Yet another global player has succumbed to the charms of Mexico's RMBS market. The Inter-American Development Bank (IDB) is in talks to provide a liquidity facility for a deal originated by housing finance company Hipotecaria Nacional, according to sources. Citigroup Global Markets is structuring the transaction.
This would mark a first for the IDB in the Mexican market, which has already drawn other multilaterals like the International Finance Corp. and Dutch development bank the FMO. A US$53 million-equivalent MBS for Su Casita and GMAC that inaugurated this sector last December carried a liquidity facility from the FMO for up to 9% of the transaction. At the time, an FMO official said liquidity was chosen over a partial guaranty because drawing on the facility was simpler.
With a guaranty, individual bondholders have a direct claim on the guarantor. In a liquidity facility, the trustee holds the claim.
While green as a guarantor in Mexico's domestic market, the IDB has gotten its feet wet in Colombia, where it provided a partial guaranty to a mortgage bond originated by Banco Colpatria. Sized at Ps138 billion (US$53 million), the Colombian deal closed in January 2003.
Many steps to recovery
Aside from the IDB's apparent involvement, the Hipotecaria Nacional deal might end up introducing a key structural detail into Mexico. Sources familiar with the transaction say that Citigroup is working to collect accurate recovery information on the issuer, which belongs to a group of housing finance companies known as Sofols. "[Hipotecaria] is probably the best Sofol in terms of keeping this information, so if any of them could do this, it would be them," said a Mexico City-based banker.
Several sources active in Mexican housing securitizaton said that a reliable account of recoveries in the industry is not currently available.
The only two proper RMBS to hit the market - the aforementioned Su Casita/GMAC deal and a subsequent transaction from state housing agency Infonavit - did not include recovery data in the structuring. They found it much easier to tread other paths to triple-A ratings, such as the FMO facility and subordinated tranches.
The challenges they preferred to avoid, and that Citigroup is now tackling, stem in part from the relative youth of the mortgages, according to one source. The bulk of loans in Mexico have been originated post-Tequila Crisis, in 1995 and thereafter. A lack of seasoning translates into flimsy recovery information, the source said.
In addition, the differences in enforceability among the states always loom large in Mexican mortgage deals. Just as in the U.S., state law governs mortgages, including foreclosures. "They've eased the [true sale requirements] of mortgages in a lot of states, but recovery is something that can vary a lot," said a lawyer familiar with the sector.
Recovery experiences in a particular state can reverberate in an RMBS. One large pension fund was rumored to have shunned an RMBS because it featured heavy exposure to a state in which the fund's parent bank had a grim experience in recovering defaulted loans.
Due to these obstacles, Infonavit, for one, decided to assume a zero recovery rate for the pool in its transaction.
However, as surveillance by servicers improves and Sofols tweak origination to cut down on the probability of default, recovery is likely to figure in future deals, even if Citigroup finds that the costs of doing it now outweigh the benefits.