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March 2007 Development of the Secondary Mortgage Market in Mexico: Current Situation and Perspectives.

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Presentation on theme: "March 2007 Development of the Secondary Mortgage Market in Mexico: Current Situation and Perspectives."— Presentation transcript:

1 March 2007 Development of the Secondary Mortgage Market in Mexico: Current Situation and Perspectives.

2 2 I. The Mexican housing market II. Role of SHF in the Mexican housing market III. Importance of the Mortgage Insurance in the Mexican Market IV. Mortgage Backed Securities market (BORHI’s) V. Hipotecaria Total (HiTo) VI. Future challenges Contents

3 3 I. The Mexican housing market II. Role of SHF in the Mexican housing market III. Importance of the Mortgage Insurance in the Mexican Market IV. Mortgage Backed Securities market (BORHI’s) V. Hipotecaria Total (HiTo) VI. Future challenges

4 4 The housing sector in Mexico has experienced a great increase over the last years. Number of Mortgages Originated Yearly Average annual growth rate (1996 – 2005) = 9.77% Source:CONAFOVI One of the most important reasons of this increase is the growth of the mortgage market.

5 5 It is expected that between 2000 and 2030, the number of households will grow approximately 83%. Number of Homes in Mexico (millions)* * According to the definitive results of the II National Population and Housing Count, total number of homes in 2005 ascended to 24.8 million Source:CONAPO e/ = estimate.

6 6 The household formation rate will present its highest levels over the next 7 years Official estimations of population establish that in 2005, 672 thousand new households were formed nationwide. This figure will increase and reach its maximum in 2012, with 690 thousand new households. Household Formation, Population by Age Groups, 2005 Source: Elaborated with information from Conapo Source: INEGI Ages of household formation

7 7 Mortgage Portfolio Amount, , , , , , , , , Million dollars INFONAVIT, FOVISSSTE Y FONHAPOSOFOLES & BANKS Based on very conservative assumptions about the economic growth and interest rates evolution, SHF estimates show that the mortgage portfolio will grow from USD $79,600 million in 2006 to USD $338,300 million in Source: SHF estimations This population dynamics represents a great challenge and opportunity for the mortgage market *The projections of the mortgage portfolio are based on the potential estimated demand. An annual PIB growth rate of 3% is assumed and a decrease over the years of the home deficit that in 2005 was 8.4 million homes. Annual rate of compound growth : 10.1%

8 8 Source: FMI, World Economic Outlook September 2004; South Africa Central Bank, CMHC (Canada), SSKI (India), Komoco (Korea), GHB (Thailand), China On-Line, SHF (Mexico), Michael Lea. Data from 2001 for Korea, Thailand, Brazil, Poland, China, India and South Africa. An annual growth in the PIB of 3% is assumed. Mortgage Portfolio Amount / GDP of selected countries (%) The growth of the Mortgage Portfolio as a percentage of the GDP would be important, even though, it would still be located at an average level compared with the rest of the world. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Netherlands USA UK Australia Germany Ireland Canada Spain Mexico (2030) Japan Mexico (2020) France South Africa Thailand Korea Italy Mexico (2005) Brazil China India Poland 10% 36% 39%

9 9 Given the competition and the improvement of the economic environment, in 2006 a borrower with 7 minimum wages of income could borrow a mortgage 16% higher in value than what he could in 2000, and 35% higher in value if he uses the joint program with INFONAVIT (Cofinavit) The previous projections do not consider the potential growth from improvements in affordability. Borrower’s income: 7 MW 11.6 Payment Factor Payment Factor Attainable Housing per Program 30,380 26,173 22,428 5,000 10,000 15,000 20,000 25,000 30,000 35,000 PROFIVI 2000PROFIVI 2006COFINANCING 2006 Million USD Payment Factor 9.94 *Figures in pesos

10 10 That scenario is conservative if you consider that for the first time in many years, all the participants in the mortgage market are growing at high rates. Exchange rate: 11 MXP/USD

11 11 To finance such volumes of credit it is necessary to have an efficient market for mortgage backed securities.

