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Securitization of mortgages in Mexico
An article by Guadalupe Ornelas of National Law Center for Inter-American Free Trade
Historically, international projects were financed either through the World Bank and other international agencies, or through syndicated loan arrangements with either a group of commercial banks or one or more insurance companies. Lenders would enter into a term loan agreement with the borrowing company and would require a security interest and a lien on everything the borrowing company owned before committing any funds. The lenders’ risk was therefore limited to “operating risk”, if the project was not completed and performing in accordance with certain specifications by a predetermined date, the lenders would simply execute on the lien.
Much has changed since those early projects: traditional secured borrowing has been largely replaced by the process of issuing securities backed by assets (i.e.,securitizing) in structured financing, and modern financiers have mastered innovative techniques to evaluate and price almost any possible risk associated with a credit transaction, be it political, economic, currency-related, etc., doing away with the traditionally more restrictive reliance on the creditworthiness of borrowers.
In the United Sates, the 1970s marked a turning point when real estate financing was achieved by using the capital markets.(1) Securitization of mortgages was then born.
The origins of asset securitization are in the U.S. secondary mortgage market, which dates back to 1970, when the U.S. Government National Mortgage Association issued the first publicly traded mortgage-backed security in 1970. The continued successful expansion of this U.S. secondary-mortgage market is well documented, constituting today a market worth over $400 billion dollars a year.(2)
In the decade of the 90s the securitization technique had an increasingly international focus. The internationalization of securitization occurs in part because the mature capital markets of the developed nations need to constantly expand and diversify. Conversely, companies or entities trying to raise funds, may not be located in countries with established capital markets, and to resort to this funding, these companies have to structure deals that cross their national borders.(3)
While international or cross border securitization may seem a little daunting for the newcomer, it is well settled that the fundamental principles of securitizing are always the same regardless of where an operation takes place geographically.(4)
In 1998 and 1999, the international capital markets have announced high expectations for the evolution of the securitization of secondary mortgage markets in Latin America, particularly the Mexican mortgage market. Among the reasons quoted for those higher expectations are: 1) the fact that this securitization of mortgages has become a high priority on the Mexican government’s agenda; 2) amendments to the legal framework of 17 Mexican states allowing for expedient foreclosure proceedings and transfer of mortgages without formalities; and, 3) the fact that Mexican banks and government affiliated lending agencies such as FOVI and INFONAVIT (5) have restricted their lending activity by lack of capital in the Mexican economy and have already resorted to the finite funds of the World Bank, the Inter-American Development Bank and the United States Agency for International Development. Historically, similar economic and legal factors in developing countries have made the securitization technique a viable financing alternative.(6)
There are several arguments, made by skeptics, who dismiss the possibility of evolution of the securitization of the Mexican mortgage markets, the most pervasive being the instability and inadequacy of the Mexican financial and banking system. These arguments, albeit accurate, are partial and overly simplistic, and fail to address specific actions taken by the Mexican government and private sectors as well as U.S. federally sponsored agencies, designed to offset these shortcomings in the Mexican system. For example, in 1994, the Mexican government enacted a law allowing the creation of private financial companies, the Sociedad Financieras de Objeto Limitado (SOFOL-Limited Purpose Financial Corporations) which operate as a mortgage bank. This measure enables the participation of entrepreneurs in the private sector to play an active role in a market traditionally monopolized by the two main Mexican banks. Another example of the specific actions aimed at expediting the evolution of securitization is the active participation of US chartered government agencies such as FANNIE MAE and FREDDIE MAC in Mexico. These agencies are currently providing consulting and financing for the development of the secondary Mortgage market in Mexico and are actively encouraging the creation of innovative securitization structures and seeking strategic partnerships in Mexico.
