After two years of preparation, Wall Street Mortgage Company (Wall Street Compaia Hipotecaria) has just successfully launched the first mortgage securitization program in Panama and what is believed to be the first in Central America.

While the first offering for $15 million was placed with local institutional investors, the company hopes to get the program rated eventually and to issue mortgage-backed securities abroad. But unlike many new mortgage companies in Latin America, Wall Street is in no hurry and sees advantages to remaining with the local market.

"Local investors seem to recognize the value of the securitized paper," noted John D. Rauschkolb, general manager and director of the mortgage company in Panama City. Compared with Panama's own sovereign bonds, which yield more than 9% in the international markets, Wall Street's first securitization will pay senior noteholders around 8.25%. Because international investors typically use the sovereign yield as a pricing base, "Right now, there's not much incentive to issue cross-border," he explained.

The first deal, approved by Panama's Comision Nacional de Valores (CNV) a month ago, was placed earlier this month, mostly with local banks. Two insurance companies also participated and "a small portion" was sold to the country's relatively new pension funds, Rauschkolb said.

Sold through a trust, the deal was structured under the existing legal and regulatory framework, without a law specific to securitization. "Panama has a strong fiduciary law, which is key," Rauschkolb noted.

The securities, split into senior and subordinate bonds much like Fannie Mae's early deals, are backed by 598 residential mortgages, with an average loan size of $23,500, he said. With 30-year terms, the variable rate mortgages are indexed to a local reference rate in Panama, now around 9.75%.

Around 25% of the loans could default without affecting senior noteholders, Rauschkolb said. But so far, default seems unlikely to happen. "I have no loans over 90 days [delinquent]," he said. "People pay better here than in California," he added.

Dollarization Key

Rauschkolb spent several years in California as a mortgage banker and subsequently worked on a mortgage program for two years in Mexico, which ultimately fell prey to the peso crisis in late 1994. After that, Rauschkolb settled in his wife's native Panama and approached Wall Street Securities, the country's largest investment banking firm, with a proposal to start up a mortgage company.

Panama's dollarized economy was a draw for Rauschkolb after his experience in Mexico, and it will also be crucial to winning over international investors in the future, he believes.

Since opening its doors on May 5, 1997, Wall Street Mortgage has established underwriting standards and originated some 1,000 "conforming" loans through two offices and a network of mortgage brokers. Now, with 24 employees, Wall Street Mortgage originates around 100 loans per month and accounts for some 25% of the Panamanian mortgage market, he said.

Despite the relatively small population of 2.8 million, mortgage lending is growing. "Panama has done a good job of making housing available...a number of housing projects are underway," Rauschkolb noted.

Local Market For Now

The company competes for business with local and foreign banks, which have, for the most part, opted to keep their mortgages on balance sheet. "They like the assets," Rauschkolb noted. Expertise - or the lack of it - is also a major issue in Panama and in Latin America, generally, he believes. "You need someone there [who knows the securitization business] every day."

A few institutions have successfully completed one-off deals: Chase, for example, sold a small, local MBS a few years ago, but has not been seen in the market again.

Wall Street Mortgage's recent securitization, by contrast, is the first in an ongoing program. As originations increase, Rauschkolb said that he hopes the country's pension funds will grow to absorb the volume. A government fund created from privatization revenues could also potentially support the growing MBS market, he added.

"Our volume will exceed the local market eventually and without government cooperation, we will hit the wall at some point." And at that point, Wall Street Mortgage may have to tap the international markets.

In fact, Rauschkolb's original proposal involved setting up a rated, cross-border securitization program. But once the global financial crisis hit last summer, the plan changed. "The local market was our back-up," he explained. "We would like to get the securities rated and sold abroad - then I could look at buying mortgages."

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