12 12 I. The Mexican housing market II. Role of SHF in the Mexican housing market III. Importance of the Mortgage Insurance in the Mexican Market IV. Mortgage Backed Securities market (BORHI’s) V. Hipotecaria Total (HiTo) VI. Future challenges Contents

13 13 SHF was created in 2001 as a government financial institution oriented to foster the development of the primary and secondary mortgage markets. Until 2013, SHF will count with the 100% guarantee from the Federal Government. After this moment, SHF must be self sufficient. Today it serves as a mortgage bank and a financial guarantor. SHF grants long term financing to financial intermediaries and covers their interest rate risk. SHF does not lend directly to individuals. SHF offers mortgage insurance and financial guaranties and a swap that allows borrowers to pay in terms of minimum wages versus UDIS denominated loans. SHF mandate and activities

14 14 According to SHF´s Law, after 2009 SHF will not be able to grant finance. Hence, it is necessary to develop alternative mechanisms of housing financing. SHF considers the securitization of mortgages as the most efficient mechanism of house financing; and in accordance with this idea, it is focusing on accomplishing to finance most of the mortgages in Mexico through it. SHF mandate and activities (Cont…)

15 15 Local capital and international derivatives markets World Bank & IADB MORTGAGE LENDING SOFOLES SHF funds SOFOLES on a matched funds basis, absorbing market and prepayment risk SHF hedges market and prepayment risk through debt and derivatives markets Mortgage Insurance SHF started operations in 2002, overtaking the activities of FOVI and has the capacity to fund in the markets. Central Bank loans MI is offered to prepare loans for securitization

16 16 LOANSLOANS Financial Intermediaries Banks Sofoles $ $ Mortgage Insurance MBS K Mortgage Portfolios SPV Capital Markets Partial Credit Guarantees SHF’s main challenge is to develop an efficient market for mortgage-backed securities (MBS) through its role as guarantor and liquidity provider.

17 17 $ $ Mortgage Insurance Capital Markets Financial Guarantee Insurance SHF has been actively seeking the entrance of private providers of guarantees. The end-game is a market based on private providers of financial solutions. LOANSLOANS Financial Intermediaries Banks Sofols MBS K Mortgage Portfolios SPV

18 18 The same effect happened in 2004 for individual loans. The acquisition of Sofoles by Banks and securitization have been a source of diversification for Sofols funding Mortgage Portfolio Administered by Sofoles Equivalent in Million Dollars

19 19 I. The Mexican housing market II. Role of SHF in the Mexican housing market III. Importance of the Mortgage Insurance in the Mexican Market IV. Mortgage Backed Securities market (BORHI’s) V. Hipotecaria Total (HiTo) VI. Future challenges Contents

20 20 The securitization model in Mexico in 2003: SOFOL or BANK Mortgage Insurance Company Mortgage + Insurance 25% BORROWER PRIVATE ADMINISTRATION TRUST MORTGAGE INSURANCE (First loss up to 25%) Mortgage Packages structured to this level. The Trust acquires the Mortgages. Financial Guaranty Insurance Company Financial Guaranty Partial or Total Insurance PREMIUM Mortgage $ $ BORHIs with repayment of principal and interest, supported by structure and guaranties $ PREMIUM Securities Market Depends on the issuer´s preference, but the mortgage insurance is required unless there is a Financial Guaranty of a 100%. =

21 21 SHF does not buy individual credits to pack and securitize them, and also will not offer 100% coverage with the GPO. Instead, SHF has been supporting the securitization of individual credits in the following way: Offering a Mortgage Insurance of up to 35% on the first loss to the Mortgages. Granting the swap UDIS - Minimum Wages to isolate the currency risk in the structure. Granting Partial Financial Guaranties to structures that comply with the minimum issuance criteria. Supporting the development of the BORHIs market through the Market Maker figure and with an active presence on the secondary market. SHF has participated actively in the securitization model.

