Mexico's bank financing fund FOVI is planning its first $50 million mortgage-backed deal for late this year, despite the considerable hurdles to securitization. And if the plan succeeds, the deal is likely to be Mexico's first mortgage-backed security.

The agency is currently talking to investment banks and the big U.S. mortgage conduits about bringing the first transaction to the local Mexican market. It is also working to get the plan approved by all levels of government.

The deal will be part of a $300 million "pilot program," split into three or four separate offerings, according to Jim Hass, managing director of Capital Advisors in Washington, D.C., which is advising FOVI on securitization.

The FOVI program will follow a "private conduit model," Hass explained. The bank or conduit that is selected to underwrite the program will purchase the mortgages from Mexico's non-bank mortgage banks, as well as some commercial banks, and issue inflation-indexed, peso-denominated bonds to the country's pension funds.

The program will securitize mortgages that have been seasoned for around one to four years, Hass estimated.

FOVI's own role in the securitization process will be to assist in getting the deals done by providing whatever services are needed, such as obtaining credit enhancement or acting as a servicer. There will not be a government guarantee on the securities (ASRI, 8/10/99, p.7).

"What's really interesting is that here you have a government agency that is trying not to involve the government and to rely on the private sector as much as possible," Hass noted. The result is that the mortgage market will develop through the private sector and the government will avoid any liability for the secondary mortgage market in the future.

"It shows a lot of creativity on the part of FOVI" and the other entities involved, Hass said.

If the pilot program is successful, FOVI expects to oversee three or four mortgage-backed deals annually, he said.

Difficulties with Subsidized Housing

FOVI will need to work out a number of issues before the program can launch, however.

Most of the issues arise from Mexico's highly complex housing system. FOVI, which operates under the central bank and is one of three housing agencies in the country, promotes lending to middle- and lower-income borrowers via mortgage and commercial banks and subsidizes these loans.

"This is subsidized housing, and you have to be careful with that," noted Steven Bernstein, vice president at Cardiff Consulting in Cardiff, Calif., and an advisor to the World Bank, which has funded FOVI. The subsidies should not be allowed to affect the economics of securitization, he explained.

In Mexico, subsidized mortgages are dual-indexed, with the result that the maturities can be extended beyond the original 30-year term.

To address this, FOVI plans to set up what it calls a "swap," or what Bernstein termed an "insurance fund," which the borrowers will pay for. In the process, the index on the mortgages will effectively be swapped from wages to inflation, which will match the securities to be issued.

As a result, the loan "will look more like a price-level adjusted mortgage to the investor," Bernstein said.

While the plan will make securitization feasible, the cost of the mortgage will increase by around 1 1/4 points, Hass said. And that could prompt borrowers to go elsewhere - namely to institutions offering subsidized loans from Mexico's other housing agencies, such as Infonavit. FOVI's main lenders, the mortgage banks, are therefore not fully behind the plan yet, Bernstein said.

Another issue that has no easy resolution is simply the condition of the local market. Interest rates have remained so high that Bancomer, which was slated to issue Mexico's first MBS more than a year ago, has finally set the plan aside, according to an official from the bank who spoke at a conference in Mexico recently. Unless the economy improves, "that deal is dead," said a source outside the bank.

Although Mexico's pension funds were interested in buying MBS, they can make more money right now by buying short-term government paper, Bernstein noted. And at the same time, because of difficult economic conditions, many mortgage portfolios are "underwater,"he added.

Funding In Place

Despite the high hurdles, FOVI has made significant progress, for which sources credit in large part the organization's general director, Manuel Zepeta.

After more than two years of negotiation and reform work, FOVI reached a loan agreement with the World Bank that was signed early last month for $505 million. Some $50 million of that is earmarked for "technical assistance," to set up servicing operations, standardization procedures, and all the systems necessary for securitization.

If the program gets off the ground this year, it will probably be Mexico's first mortgage-backed security and will represent the culmination of many years'work. - JB

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