Foreign investment bankers, guarantors and even cross-border investors have swept into Mexico in recent years to grab a piece of the growing mortgage and RMBS sectors.

The freshest faces at the table are mortgage providers Genworth Financial and AIG United Guaranty, which might be joined by their peers if pending regulations are enacted within the next few months as anticipated.

"The market has great potential, [given] the housing deficit and commitment of the government," said Octavio Figueroa, the country manager of Mexico for United Guaranty, which has already reinsured insurance provided by government agency Sociedad Hipotecaria Federal.

Wielding a monopoly on providing insurance for domestic mortgages, SHF signed reinsurance agreements with Genworth and United Guaranty in October. The agreements work on a quota-share basis, with the reinsurance covering 70% of each batch brought into this arrangement. Like United Guaranty, Genworth has begun reinsuring Mexican product.

Changes must be made

The real action will ensue only when the country's Insurance Commission approves and interprets the changes in regulations governing mortgage insurance. The Mexican Senate is expected to pass these new rules this month, or next. The changes will abolish SHF's monopoly, paving the way for mortgage insurers to sell their product directly to Sofols, the nonbank institutions that in the aggregate provide most local mortgages, and banks. The SHF is only too happy to invite others into the market.

"We don't want the monopoly. That's why we've been selling the risk to others," said Jorge Galindo, director of market development at the agency.

"We are looking forward to the day we can begin offering mortgage insurance on our own in Mexico once legislation [makes] that possible," said Terry Souers, vice president of public relations at Genworth.

Figueroa has the same idea.

"It's a market where we'll have a strong participation in a direct manner," he said.

Indications are that Genworth and United Guaranty aren't the only players that will take advantage of the looming open-door policy.

"We are definitely looking" at Mexico, said Beth Haiken, vice president of public relations at the PMI Group. "We have a lot of people always scanning the globe."

A source at another mortgage insurer said that "from a mortgage insurance perspective, Mexico is a template of what could, and what should, happen."

But until companies can directly insure Mexican mortgages, the re-insurance opportunities are likely to remain slim.

Low critical mass,for now

SHF's vice-president of risk management and planning Alan Elizondo said that, while the risk-sharing arrangements with Genworth and United Guaranty aren't exclusive, the agency doesn't produce the level of critical mass that could easily be spread around. SHF has been insuring, on average, the local currency equivalent of $100 million in mortgages per month. But the potential is far larger, with about $500 million in loans originated monthly by the private sector in Mexico.

SHF's insurance covers up to 25% of the outstanding size of a mortgage. The coverage amount depends on the originator's requirements.

Taking a page from the U.S. industry's book, the SHF will not insure mortgages with triple-digit LTVs. The cap is 90%, but goes up to 95% for loans originated by government agency Infonavit, which focuses on poorer borrowers and has payments automatically deducted from paychecks. Also, a loan is eligible for insurance as long as the borrower's monthly salary is at least four times the mortgage payment. Mexico's version of the FICO score forms part of the criteria. The methodology is analogous to that used in the U.S. But some of the variables vary, according to Martin Rodriguez, deputy director of risk at the SHF.

"Through the FICO method, about 15% of borrowers aren't eligible for the insurance," Rodriguez said.

Not everyone is convinced that credit scoring is particularly accurate in Mexico.

"The credit profile of the consumer down there can be sketchy," said one industry source.

But, as with other less developed features of Mexico's mortgage landscape, some players will be willing to assume that risk as an acceptable hazard in a fast growing market.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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