22 22 Banks, Sofols and Trusts issuers of BORHIS MI Companies Private MI Companies SHF 1.Short Term ( ) : SHF offers an MI coverage, looking for reinsurance with international specialized companies. 2.Medium Term ( ) : Private Insurance companies offer medium and residential coverage. SHF takes risks with the low income sector, and with some other risk not covered by the private sector. 3.Long Term (2013+) : Private Insurance companies offer coverage in all segments, SHF offers reinsurance for riskd not accepted by private entities. Promoting the creation of an MI market in Mexico MI Reinsurance International MI Companies AHF

23 23 I. The Mexican housing market II. Role of SHF in the Mexican housing market III. Importance of the Mortgage Insurance in the Mexican Market IV. Mortgage Backed Securities market (BORHI’s) V. Hipotecaria Total (HiTo) VI. Future challenges Contents

24 24 Up to day there are 27 BORHIs issuances, for a total amount of USD$ 2,478 million. And also, two transactions which are innovative for this market.

25 25 *Exchange rate = 11 MXP/USD. As of March 2007, the total BORHIS outstanding was around USD $1,842 million

26 26 The increase on the number of issuers was, of course, an important factor to increase the issued amount GMAC Su Casita Metrofinanciera Hip. Nacional GMAC Su Casita GMAC (Patrimonio) GMAC (Crédito y Casa) Metrofinanciera Hip. Nacional GMAC Su Casita GMAC (Patrimonio) GMAC (Crédito y Casa) Metrofinanciera Hip. Nacional GMAC Su Casita 2006 Banorte Crédito y Casa Patrimonio ING FINCASA

27 27 LOAN SECURITIZATION IN PESOS, FIXED RATE, 20 YEAR TERM Mortgages Portfolio 97% Senior Bond 3% Subordinated Bond 25% First loss Mortgage Insurance 10% Financial Guarantee Average rate Servicing fee Life & damage Insurance + structure costs Funding rate BORHIs 15.50% 1.25% 8.94% 2.81% Mortgage Ins. & Fin. Guar. Excess rate = The return over equity for the Sofols which securitize is relatively high Rates in pesos

28 28 Though Borhis are a relatively new product in the mexican market, the demand for these type of Bonds has consolidated…. Issuance

29 29 …. and spreads versus government securities have shown a stable trend One of the main reasons why BORHIS have been well demanded is the existence of a liquid secondary market for these securities. **Government Real Rate Benchmark (with similar duration to that of the BORHIS). *Weighted Average YTM (calculated, at each time, with the outstanding amount of each issue). Source: VALMER; Mexican Price Vendor. Spread = BORHIS* – “Mexican Government Real Rate Benchmark” (Dic-2003 – YTD) Avg. = 104 BP

30 30 BORHIS offer very attractive yields to Foreign Investors …. YTM: BORHIS* vs. “Mexican Government Real Rate Benchmark”, “TIP’s + EMBI+”, TIP’s (Dic-2003 – YTD) 4.57% 3.49% 3.36% 2.35% *Weighted Average YTM (calculated, at each time, with the outstanding amount of each issue). Source: VALMER; Mexican Price Vendor. **Government Real Rate Benchmark (with similar duration to that of the BORHIS). TIP’s = Treasury Inflation Protected Bonds; EMBI+ = Emerging Markets Bond Index (Mexico).

31 31 …. sovereign risk adjusted and inflation protected The average spread between the “GNMA 30 Yr.” and the “10 Yr. UST” has been of 90 Basis Points (2004-YTD). Spread = BORHIS – “Mexican Government Real Rate Benchmark” and “TIP’s + EMBI+” (Dic-2003 – YTD) Avg. = 104 BP Avg. = 201 BP

32 32 SHF created the Market Maker figure in order to promote the Borhis’ secondary market There are now 10 Market Makers who have participated with competitive positions since the last 12 Borhis’ auctions, and who operate actively in the secondary market the 23 outstanding issuances.

