NEW YORK - While it has yet to get off the ground, Mexico's MBS market - or rather talk of it - can already draw a crowd in New York. At Moody's Investors Service 4th annual Latin American Securitization Briefing, attendance at a session devoted to the embryonic asset class spilled out into a hallway of the Sofitel Hotel. "It's very ripe for securitization," said Susan Romo, vice president at Credit Suisse First Boston, channeling a sentiment clearly shared by others in the room. With 700,000 new households added to the stock every year and a still-low residential mortgage rate of 12.6%, the potential for MBS in the country runs deep.
On the domestic side, housing finance companies known as Sofols have already securitized bridge loans for construction, but an MBS with a true sale of loans has yet to surface. Banorte nudged the market in that direction on Sept. 23 by closing a Ps340 million (US$31 million) transaction backed by cash flows from mortgages originated by Banca Serfin in the late 1980s, but it's not quite the real deal.
"I don't think it's the recommended structure industrywide," said Boris Otto, a partner at Thacher Proffitt & Wood in Mexico, citing problems that could arise in securitizing cash flow as opposed to the underlying mortgages, especially in regards to servicing trouble. He suggested that the cash flow option worked for Banorte because of circumstances particular to that transaction.
Locally, the sector is marching towards securitization. A catalyst has been the progressive withdrawal of financing from government agency Sociedad Hipotecaria Nacional (SHF). Narrowing its activities to those of guarantor, the SHF has choked off funding to construction loan origination and is gradually paring down mortgage monies as well.
"They have to be entirely out by 2009," said Manuel Campos, CFO of Su Casita, the second largest Sofol, with Ps13.6 billion (US$1.3 billion) in assets at the end of 2002. In other developments surfacing at the conference, Campos said Su Casita made its first-ever lending of fixed-rate mortgages with a maturity of 25 years. Financing came from sources other than the government.
"It's really a breakthrough for mortgage origination," said Jose Landa, managing director of GMAC Financiera Mexico, which lends to most of the Sofols.
Consolidation provokes servicing questions
An incestuous servicing base is one issue that has hung over the slowly emerging MBS sector in Mexico. The Sofols tend to outsource servicing to each other and that may turn into a problem if consolidation takes hold, Romo said. She suggested that in such an environment naming a backup servicer might give a false sense of security, as that entity may merge with the primary servicer. As for standalone servicers, they do not exist yet for normal loans in the Mexican market. "There isn't a Fairbank or C-BASS right now," Romo added, but pointed out that GMAC has an autonomous unit servicing distressed loans.
The push toward a cross-border MBS also got play at the conference. Apart from the oft-mentioned currency swap market as a prerequisite for launching into the dollar market, the issue of taxes arose. Thacher's Otto said that issuers would be wise to register a cross-border deal with local regulators in order to avoid a potentially more onerous tax treatment. But even then, the rules aren't 100% clear. To ensure a 4.9% flat rate, "the issuer has to be a Mexican entity, but when you have an issue with swaps, etc...regulators can come back and say, wait a minute, this is not a Mexican entity," Otto said. While this has not been tested, players would like to see this potential thorn removed before MBS goes cross the border, he added.
Cross-border activity slows from 3Q surge
Meanwhile, on the cross-border side of things, Moody's analysts predicted that Latin volumes could total US$1 billion in the fourth quarter, a healthy figure but a pullback from the hyperactive third quarter. "There was a conscious decision of issuers to hold off, [which] led to bunching up," in the current quarter, said Susan Knapp, vice president of Latin American structured finance at the agency. According to ASR data, some US$2.1 billion of ABS flowed from Brazil to the cross-border market between July and mid-September. The country has hosted all but two of the transactions in the year to date. "The health of the Brazilian economy will continue to play a pivotal role in the cross-border market," Knapp said.
A broader investor base was another topic discussed at the conference. Recent structured deals from Latin America have roped in new entrants. A US$750 million Petrobras transaction earlier this year epitomized this trend, with high-yield investors buying a significant chunk. But it's anyone's guess whether Latin paper will remain in vogue for non-traditional investors.