An article by Guadalupe Ornelas of National Law Center for Inter-American Free Trade. Guadalupe Ornelas is a lawyer based in New York.
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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 Mexicaneconomy 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.
Conclusion
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 gornelas@ix.netcom.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).
2. The Business Lawyer, Structured Financing Techniques, 50 Bus. Law. 527 (1995).
3. Schwarcz Steven L., The Universal Language of Cross-Border Finance, 8 Duke J. Comp.& Int'l L. 237 (1998).
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.
6. Graffam Robert D., A Case Study in International Securitization: Meeting the Needs of Developing Nations, 26 U. Miami Inter-American L. Rev. 154 -155 (1993).
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.
8. Not only the six Mexican states bordering the U.S. have a largely dollarized economy, but certain sectors, such as real estate transactions, are mostly dollarized throughout all Mexico.