33 33 I. The Mexican housing market II. Role of SHF in the Mexican housing market III. Importance of the Mortgage Insurance in the Mexican Market IV. Mortgage Backed Securities market (BORHI’s) V. Hipotecaria Total (HiTo) VI. Future challenges Contents

34 34 The securitization process of mortgages (BORHIs) is recent, its development depends on the following key elements: 1.Portfolios of credit that fulfil certain minimal criteria in their origination and administration (solid and trustable mortgages). Currently the issuances in the market are backed by portfolios that: Fulfill a common standard in terms of strict mechanisms of origination (eligibility criteria) and administration, integration of the credit file, reports of the information, etc. Were reviewed by a third party (insurance credit housing providers or financial guarantees) that will face loses in case of defaulting). In order to develop in Mexico a securitization market there must be 4 key elements LTV <= 65% Housing credit insurance or GPI Valid credit Complete filing (certificates of property, appraisal, etc.)

35 35 2.Credit enhancers with value and trustworthy included in the market: Currently the structures have diverse credit enhancers that strengthen them when possible defaults from debtors may occur: Mortgage Credit Insurance or GPI Financial Guarantees (GPO) or Partial Credit Guarantees (PCG). 100% coverage of the full-wrap portfolios SHF has worked together with diverse financial intermediaries and multinational organisms to participate as guarantors in these structures. The answer has been positive, since currently the IFC and FMO participate in PCGs, United and Genworth in GPI through the re-insurance figure, and this year they worked directly with Sofols and Banks. AMBAC gave its first coverage of multinational AAA to the 100%. We are working with the 3 credit rating agencies in the optimization of this credit enhancers that may permit to optimize the structures. In order to develop in Mexico a securitization market there must be 4 key elements

36 36 In order to develop in Mexico a securitization market there must be 4 key elements (Cont…) 3.The possibility of taking in firm of long term securities in behalf of the investors The investors have shown a greater participation both in the primary and the secondary market of BORHI´s in the way in which the issuances have been done for many reasons: a)A market of national and foreign investors has been developed, in its majority institutional (Siefores, Insurance companies) that have manifest appetite for securities in a long term. b)The curves of the government are longer and are a reference that facilitates the development of the long term debt market that includes BORHI´s. Demand of BORHIS

37 37 4.Efficient mechanisms of portfolio adjoin that permits to give certainty to the originators/administrators of the mortgage credits about: a)The existence of a source of liquidity and continuous and safe funding trough the capital markets. b)A well known interest rate to discharge their credits from their balance, and to permit to eliminate the market risk that is currently given to between the credit origination and its securitization (It takes about 28 months in average between these two events) SHF and diverse financial intermediaries have focused and been able to develop the key elements, nevertheless it hasn't been possible to advance in the following last element: Efficient mechanisms of portfolio adjoin. It is one of the reasons why the small and middle size Sofols have not shared in the securitization.  In order to develop in Mexico a securitization market there must be 4 key elements (Cont…)

38 38 Debtor: Requests credit Sofol Requires Funding Government rate + X bp Sofol Gives Credit Sofol Accumulates mortgages Securitization The process is long, about 35 months Current Model When there are no adjoin of efficient mechanisms, the current securitization model last 28 months in average If the market conditions permit it Gives Funding

39 39 To promote the use of a vehicle that may guarantee the liquidity of the originators and eliminates the market risk between origination and securitization, a solution called HiTo has been developing In 2001 an agreement of “Partnership for prosperity” was singed between the Governments of Mexico and The United States. The United States Department of the Treasury requested Soros to look for the best solution to finance the great housing need of Mexico. SOROS & VP agreed in June 2003 to establish an Institution focused in the aim to offer to Mexico the Danish Model of Mortgages. After a continuous interaction of the Danish institutions with their Mexican counterparts (INDEVAL, SHF and some Sofols), an adaptation of their business model has been defined for Mexico by creating a company called Hipotecaria Total (HiTo) With that purpose, SHF has kept a close relationship with Danish mortgage banks, the Danish Central Depository Institution (VP), and Soros Equity Fund.

