The once mighty real estate sector in Mexico isn't looking so unsinkable anymore. Originators are sticking to issuance plans, but spreads are blowing out. Real estate receivables aren't exhibiting the credit problems pervasive in U.S. subprime, but that apparently hasn't been much comfort to local investors.

Sources say the asset class, despite the relentless campaign by players to differentiate it from its counterpart abroad, is being punished more than other debt sectors in the country.

Recent events bear that out. Su Casita, a big-name originator, suffered the indignity of not receiving a single bid in the hour originally allotted to an auction of a deal backed by its construction bridge loans, a long-established asset class. The local stock exchange sent a notice announcing that the auction deadline would be pushed back from 11 a.m. to noon. In the end, the deal closed and the spread wasn't a disaster. A six-year A tranche sized at Ps1.1 billion ($102 million) yielded 120 basis points over 28-day TIIE.

Compare that to a deal by peer Credito y Casa, which priced at 100 basis points over last November. But there was talk that the transaction didn't go to public investors - that it was either retained by the originator or bought by a government entity. A Su Casita official didn't return a call for comment as of press time.

BBVA Bancomer, a unit of the Spanish goliath, didn't fare much better. Last week, the originator came out with its second RMBS for Ps1.1 billion. The yield, at 8.85%, was actually tight to the 9.05% achieved by BBVA's debut RMBS in mid-December. But the spread over the Mexican treasury benchmark came to 133 basis points, from 112 for the last transaction. The investor book, said a source on the deal, was "complicated."

The spread widening hasn't killed the market though, and for the foreseeable future originators are willing to swallow the tougher terms. Case in point: Scotiabank was primed to hit the market with its first ever peso RMBS late last week, just a couple of days after Su Casita's auction upset and BBVA's wider spread. The 20-year transaction, capped at Ps2.5 billion, was expected to price a touch higher than BBVA's. Sources close to the deal said the originator was fine with that.

Another nuance to the gloomy picture is the fact that at least one player is benefiting from a thinner field of competitors. Genworth insured all the mortgages in the Scotiabank deal with LTVs over 80%; insured about a third of the loans in the BBVA deal; and insured a chunk of mortgages backing a deal from Metrofinanciera in mid-February.

With the monolines booted out of the sandbox, the mortgage insurer is finding it easy to make friends. Others in its field could follow.

But just how many friends remain for Mexico's real estate originators is somewhat in doubt. Fitch Ratings recently released a report on the refinancing challenges facing the country's mortgage companies, which had been ratcheting up commercial paper placement over the last few years. In 2007, issuance grew 17%.

Fitch said the outlook for the industry in general is stable, but the agency added that it couldn't rule out downgrades for those with "limited capabilities to adjust to current and future market conditions." The sector, in Fitch's opinion, has to enhance its liquidity indicators to ride out the market cycle.

But as recent pricing trends show, long-term investors are giving originators a hard time. One expectation is that government agency Sociedad Hipotecaria Federal will temporarily halt, or perhaps reverse, its move from a direct bankroller of assets to a guarantor of structured deals. This would surely ease pressure on originators. At any rate, Mexico's real estate sector is still securitizing assets, and for sizable amounts at that. This sets it apart from markets in, say, Europe, where RMBS issuance remains nothing more than a memory.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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