After years of delays, Mexico's mortgage-backed securities market may finally be ready for launch thanks to the government's efforts to diversify funding for the housing sector, said Jose Ramon Tora, a director in Standard & Poor's Ratings Group structured finance group.

Several of the country's 14 nonbank banks (sofoles) responsible for lending to real estate developers are rapidly developing mortgage-backed transactions ranging in size from 20 million pesos ($2 million) to 1 billion pesos ($100 million), Tora said. The first of these deals to hit the market will probably be a 40 million-peso inflation indexed bond sold by Hipotecario Nacional, the largest of the nonbank institutions.

Although the deal will actually be securitizing government securities, such as Cetes, it will serve as a vehicle for Hipotecario Nacional to break into the local market and issue mortgage-backed paper in the future, Tora said. If it closes, the sale will mark the largest local debt issuance by a sofole.

"The whole idea is that they want to create a secondary mortgage market," Tora said. "So it's all pointed at securitization."

The advent of a mortgage-backed market in Mexico was held up throughout the 1990s due to a combination of legal and structural factors. While the complex filing procedure required by the government bogged down many transactions, the fact that most of the mortgages in the market were for low-income housing was an additional impediment, Tora said.

Because these mortgage loans are indexed to both inflation and the minimum wage while being subsidized by the government, their payment schedule is erratic and using them to calculate a future stream of payments is very difficult.

FOVI, the state agency that currently funds all sofole housing-related lending, has helped push stalled deals forward as part of its effort to diversify the housing banks' funding sources. The banks themselves have started to address the technical hurdles to mortgage-backed issuance by pooling more middle-income mortgages with simpler structures.

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