Less than a year after the announcement of its political risk insurance product for the capital markets (ASRI 8/9/99 p.1), the Overseas Private Investment Corp. (OPIC) is looking to enter the MBS arena. The U.S. federal agency created to support U.S. business interests abroad said last week that it would develop "bold and innovative" ways to apply its financing and insurance products to housing markets in developing countries.

The new product will initially focus on Latin America. "Latin governments are no longer able to subsidize their housing sector, so the natural next step is for the capital markets to respond to the housing potential," explained George Munoz, OPIC's president and CEO, speaking at a meeting on securitization in Peru. "We are convinced that with a properly structured model we can successfully raise some long-term financing in the capital markets for Latin MBS."

Munoz outlined several models by which the agency's new capital markets insurance program could be applied to emerging markets, particularly in the establishment of primary mortgage finance systems and mortgage securitization vehicles. "What OPIC is prepared to do is to modify our existing insurance product for the capital markets and provide political risk insurance together with some of the credit risk for a certain layer of default," he said. "This model is one that is used in the U.S. but that needs to be adjusted to the main risks in emerging markets: currency devaluation and non-transferability of funds."

OPIC has been working on the application of this model in the Dominican Republic, where it has been working with the U.S. Department of Housing and Urban Development (HUD) to help finance the building of housing for 5,000 low-income families whose homes were destroyed by Hurricane George (ASRI 11/1/99 p.1). "In the Dominican Republic we will provide both political risk insurance and a pool of funds that function like a private mortgage insurance. This pool can be tapped into in case of a default," explained Munoz.

Market players acknowledged the advantages of OPIC's involvement in Latin America's housing sector. Roberto J. Zamora, president of Lafise Group, a banking consortium in Central America regarded the product as "the beginning of a new revolution for Central American and other developing countries."

Yet many hurdles remain. "One of the main concerns is that there is no way to predict future volatility," said Debra Erb, president of Societas International Institute for Real Estate Finance. "That raises questions regarding the long-term performance of the bonds."

Equally important is the issue of an appropriate legal framework. "Latin American governments need to provide the right legal environment and the right incentives in order to facilitate the entrance of the private sector," said Munoz. "For example, Argentina applies a value added tax to mortgages which we see as a barrier in the growth of the housing sector."

Another vital question is whether political risk insurance is sufficient to bring Latin issuers to market. Sources agree that OPIC's insurance policy is helpful in bringing "border-line" issuers up to investment grade. However, in cases in which the gap is too wide, OPIC's policy is not much help.

No OPIC-backed Latin securitizations have come to market so far. But Munoz remains optimistic. "We have already committed to supporting close to a half dozen Latin American ABS transactions," he said. "We are convinced that as the market starts getting closer to more reasonable spreads we'll see a very fast paced issuance of bonds with OPIC coverage. It's only a question of timing."

OPIC expects to make a formal announcement for its MBS product by May and some issuers are said to have a strong interest in using it for future deals.

As is always the case, the market will be the final arbiter. "There is definitely a gap between saying that you have a product available and you have the intent and the will to work with a sector and actually making transactions happen," Erb said. "There will be a lot of fine tuning that will have to be done before they find investors for this kind of bond. The good news we heard in the meeting is that once these factors are addressed, the investor demand does exist and we may be able to replicate the model elsewhere."

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