Another controversy regarding the securitization of the Mexican secondary mortgage market is the currency- exchange- control- risk, i.e., the risk that Mexican government may limit the export or private use of U.S. dollars(7) This exchange control risk may be mitigated by structuring off-shore reserve accounts, currency swaps or securitization transactions in Mexican states with dollarized economies.(8)
As for the need to analyze servicing capabilities of the new SOFOLES -which is another common concern of U.S. and international investment bankers-servicing checklists and mortgage origination questionnaires should be utilized to gauge their infrastructure and level of expertise; bringing them up to international standards where needed, so as to position them to fairly compete with large Mexican and international banks.
While securitization of the Mexican secondary mortgage market is unquestionably in an emerging phase, its growth and development cannot be denied. Those interested in keeping abreast of the continual advances made by all the sectors involved have several options:
First: The main international rating agencies, such as Standard and Poor’s, or Fitch Ibca, based in New York City, have excellent monthly periodicals on the developments of structured finance and securitization in the Latin American markets; these periodicals are available at no cost to the public. Second: The Duke University, Global Markets Center directed by Stephen Schwarcz, one of the world-recognized experts in international securitization, offers updated on-line information on international structured finance at www.law.edu/journals/djcil, and third: information on developments in securitization in various Latin American may be obtained through the National Law Center for Inter-American Free Trade at www.natlaw.com or directly contacting Ms. Ornelas by e-mail at email@example.com. ”
1. The term capital markets means any market where debt and equity securities are traded. Capital markets include private sources of debt and equity as well as organized markets and exchanges. See John Downes & Jordan Goodman, Dictionary of Finance and Investment Terms, 309 ( 3rd ed.,1991).
5. INFONAVIT stands for Instituto del Fondo Nacional de la Vivienda para los Trabajadores (National Institute for Housing Funding) and FOVI stands for Fondo de Vivienda (the Operation and Bank Discount Fund for Housing). Both agencies are affiliated to the Mexican government.
7. Currency control has already occurred, at least de facto, in Mexico. David Asman, The Americas: Complex Models Won’t Stop Mexico’s Peso from Tumbling, Wall St. J., Feb.17,1995, at A15, quoted in Schwarcz.
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Now is the Time for Catastrophe Bonds
By Menachem Feder
[The author is a partner in the law firm of Caspi & Co. in Tel Aviv and specializes in finance and international transcactions. He can be contacted at firstname.lastname@example.org. This article was published in Haaretz in English on January 24, 2002 and in Hebrew on January 22, 2002 ]
Losses spreading from last year's September 11th tragedy can be measured not only in human terms, but in economic ones. Certainly, one of the consequences of the terrorist attacks on New York’s World Trade Center will be more insurance liability than in any previous catastrophe. This only spotlights the shortcomings of the surprisingly critical reinsurance market. More than ever, catastrophe risks require efficient management and the ever-growing financial world of securitization may provide the necessary service.
As arcane as reinsurance sounds, a proper reinsurance market is essential to efficient allocation of catastrophe risk. This too sounds arcane, but this allocation can be critical to even the average citizen. The average citizen depends on insurance, but insurance often depends on reinusrance.
A business or household normally insures against the risk of natural catastrophe – in Israel, primarily earthquake – because alone it cannot bear the economic loss of a building or home. But, primary insurers too cannot healthily bear all that risk. Because the natural catastrophe risk that they insure concentrates in a single geographic region, they cannot survive a sizable local catastrophe. Thus, they sell portions of the risk to global reinsurance companies. These reinsurers, in contrast, regularly retain the risk because they consider themselves protected – they pool exposures to all kinds of risk events around the world, diversifying the risk to the presumed point of manageability.
The traditional reinsurance model, however, is imperfect. For one, not even the reinsurance companies may be able to easily handle the capital obligation that arises from a mega-catastrophe. Almost certainly, they would struggle with one such disaster following closely on the heels of another such disaster.
The final losses arising from September 11th can only be guessed at – size of claims and legal issues have yet to clarify. Nonetheless, the prospective liability has already so much reduced reinsurance capacity that many types of reinsurance have become prohibitively expensive. This leaves those facing oppressive risk with the prospect of expending great sums for insurance, maintaining an unsound risk profile or, in the case of insurers, limiting business.