40 40 The Sofols participation in HiTo, will be very simple The idea is that with simple interfaces and sending similar lay-outs to those sent currently to SHF, Sofols could access the Capital Markets continuously to fund their mortgages at a low cost and anytime they need it. Hito Mexico Hito will adapt to Mexico the systems that support the operation in Denmark, which is well known for the foreign investors and the rating agencies. Reduce the funding rate and optimize credit enhancers. SHF with SOROS and VPX, are working in the implementation of the infrastructure that supports the securitization systems of HiTo. From November 2006, HiTo is a company focused in the Securitization services, with systems connected with INDEVAL and the banking systems that Sofols currently uses, in a very automated way ( Straight Through Process, STP ).

41 41 Conceptually the technological solution is simple Indeval Funcionality VPX FundingXpert interface Clearing Operations capture Market information Investors and issuers account administration Investors Payments Administration Banking System “VPX Bond Management Interface” Client assistance Credit score Client management Administration of credits Investors Payments Administration Funcionality FundingXpert VPX Bond Management System Payment administration Building appraisal Prices and charges of commissions and services Account management

42 42 Small Sofole Operation of HiTo in Mexico Small Sofol Medium Sofol Small Bank Large Bank or Sofol Abanks + FundingXpert VPX HiTo (VP Mexico) Indeval HiTo Trust Own Brand Trust Trust for independent Bank Brand Securities HiTo Securities Sofol X Securities Sofol Y Securities Sofol Z Multisofol Trust HiTo will be an open system to any interested participant in securitizing their mortgage portfolio. The participants in the Market could issue securities with their own brand (eg: Su Casita, Metrofinanciera, GMAC, etc.) or using a Multisofol brand (multisofol issuance). In both cases, the subordinated piece will be kept by the originating Sofol

43 43 By securitizing through a vehicule like HiTo, the originators/administrators will obtain very important benefits:  The existence of a liquidity source and continuous and safe anchorage through capital markets.  A known interest rate to unload its credits off the balance, and that allows to eliminate the risk market that at the moment occurs between the origination of the mortgage and their securitization (it takes approximately 28 months in average between these two events).  The standardization does not imply rigidity in the type of mortgage since today the danish model supports several types: fixed rate, variable rate, with caps, etc. Conclusion These benefits allow the Sofol to be in conditions to offer a highly competitive mortgage product and increase their volume of mortgage originations

44 44 I. The Mexican housing market II. Role of SHF in the Mexican housing market III. Importance of the Mortgage Insurance in the Mexican Market IV. Mortgage Backed Securities market (BORHI’s) V. Hipotecaria Total (HiTo) VI. Future challenges Contents

45 45 To build a market where investors, mainly local and foreign institutional investors, could feel comfortable regarding transparency and liquidity of the securities. To develop entities or vehicles specialized in the purchase of mortgage loans, Borhis issuance and investment on tranches of the structures. To assure the continuity of the business model, supporting liquidity during all the loan origination process. To maintain the loan portfolio growth, while keeping the same credit quality. To develop a more efficient and deeper secondary market in order to satisfy the potential credit demand during the next years, and to maintain the Sofols’ competitiveness against Banks. To transfer all benefits achieved in housing finance in more benefits to the borrowers, in terms of lower rates, down payments and monthly payments. Challenges for the Borhis market development:

46 46 Development of the Secondary Mortgage Market in Mexico: Current Situation and Perspectives. March, 2007


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