Mexican Development Bank SHF Moves To Shore Up Mtge Industry

Mar.19, 2008 in Market Outlook

Last Update: 3/19/2008 4:28:18 PM

By Ken Parks

Of DOW JONES NEWSWIRES

MEXICO CITY (Dow Jones)–Mexican development bank Sociedad Hipotecaria Federal,
or SHF, has taken steps to bolster the mortgage industry in recent months by
extending credit lines to lenders and actively purchasing mortgage bonds amid
signs of tightening liquidity in global financial markets, according to a top
executive.

SHF has started offering revolving credit lines to non-bank home lenders, taking
mortgages and construction loans as collateral after some institutions had
trouble rolling over short-term debt last year.

“It’s a product that allows them to bridge the liquidity problem they might have,
and gives them financing at market rates,” Javier Gavito, the bank’s chief
executive, said in a recent interview. “There is one lender that is using it and
others are considering it.”

SHF continues to act as a market maker in the mortgage-backed securities, or MBS,
market with just under 8 billion pesos (about $747 million) of mortgage bonds in
its portfolio, Gavito said.

Mexico’s home finance companies and banks have increasingly turned to mortgage
bonds to fund their lending operations, pay down credit lines and trim their
exposure to the country’s booming housing market.

Since late 2003, private lenders have sold about MXN46 billion of MBS on the
local market.

Financial markets were closed to mortgage bond issuers last August, September and
November, and again in January due to volatility in global securities markets,
which are suffering from liquidity problems and growing risk aversion following
last year’s collapse of the U.S. subprime mortgage market.

Market conditions improved in February, when non-bank home lender Metrofinanciera
SA sold MXN1.04 billion in mortgage bonds, and last week banks BBVA Bancomer and
Grupo Scotiabank issued a total of MXN3.61 billion.

The short-term debt market has also improved in recent weeks, with
Metrofinanciera, Hipotecaria Su Casita and Patrimonio Hipotecaria making
successful placements.

“Our estimates are for close to MXN50 billion in loans to be securitized this
year, half by banks and half by home finance companies, and we will have to see
if the market exists to take all of that paper,” Gavito said.

So far, the fallout from the U.S. credit debacle has been limited to volatility
in local stock and bond markets, as Mexican lenders have managed to avoid the
asset quality problems observed at many of their U.S. peers thanks to stricter
lending standards.

“We believe that if the (securitization) structures are healthy and well built,
there isn’t any reason that they wouldn’t be an attractive investment, above all
if the rates are attractive,” Gavito said.

SHF was created in 2001 with a mandate to provide mortgage insurance, financial
guarantees and long-term funding to the mortgage industry.

SHF plans to open a mortgage insurance company this year to compete with firms
like Genworth Financial Inc. (GNW).

Mortgage insurance protects lenders in the event of default by covering a portion
of the outstanding loan balance, which can translate into lower down payment
requirements for borrowers.

Financial problems at bond insurance companies like Ambac Financial Group (ABK)
and Financial Guaranty Insurance Co. have also spurred greater demand for SHF’s
partial financial guarantees, which protect mortgage bond investors from
non-payment of interest and principal on the underlying loans.

SHF last year scotched plans to open a financial guarantee subsidiary after
competition from full-wrap guarantees sold by bond insurers and mezzanine debt -
two kinds of credit enhancement that help securities obtain a better credit
rating - virtually killed demand for its partial guarantees.

“We are starting to once again provide financial guarantees, but not in the
volumes that we consider would merit an insurance company,” Gavito said.

SHF is also promoting other securitization vehicles as an alternative to the U.S.
model used by most Mexican issuers, where a lender accumulates a pool of
mortgages which are then sold to a special-purpose vehicle that issues bonds.

That process removes the mortgages and the risk associated with those loans from
the lender’s balance sheet, but is also capital-intensive and vulnerable to
interest rate fluctuations.

SHF, along with other investors including the Netherlands Development Finance
Co., and Geomex Investor, a company linked to the Soros Foundation, founded
mortgage securitization company Hipotecaria Total, or HiTo, in 2006.

HiTo, which has a platform similar to that used in Denmark, securitizes
third-party loans about a week after they are closed. Since December, HiTo has
sold MXN20.1 million of bonds in four placements.

Gavito also wants to create a covered bond market in Mexico, although that will
require legislative action by Congress.

Covered bonds are backed by cash flows from mortgages or other loans, but unlike
MBS, they remain on the issuer’s balance sheet.

“We should promote different options and the market can decide which seems the
most attractive,” he said, adding that the government hopes to get covered bond
legislation approved this year.

A healthy, functioning mortgage bond market is key to the long-term viability of
non-bank lenders. Unlike banks, home finance companies can’t take deposits from
the public, and rely on SHF, bank loans, and mortgage bonds for funding. SHF,
however, will cut off its funding in October 2009.

While bigger firms like Su Casita and Credito y Casa have become regular MBS
issuers, the future of smaller lenders is less certain.

“With the return of the banks to the mortgage market in a big way and the
entrance of savings banks in the low-income segment, home finance companies are
going to have to look at what it is they want to do. Maybe what they need to look
at are specialized areas like (loan) origination, servicing, etcetera,” Gavito
said.

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