In a move that shows that securitization can be more than a way for rich banks to get even richer, mortgage-backed securitization is being used to by U.S. government agencies and private sector banks to finance the building of housing for 5,000 low-income families in the Dominican Republic whose homes were destroyed last year by Hurricane George.

The project is being led by the U.S. Department of Housing and Urban Development (HUD), which is planning to issue $20 million in mortgage-backed bonds guaranteed by the Overseas Private Investment Corp. (OPIC) and backed by mortgages issued to the hurricane victims.

The proceeds will be used to build a planned development housing project. "We are going to issue mortgages to low-income Dominicans who want to live in the housing project at about 16%," said a source familiar with the transaction. "That is a good rate compared to approximately 27% offered by local banks."

U.S. investment bank Raymond James and Puerto Rican bank Doral Securities will be the placement agents for the notes, which will be sold to U.S. investors. "In order to get the institutions in place we need liquidity. And since it was unavailable inside the country we decided to try and get it outside," the source added

In order to minimize credit risk Hud will implement a model similar to the Mexican Sofoles, which are non-depository financial institutions akin to mortgage banks authorized to make loans for housing and other assets.

"Though the first round of financing will be directed toward lower income housing in the countries that were most affected by the hurricane, the entire financing mechanism is done at market rate," explained another source. "Any subsidy that might be provided will be an up-front subsidy so that the mortgages remain market rate mortgages. That is a new concept in Latin America, a step out of social banking which, we hope, will start a sustainable mortgage market."

The project is a combination of vision and coincidence. Officials from Doral Securities were working as financial advisers to Santo Domingo's mayor when they became aware of Hud's initiatives to launch the local housing finance industry. Doral quickly became involved in the design of the financial structure.

"We brought our knowledge of the Spanish language and our expertise in dealing with lack of liquidity in our own market to the Santo Domingo case," explained Hector del Rio, senior vice president at Doral. "It was an extraordinary coincidence that the federal government was going in the same direction that we were going and that we met in the middle of the road. A lot of vision has to accompany movements in this direction and I take my hat off because Hud and Opic really made it happen."

Far from being a one-time venture, the current offering is part of a $150 million project. Following its mandate to assist countries that were devastated by Hurricanes George and Mitch, Hud will extend the program to other countries in the region, with Honduras next on the list.

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