While Mexico's nonbank originators known as Sofoles are still grappling with the effects of the economic crisis, state-owned agency Infonavit continues to turn out mortgages and securitize them in steady if not growing volumes.

The originator, which has been dominating the RMBS market along with fellow government-owned agency Fovissste, has no intention of scaling back this year, with plans to float Ps16 billion ($1.3 billion) of RMBS, according to Jerzy Skoryna, who heads up structuring at Infonavit. The goal would be a 5% increase from last year.

But Infonavit will not be financing itself in quite the same way it has over the last several years. There is a new kind of RMBS the agency debuted last year: the Hitotal. With its heavier reliance on wealthier borrowers than the originator's standard RMBS - known as the Cedevi - the bank is looking to make the Hitotal a major part of its funding. Indeed, Skoryna said that Hitotal should account for between Ps5 billion and Ps6 billion of issuance this year, nearly a third of the projected figure.

As the GSE that originates and services more than half the mortgages in Mexico, Infonavit does not have to look far for raw material, with lending having consistently grown from 2001 to 2008 (see bar chart above). While last year's figure of 475,072 is still behind the peak in 2008, there is a clear resumption of growth on the back of revived economic expansion. The current consensus is that Mexican GDP should tick up by 3.7% this year, according to news reports.

By law prohibited from issuing straight debt, the agency is, so far at least, obligated to use securitization in order to tap the market. But this may change if long-anticipated covered bond legislation is passed.

Since Infonavit's debut in the capital markets in March 2004, RMBS from the agency has been synonymous with the Cedevi label. With the exception of two peso-denominated transactions, Cedevis are denominated in inflation-indexed units (UDIs) and tend to have highly consistent characteristics, with collateral sporting LTVs of between 87% and 88% and DTIs of 22%. The borrowers tend to be lower-to-middle income, as the agency faces a cap of 180 times the minimum wage on the size of the mortgage.

But Infonavit can get around this by co-financing with another entity, and the agency is doing just that with its Hitotal platform, set up and master serviced by Hipotecaria Total.

The agency issued its first Hitotal in December for Ps1.6 billion - Ps1.5 billion in senior notes and Ps130 million in a sub-piece. Hipotecaria Total's approach borrows some ideas from the Danish model of securitization, including a very short period between origination and securitization. For now, Infonavit is co-originating with Citigroup unit Banamex. The way it works is that the GSE covers the mortgage for up to its limit of 180 times the minimum wage, while Banamex handles the rest.

But the total mortgage is automatically deducted from paychecks, just as the ones used to securitize Cedevis. While Infonavit has an agreement to work with Banamex for three years on the program, the agency is open to co-lending with other private-sector originators, Skoryna said.

The weighted average salary of the borrower in Hitotals is 12.66 times the minimum wage as compared to 5.61 times in Cedevis. In the first deal of its kind, this translated to an average current balance per borrower of Ps445,487 as compared to loans amounting to between Ps215,422 and Ps220,842 for Cedevis.

As this is an income stratum relatively new to Infonavit, and the Hitotal model is based on a shorter origination-to-securitization cycle, the seasoning on the debut deal is a great deal lower than in a typical Cedevi. Mitigating this risk is a 2% guarantee for early delinquent loans, and a guarantee that Infonavit will either replace or buy back a loan when a borrower misses any portion of the second and third bimonthly payment.

In addition, for a loan to be eligible, at least one payment has to have been made. "One of the major risks is receiving the first payment," said Fitch Ratings Managing Director Greg Kabance. "Some of these loans can be originated fraudulently, and once the first payment is made, you mitigate that risk substantially."

Based on the data that Fitch has on Cedevis, Fernando Padilla, a structured finance director in the agency's Mexico City office, said Hitotal paper should perform better since it targets a higher income segment with a higher credit score. But until the newer bonds have a track record, the ratings assumption is that the two RMBS types will behave the same.

Despite the fact that the Hitotal loans are taken out by wealthier borrowers, the excess spread on the first deal was actually significantly higher than for Cedevi transactions, and will continue to be so in subsequent transactions, as these higher-income borrowers are charged higher rates. The weighted average interest rate was 9.68% for the debut Hitotal deal, as compared to 7.64% for standard Cedevis. The weighted average payment to income in the Hitotal is 22.19%, with none exhibiting a PTI over 35%.

Fitch expects prepayments to be higher in Hitotal than in Cedevi deals, where they have been negligible. This matters in particular because of a mechanism that sets Hitotal apart from Cedevis. The senior note amortizes based on a combination of scheduled amortization and the target overcollateralization. The former is paid in equal amounts throughout the life of the bond. The latter kicks in when the scheduled amortization is not enough to reduce the balance of the senior notes by the same amount as the collateral. This ensures that if the loan balance drops, either through defaults or amortizations, the volume of outstanding notes will shrink in equal measure.

The Cedevi amortizes with all the residual cash flow after interest on the senior tranche and the mezzanine has been paid. The amortization of the mezzanine is fully sequential, so it begins to amortize once the balance of the senior tranche is zero. If the trigger is on, the amortization of the senior tranche comes after the senior interest payment and the mezzanine interest is capitalized. "Therefore, if not only the trigger of the Cedevi, but also the trigger of Hitotal are on, both structures become full turbo," said Fitch's Padilla. "If the triggers are off, the Cedevi can amortize sooner because there is no money going to the mezzanine amortization in contrast to Hitotal. However, since there will be more prepayment in Hitotal, it is hard to say which one will amortize sooner."

But Hitotals will not necessarily have faster prepayment than other RMBS in the country, as the average rate for borrowers in nonbank and bank RMBS is even higher than for Hitotal borrowers. In addition, borrowers in RMBS originated by banks probably have similar income levels as the ones in Hitotals.

Another difference between Hitotal and Cedevi is the treatment of the mezzanine piece, which tends to have a shorter life in the former product because it can start to amortize, if there is cash available, in the first payment. The Cedevi, in contrast, is fully sequential, Padilla said. "In other words, the mezzanine can amortize only if the senior tranche is paid out completely."

Despite their differences, nearly all Cedevis and Hitotals are denominated in UDIs, while the underlying mortgages are in multiples of the minimum wage. Under law, Infonavit cannot issue mortgages in any other denomination. "It's a straitjacket for the agency," said Infonavit's Skoryna.

Another regulation that crimps Infonavit's financial maneuvering is the prohibition on its issuing corporate debt. Regulators and legislators looking into making covered bonds a reality in Mexico will have to change this rule in order to have Infonavit participate, Skoryna said, adding that a law would have to be clear for the agency to be interested. "If our lawyers say it's okay, then we would probably do the sort of covered bond they issue in Germany," he said.

Whether covered bonds actually come on line this year, one thing is certain: the bulk of capital market financing for mortgages will come from Infonavit and Fovissste. A few banks may join them in 2011, but the Sofoles are still out of the game. A quick look at the spreads of RMBS from Sofol versus that of Infonavit shows that while the risk premium on Cedevis vis-à-vis local treasuries inched up in the last two months of 2010, it jumped significantly more for the already damaged Sofol paper. Unable to attract long-term funding from market investors, the Sofoles will remain largely dependent on government agency Sociedad Hipotecaria Federal.

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