Last year, Mexican state agency Sociedad Hipotecaria Federal (SHF)was on track to cut off direct funding of mortgage origination for nonbank entities known as Sofols by the end of 2009.

But thanks to tighter liquidity, the government dropped the deadline so lenders struggling to attract market investors don't have to be concerned with weaning themselves off this funding source. That shift is only one aspect of a broader, more muscular role for the SHF, one that market players view with some ambivalence, even though most agree it has helped sustain lending.

Unnerved by the subprime crisis in the U.S. and by liquidity problems particular to Sofols, domestic investors that had once been eager buyers of CPs and deals backed by construction bridge loans and RMBS are demanding steeper spreads from these originators.

On top of that, the local units of foreign banks burnt by the subprime conflagration are being told to stay away from anything within a mile of mortgages.

One effect has been a reprisal of SHF's partial guarantee, a product that had faded with the arrival of leading monoline insurers in the asset classes of mortgages and construction loans. "The partial guarantee is coming back," said Javier Gavito, general director of the SHF. One way it's being used is as bond enhancement.

Just two weeks ago, Credito y Casa had the guarantee on a Ps600 million ($58 million) transaction backed by construction loans, its first use of the product since 2003. The tough pricing environment pushed the originator to go out with a four-year tenor - in an asset class that was effortlessly banging out deals in the seven-year range during the sunnier times of last year and 2006. But even so, the enhancement was key for galvanizing investor appetite and making up for the disappearance of foreign investors, which had been reliable buyers of the subordinated pieces that the domestic triple-A crowd largely ignored.

Today, Sofols face one of two scenarios of foreign investor demand for subordinated tranches. "They are either going to ask for a premium that's too high or there are none of them," said Luis Parra, director of funding for Credito y Casa.

SHF's partial guarantee can also work for warehouse facility and credit lines. A market source said that the guarantee was instrumental in getting a warehousing facility that Metrofinanciera has with Deutsche Bank bumped up to $150 million in February, from the original cap of $75 million.

Similarly, the partial guarantees that the market used to see from the Dutch development bank the FMO and the International Finance Corp. (IFC) could return as well. Indeed, one source said that the IFC and Inter-American Development Bank have set up a joint facility to provide up to $300 million. Neither multilateral could comment by press-time, but there was a joint announcement in May alluding to potential credit enhancements to combat the loss of investor appetite in a down cycle.

A newer arrow in the SHF's quiver is a three-year warehousing facility in which a Sofol would place collateral in a vehicle funded by the state agency. "[We] are ready to operate with this product, but we're waiting on five or six Sofols to complete the process of rating the collateral and revising the contracts for [the facility] to begin to function," said SHF's Gavito.

The SHF has also participated in the market by purchasing RMBS directly at auctions. But even in the market's darkest days, this year the agency has kept its purchase to under a fifth of the total, with only one exception. The SHF's RMBS book now stands at Ps10.15 billion, about 24% of the market's overall figure.

All the same, direct funding for origination remains a pillar of the SHF's strategy, and the government's decision to prolong this role of the agency indefinitely was clearly recognition of its importance in troubled times.

"Today 65% of our mortgage funding comes from the SHF," said Othon Paez, head of financial planning at Patrimonio. "The expectation was that this was going to be replaced by warehousing lines and securitization." The up-tick in market spreads, however, forced Patrimonio to hold steady the share of SHF funding.

Paez said that if conditions improve Patrimonio could test the waters of the RMBS market in a few months. In the view of Gerardo Tarrats, head of corporate finance at Credito Inmobiliario, the tide is already turning in the favor of some Sofols. "Investors are coming back a little," he said. "Each time we renew our CPs, there is more demand in the book."

But others counter that on top of the issues facing the housing sector in particular, inflationary pressure is bound to send interest rates higher, and appetite for paper in general could get hit.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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