Mexican banks appear to be moving down the food chain in mortgage lending, according to a release by Moody’s Investors Service.

Banorte, Santander and Scotiabank all announced deep rate cuts in their mortgage products in mid July, an indication that they are tapping lower-income borrowers, the agency said. They are now lending at rates that are nearly 200 basis points below the April 2011 average of 11.8%. At the same time, LTVs could hit 95% in these banks' co-financing programs with government agencies Infonavit and Fovissste. LTVs averaged 67% in April, Moody’s said.

“By offering lower rates and higher LTVs, the banks are repositioning their products and target markets and intensifying competition,” said the agency, which views this push as a credit negative.

By attracting lower-income borrowers Mexican banks are moving into turf once dominated by nonbank lenders known as Sofols, many which have struggled in recent years as their collateral deteriorated and funding sources dried up due to the economic slowdown.

As illustrated by the graph below, banks have been able to keep past-due loan ratios low throughout the crisis thanks to their traditional focus on middle-to-higher-income borrowers, whereas Sofols saw their ratios shoot up.

Now absent from ABS, Sofols also used to be active securitizers. Mexican banks have not quite picked up the slack, although Infonavit and Fovissste have been cranking out RMBS over the past few years.

A PDF of the Moody’s release is attached.

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