Finding a Home?

Legal experts and financiers acknowledge that Latin America’s ongoing legislative advances are vital to the formation of mortgage-backed securities markets but warn that several factors may still inhibit these markets from developing.

Mexico is emerging as the regional leader in the next stage in the development of a securitization market. Over the past several years, changes in bankruptcy, trust and securitization law, coupled with initiatives by the International Finance Corporation (IFC), have enabled the beginning of  mortgage and mortgage-backed securities markets.

After more than five years’ planning, Hipotecaria Su Casita de CV, a Mexican loan servicer, issued $35.4 million of mortgage-backed securities in late June, marking the first transaction of its kind in the country. The deal is backed by a pool of mortgage loans extended to middle-income borrowers in Mexico.

While most market observers point to mortgage-backed issuance in Mexico as the beginning of a larger, permanent market, some have raised doubts that the recent legal changes will adequately address long-term requirements for such a market.

“Irrespective of the attempt of [recent] reforms aiming to provide better grounds for secure financing, they seem an incomplete effort to establish the conditions necessary for a modern secured-financing system,” comments Samuel Garcia-Cuellar, partner at Creel Garcia-Cuellar y Muggenberg in Mexico City. “The reforms, among other things, limit essential contractual rights and consequently complex structures will still prevail to compensate the deficient legal framework.”

At Merrill Lynch in New York, director of Latin American debt capital markets, Michael Lucente, asserts that for asset-backed financing to grow in Mexico and the region investors should be confident that adequate security is built into the transactions to protect issuers. 

“In Mexico, you’ve had some changes in the legislation regarding mortgages and, like much of the legislation in different Latin American jurisdictions, there is a focus on improving the ability of entities holding the loan assets to gain access to their collateral in a timely fashion. In other words, mortgages should have the ability to foreclose, autos should be open to repossession, and credit cards should be able to go to court to validate a claim,” explain Lucente.

“If the legislation really gives lenders strength in terms of enforcing their collateral, investors will give more value to it and prices for bonds backed by those assets will go down creating more impetus to the issuance,” says Lucente. “Investor sentiment moves hand in hand with this regulation.”

In Brazil, legislative developments have continued to aid growth of an asset-backed financing market since 1998, when Cibrasec, a Brazilian mortgage-backed company was formed. This year, the country’s largest mortgage lender, Caixa Economica, is accumulating pools of assets and writing mortgages following a new law that addresses guarantor trusts. A series of mortgage-backed transactions for Grupo Rossi may serve as a “pilot” for a wave of similar mortgage-backed securities.

In late June, a ?Brazilian Securities Series 2001-21′, the special purpose company created by Grupo Rossi, issued 3.3 million reais-denominated backed by residential mortgages in Sao Paulo. The main difference between the mortgage loans backing this transaction and those backing previous transactions is that in Series 2001-21, all loans, which are now current, had been restructured in October 2000. This was because of the obligors’ delinquencies stemming mainly from high interest rates in the early and mid 1990’s.

“I think the Rossi deal is significant even through it’s just a blip on the screen right now – there’s lots of potential in Brazil,” comments Alex Manson, director of asset-backed securitization at Deutsche Bank in London. Manson points out that recent changes in real estate lending legislation are likely to spark more mortgage-backed financing.

The governor of the Central Bank of Brazil, Arminio Fraga, is largely credited with the recent legal transformations affecting asset-backed securities in the country. Fraga has actively lobbied for greater open market oriented reform including legislation to enable faster foreclosures resulting in a simplified interest rate. Changes to foreclosure were introduced by Law 9514 under which the process takes the form of a trustee sale, allowed under the aliencao fiduciaria, or deed of trust from mortgage. This allows the creditor to take possession of a property on a timely basis if an obligor defaults. According to a recent Moody’s report, the procedures to recover the credit under this law are extra judicial and therefore easier to effect, compared with the previous judicial process which could delay foreclosure for up to seven years.

At Pinheiro Neto Advogados in Sao Paulo, partner Alexandre Bertoldi comments that efforts to reform Brazil’s financial laws have been in response to greater demand for such markets.

“Access to the foreign capital markets has become much more difficult in the past two years for us,” says Bertoldi. “The corporate bond market has really shrunk, and raising capital through IPOs and secondary issuance of shares became very difficult, so the central bank and the government decided that securitization could be a good way to address the problem,” adds Bertoldi, who served as legal advisor on one of the biggest deals in the region this year.
Although Bertoldi was unable to talk about his involvement in the deal, the transaction represents one of the first individual-to-individual future flow remittance deals completed in Brazil. The deal – the Nikkei Remittance Trust – was led by Merrill Lynch for Banco do Brasil and involved $250 million in fixed-rate certificates due 2006.

The flow of money between Japan and Brazil is enormous. An estimated two million Brazilian workers of Japanese ancestry work in Japan and funnel their savings in deposits through Banco do Brazil. The transaction securitizes these deposits.

Bertoldi notes that while this type of asset-backed securitization does not require new legislation itself to function, it draws attention to securitization in general and contributes to legislation that accommodates other forms of asset-backed financing, including local mortgage-backed securitization.

Elsewhere, legislative action in Colombia has set the stage for the development of mortgage-backed financing. At the end of May, Colombia’s superintendent of securities authorized the creation of Corporacion Hipotecaria Colombiana SA Sociedad Titularizadora, the nation’s first mortgage securitization company. In Chile too, recent legislation has liberalized the range of assets that may be securitized. Argentina led the market in 2000 with several transactions for Banco Hipotecario SA Mortgage Trust (BHN) but has been unable to proceed with any large financings this year. Nevertheless, mortgage-backed financing ? the most advanced in the region ? remains influential, owing to the body of law the growth in the market engendered.

“Argentina was at the cutting edge of asset-backed securitization. Mexico is now in the process of following, as is Brazil with very similar laws,” comments Victor Alvarez, partner at White & Case in Miami.

Argentina, driven by the need to address the boost in the demand for housing after a series of privatizations in the early 1990’s, passed Law 24,441 in 1995, which provided an enhanced legal framework for the establishment of trusts and other structures necessary to develop a mortgage-backed securities market.

“Once the market is re-established you’ll see more and more mortgage-backed securities here and eventually throughout Latin America because they can be very secure, the laws are very clear and they work very well,” comments Hernan Slemenson, an attorney at the Argentine firm Marval O’Farrell & Mairal in New York.

“Latin America as a whole has a huge need for housing which will continue to create demand for mortgages and mortgage-backed securities as these laws develop and spread,” says Slemenson.