The securitization of mortgages and construction loans has slowed down to a listless sputter over the last few months in Mexico, a victim of blown-out spreads and investor aversion to debt from nonbank companies known as Sofols and Sofoms.
But efforts are underway to pump new life - or at least millions of pesos - into the market all along the financing chain.
Much of this money is coming from multilateral banks, which are bound to play a market role in 2009 that's vastly expanded from anything seen in the last few years.
What's more, there's a shelf in the works from a newcomer, the fund for state agency Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado. Known as Fovissste, this piggybank for government employees plans to debut a Ps20 billion ($1.5 billion) RMBS next year.
When spreads were lower and investors were eager for Sofol and Sofom risk, multilateral banks took a step back and let the market do its work. But, reflecting conditions worldwide, private investors have pulled back. The situation has been further exacerbated by heavy short-term liquidity needs at some Sofols, and the mismanagement of construction loan ABS and potentially RMBS by Metrofinanciera (ASR, 12/8/08).
These are the moments in emerging markets where multilaterals make their mark. And, judging by pledges made over the past several weeks, that is certainly what they plan to do over the next year and beyond.
The International Finance Corp. (IFC), the World Bank, and the Inter-American Development Bank (IADB) have all announced financing initiatives to support Mexico's housing market. These initiatives add up to about $3.95 billion. Directly and indirectly, a good portion of these funds is intended to stimulate RMBS activity in the country.
The bulk of this money will go directly to Mexican state agency Sociedad Hipotecaria Federal (SHF), which two months ago announced a Ps40 billion initiative, with the bulk of the money coming from the World Bank and IADB.
In addition to the giant kitty provided by the Washington-based multilaterals, after a few years of little activity in Mexico, Dutch Development Bank FMO provided a partial guarantee on an RMBS issued by Sofol Su Casita two weeks ago.
SHF is using the funds for credit lines extended to originators of construction loans, and to provide guarantees on credit lines to those same players, as well as to securitizations of mortgages and construction loans, and other forms of financing. As a market maker, the agency will also be purchasing RMBS and construction loan ABS directly at auction as part of this ambitious financing program.
The IFC is providing a facility of $150 million, with a matching amount from the IADB, to purchase up to 15% of RMBS from both bank and nonbank originators. The funds from the facility can also be used to provide partial credit guarantees on RMBS, or to invest in the mezzanine tranches of deals.
"The facility is meant to demonstrate confidence in the Mexican housing finance sector and stimulate renewed investor flows in the RMBS asset class," said an IFC spokesperson via e-mail.
Just how effective these kinds of enhancements, and overseas multilateral support in general, will be for drawing market investors back to RMBS, remains to be seen. It is likely there will be some impact as early as next year given the muscle involved, but it may take some time.
The recent issue from Su Casita is a case in point. Led by HSBC, the issue totaled 400 million inflation-indexed units (UDIs) ($124 million), split into two equal tranches. The deal was rated triple-A on the national scales of Fitch Ratings and Standard & Poor's, and the pieces priced at 5.86% and 6.55%.
In addition to the partial guarantee from the FMO - for up to 15% of the deal's volume - a chunk of the portfolio carried mortgage insurance from Genworth.
Even so, a source close to the deal said a "significant portion" of the transaction ended up with the SHF. Another market source said the share was well above half. A spokesman from the SHF had not returned a request for the percentage bought by the agency as of press-time. Generally, the SHF tries to keep the share it buys at auction between 20% and 30%, but indifferent private investors have forced it to grab the bulk of paper before.
With buysiders still wary of anything that smacks of housing, and the local branches of international banks being directed by their overseas bosses to stay away from the asset class, the push to get private investors back in the game will take time.
The IFC, however, remains optimistic. "To date, rating agencies have affirmed the ratings of the vast majority of Sofol and bank mortgage securitizations now on the market," the spokesperson said. "To the degree that these transactions continue to perform well, and the international crisis abates, the prospects for new Sofol issues should improve."
The dark cloud that has been hanging over the industry, Metrofinanciera, is also expected to dissipate as an external audit on the company is completed. The company, battered by downgrades due largely to lapses in corporate governance, is seeing its issues continue to be downgraded.
Only last week, S&P put four RMBS from Metro on negative credit watch, citing "certain discrepancies" in recognizing past-due loans by the company as a servicer of the collateralized loans. Two bankers in the sector said they believed Metro's woes were unique to the company, but the noise they have generated is aggravating the sector.
SHF has played an active role in supporting Metro through its audit, and was behind recent management changes at the company, according to sources. The agency has said it will provide SHF with a line of credit to the originator, as long as certain conditions are met, according to a Fitch report. An SHF spokesman said the agency can't comment on any of its clients.
In neither an extensive internet document on the World Bank Web site regarding the $1 billion to be doled out to the SHF nor a press release from the IADB regarding its $2.5 billion credit line to the agency, is there mention of the corporate governance issues at Metro. A request for elaboration from the World Bank was not returned as of press time. Repeated calls to the IADB were not returned.
While the nonbank institutions can use the multilateral support, RMBS from banks such as BBVA Bancomer and HSBC, and from government agencies such as Infonavit, have not suffered as severely. This could provide an opening for Fovissste.
The fund plans to originate more than 680,000 mortgage loans between 2007 and 2012, which is equal to slightly over 80% of all the loans it has granted so far. Part of the funding for this ramped-up origination effort is coming from the market.
"We're a fund for [government] workers that has transformed in the past two years," said CEO Manuel Perez, who's been in charge since early 2007. "We think we're in a condition to convince market players [and] capitalize on the changes we've made."
The agency has already mandated that Banco Mercantil del Norte (Banorte), Goldman Sachs, IXE, and Merrill Lynch structure the Ps20 billion program and place the deals. It has already received an "Above Average" servicer rating from S&P, and has enlisted a servicer ranking from Moody's as well. All three global rating agencies will grade the program, Perez said.
Historically, Fovissste only served a sliver of its potential client base, offering one kind of mortgage loan available through a lottery system. "In the past only about 7% of the workers would have access to our mortgage credit," Perez said. But in the last couple of years, origination has spiked and the fund has introduced five new mortgage products, including the co-financing of loans with other originators. The newer products are available outside the lottery system.
Fovissste expects to originate Ps44 billion next year, up 33% from 2008, even under the current conditions. In an indication of continuing robust demand for its loans, in the last lottery of its traditional mortgage product only a month ago, demand was more than three times the supply, according to Perez. The fund has the second biggest mortgage book in Mexico after the agency Infonavit, which has been securitizing its portfolio for a few years. As with Infonavit, payments for Fovissste mortgages are automatically deducted from a contributor's paycheck.
The potential for growth lies in the fund's vast client base, Perez said. Fovissste has 2.12 million affiliates, with an additional 300,000 workers who freelance for government entities set to fall under the social security umbrella and become contributors to the fund. In addition, there are 650,000 pensioners who receive benefits from the system and could become future mortgage borrowers.
Even with the gloom pervading the mortgage market elsewhere, Perez says he's looking toward next year "with optimism."
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