Additionally, it is sometimes thought that, as a general matter, primary insurers do not pass on enough of their catastrophe risk to reinsirance companies to survive a sizeable disaster. Various barriers to efficient reinsurance — insufficient reinsurance supply, reinsurance company market power and opacity and the like – are theorized to lead to insufficient reinsurance. Whatever the reason, over-exposure by a primary insurer exposes the unsuspecting insured.
One way to expand and improve catastrophe reinsurance is to access efficiently new sources of risk capital. If the capacity of the traditional reinsurance industry is tight or if its reliablity is not convincing, then non-traditional capacity should fill the void by recapitalizing reinsurers or by directly reinsuring primary insurers. The most logical supplier of alternative and efficient capacity are the highly liquid and highly-volumed capital markets. To access these markets, all one needs to do is issue an appropriate security.
Enter the catastrophe, or "cat" bond. Essentially, a cat bond is a tradable capital market instrument that creates reliable reinsurancey in the event of a catastrophe. It is the end-product of a financial process called securitization, which transforms risk into liquid security instruments. A cat bond can take many forms, but it always involves reward if no catastrophe occurs and, depending on certain conditions, debt forgiveness if one does.
In one cat bond variation, an insurance or reinsurance company seeks to pass on natural catastrophe risk by issuing a short-term bond with attractive rates of interest. If a triggering catastrophe occurs in a specified geographic region within a stipulated period of time, and if losses exceed a certain threshold, the bondholder will lose some aspect of its investment. For the relatively conservative investor, the bond can offer a principal protected tranche – interest will accrue at a moderate premium over prevailing rates, but will be confiscated in the event of the triggering catastrophe. For the investor willing to stomach more risk, the bond can offer a tranche with interest at a great premium, but which exposes the principal to confiscation upon an insured event.
For the investor, the cat bond can be alluring not just because of its nominally attractive rate of return, but because of its unique nature. Since the risk to the cat bond investor is linked to Acts-of-God and not market conditions, a cat bond offers a money manager diversification from the normal risks of market investments. Of course, it may not be efficient to sequester the maximimum potential loss, as cat bonds usually do, instead of pooling uncorrelated risks, as traditional reinsurers do. Nonetheles, the sequestration allows the capital markets to act as truly dependable reinsurers.
Securitization of natural catastrophe risks was not possible even a decade ago. Capital market instruments require a lot of information for accurate pricing and, for many years, insurers and reinsurers alone collected and analyzed systematically the geophysical, meteorological, and developed real estate information required for an economic understanding of natural catastrophes. But, today, a number of specialty firms develop and sell to all comers models that simulate the economic aftershocks of, say, an earthquake.
In Israel, economic exposure to earthquake is growing as both population and building construction grow. This only magnifies the importance of laying off reliably significant earthquake risk. In today’s environment, securitization via cat bonds may provide the best allocation of that risk.
Securitization has been around for only a short time and cat bonds for even less. Nonetheless, we know already that securitization works well where large capital capacity is required and when the risks involved can be relatively understood. For the natural catastrophe overexposed, this means that they may no longer have an excuse to put off risk transfer, especially since earthquakes wait for no one.
China’s First Asset Securitisation in Auto Leasing
December 11, 2013
Xinjiang Guanghui Leasing Company the largest passenger vehicle leasing company in China, successfully issued its first asset securitization product, named the “the yuan issue”, of its specific asset management plan on December 5, marking the first domestic auto leasing company to finance via asset securitization. This was the fourth asset securitization product approved by the China Securities Regulatory Commission (CSRC) and also the first asset securitization product in the field of auto leasing.
By far, a total of 29 asset securitization programs have been under review, which indicates that the CSRC is making an all-out effort to promote the development of asset securitization in the mainland.