose a threat for Chile, either. As with Mexico, the market, which has roughly $2 billion in RMBS outstanding, is a world apart from the troubled sector in the U.S., according to a report by Fitch Ratings.
Chile has no variable-rate mortgages among low income borrowers, and even among well-heeled homeowners, this product hasn't been securitized yet. LTVs are essentially in the range of 80% to 85%, with the government providing a subsidy to low-income borrowers that will double down payments, which are generally in the 5% to 10% range.
Delinquency rates for the past 12 months are also considered manageable. On low income loans, they average 10.5% for greater than 90 days, but fall to 5.3% for greater than 180 days.
Nor has any part of Chile experienced the kind of property inflation that has affected swathes of the U.S. "There's still a housing deficit in Chile," said Matias Acevedo, an analyst at Fitch. "We haven't seen an excess of demand there."
On the liquidity front, structured issuance from Chile is getting hit by higher rates, but Acevedo said that tighter credit is a function of monetary policy responding to high economic growth, which is projected to reach more than 6% this year. Indeed, after a 25-basis-point hike on Sept. 13, the Central Bank of Chile is expected to raise interest rates again this year.
In Argentina, meanwhile, the RMBS sector is fairly small. The market was resuscitated only two years ago following the crisis of 2002, and Banco Hipotecario has been the main engine. Since the crisis, borrowers in Argentina have had negligible long-term leverage, and LTVs in most transactions are very low, hovering around 50%, according to Rafael Rivero, head of finance at Banco de Credito y Securitization. Rivero has led a number of transactions for Hipotecario for a total of Ps500 million ($160 million). All have been backed by fixed-rate loans.
The market environment has taken a turn for the worse, however, with the pullback in global credit, and interest rates have shot up in more recent transactions. There hasn't been an RMBS in sight over the past couple of months, but a consumer ABS that would have priced at 10% in July instead went for 25% two weeks ago, said Cristian Calderon, head of securitization at Standard Bank Argentina. Last week, a deal in the sector priced at 21%, but Calderon said that if rates don't come down further, issuance will cease. "The reality is [those rates] aren't sustainable over time," he said.
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