Latin Finance - March/April 2011 - 74

Mexican mortgages

and in the US, enabling them to grow rapidly. “When Su Casita, Mexican economy, and says providing affordable units is a top the RMBS pioneer in Mexico, first issued it was able to borrow in priority. The challenge is expansion and being able to provide the debt markets,” says Alex Monroy, debt analyst at Barclays. mortgages at the necessary pace. The credit crisis in 2008 led to the virtual collapse of Mexican “The mortgage Sofoles and Sofomes that are participating in RMBS, so it was very difficult to package such mortgages and the market are solid, solvent and are viable in the long term,” sell them to keep Sofoles liquid, and their funding sources says Cordero. “Adjustments are taking place but they will be in evaporated. Analysts say that unlike in the US, where there conditions to access the securitization market in the future in was a problem with the credit quality of mortgage lenders,this order to continue to provide mortgages to the informal sector,” had more to do with mismanagement and a lack of regulation. he adds. Some mortgage lenders also issued an excess of commercial Sofoles and sofomes are financial intermediaries that give paper, resulting in a liquidity problem that turned into a loans to individuals and corporations. They are non-bank solvency crisis. Delinquencies shot up dramatically as borrowers lenders that can provide mortgages for entry level housing. They depend on funding from development bank loans and debt began defaulting due to poor origination combined with rising unemployment. issuance, as unlike commercial banks, they are not allowed to Government agency Sociedad Hipotecaria Federal (SHF) was accept deposits from the public. originally a liquidity provider and moved Sofoles can provide loans only for a to more of a regulatory role when Sofoles specific purpose, such as a mortgage or a began to diversify funding streams and car loan. They are authorized to operate became independent. During the crisis by the ministry of finance, but they are not it returned to being the main liquidity supervised by the national banking and provider for Sofoles, and is still providing securities commission (CNBV). Sofomes the financing to keep them functioning. can provide credit for a broader range Three of the largest Sofoles experienced of purposes and they may or may not be severe financial distress. Metrofinanciera’s regulated by the CNBV. bankruptcy was the first collapse of an They have to be regulated if they are RMBS servicer, which was the result of part of a credit institution or financial alleged fraud. Investigations, audits and group and are called Sofomes ER reviews showed operations that diverged (regulated entity), otherwise, they are from best practice, a lack of transparency called Sofomes ENR (not regulated entity) and alleged diversion of over 3.5 billion and are not supervised by the CNBV. pesos by the management that was meant to All the Sofoles have until July 2013 repay debt. In November 2010 it emerged to constitute themselves as Sofomes, from bankruptcy and is now operating with otherwise, they will not be able to continue Targeting foreign investors: Gavito new management. operating. Moody’s says that bank, Infonavit and Fovissste originated RMBS should stabilize fully in the first half of 2011 as Mexico enjoys a stronger economy. However, performance of Sofol RMBS will continue to face challenges in 2011. “Servicers with weakened financial strength may be unable to devote sufficient resources to sustain their servicer capabilities and to tackle an already high level of defaults across the RMBS that they service,” says the report. Ensuring mortgage lenders are financially strong is therefore key to getting investors onboard. Non-bank lenders must continue to sell RMBS if they are to adequately meet the huge demand for mortgages. Credito y Casa sold its servicing platform and started the process of liquidation and discontinuing operations. Su Casita, the pioneer of RMBS in Mexico, is working through restructuring, with 75% of its mortgage portfolio having been transferred to SHF. Market participants expect some consolidation this year. “There is not much left to consolidate, the three largest sofoles have already been consolidated, which accounts for 70% of the market. Some of smaller lenders have also been consolidated, while others are too small to be targets for acquisitions,” says Zaltzman. “Of those that remain there is nothing definite yet up for sale,” he adds. Despite Infonavit and Fovissste and some banks having absorbed demand, the need for specialist lenders to the informal sector is clear. Moody’s says the role of the lenders is especially crucial in managing delinquency levels among low-income borrowers. LF

What Went Wrong

Sofoles were set up in 1995 to provide mortgages to the informal sector in Mexico. This is the sector of the economy which is not regulated by the government or does not pay tax, which market participants say makes up 40%-50% of the population. During the early to mid 2000s the sector grew significantly, and these entities were able to tap the unsecured debt, commercial paper and securitization markets both domestically

UPDATE

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March/April 2011

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Latin Finance - March/April 2011

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