Revisiting the Mexican Market.

Position:Opportunities for US mortgage bankers in Mexico

Opportunities exist for American mortgage bankers in today's Mexican housing markets. Progress is being made to build the mortgage finance infrastructure, and the Mexican version of a mortgage banker--the SOFOLES--are showing how profits can be made in this market.


Many U.S. banks and lenders were interested in this market back in the early 1990s, when the economy was booming, but most were scared off by the 1994 currency and banking crisis and have yet to return. A few hardy pioneers, Pulte Mortgage Corporation, Greenwood Village, Colorado, and WSM Services of Mexico, SA de CV (formerly Weyerhauser) have hung on through the bad times and are now showing profits.

On a recent trade mission sponsored by the U.S. Department of Commerce and the Mortgage Bankers Association of America (MBA), we saw evidence of returning strength and long-term potential in the housing-construction and finance sectors. There are still barriers, but there are interesting positive developments as well, which indicate that now is the time to take a good hard look at our neighbor to the south.

The reasons for the early flurry of interest still exist--a housing deficit of around 4 million units with more than 1 million new households added per year, a median population age of 21 and a literacy rate of 88.4 percent. Mexico is accessible, closely tied to the United States through the North American Free Trade Agreement (NAFTA), and has a high number of immigrants living in the United States. Mexican citizens have a strong desire to own their homes and because of their social and family ties will often keep their home for life. According to New York City-based rating agency Fitch IBCA in its May 1998 report, "Guidelines for Rating Mexican Residential MBS," Mexican borrowers will continue to pay their mortgage beyond the point of the average U.S. borrower when economic stresses occur. This trait has been put to the test in the past five years, when many borrowers saw the negative amortization on their loans reach unmanageable levels. Delinquency rates at the banks have been quoted as high as 60 percent on old portfolios. However, new originations during the past two years are per-forming well.

Since the 1994-1995 crisis, there has been slow but steady improvement in the macroeconomic conditions and also in the willingness of the Mexican government to implement changes favorable to the development of a private-sector mortgage finance system. NAFTA has, arguably, helped increase trade between the United States and Mexico and has helped to stabilize the Mexican economy, especially in the border regions. This was in evidence during the Brazilian devaluation in late 1998, which did not create the shock to the Mexican economy that many expected. The Mexican Finance Ministry projects that inflation will be 13 percent this year, with a target of 10 percent in the year 2000.

The average inflation rate for the first quarter of 1999 was 4.87 percent, the lowest first-quarter rate in five years. The average cost of credit has been declining steadily since the first of this year, and the unemployment rate of 2.9 percent for the first quarter of 1999 was the lowest since 1992. The average national minimum wage has more than doubled since 1993, to 31.19 pesos per day. This has two benefits: First, it increases the purchasing power of homebuyers; and, second, it improves the performance of the existing portfolios of dual-indexed mortgages (DIMs). (DIMs calculate interest based upon nominal rates and payments based upon increases in wages. This has resulted in significant negative amortization in the past.) The greatest drag on the economic recovery is the condition of the banking system.

Institutional review

The construction sector is most active in the area of "social housing," targeted to homebuyers with incomes of 1.5 to 15 times the minimum wage (roughly $5 to $45 per day). This is because there is virtually no financing available from banks or other private lending institutions for middle- to high-priced homes. The so-called residential (or higher-priced) houses are being financed by the builders themselves or through "autofinanciamientos," a self-managed system that combines savings with a lottery for mortgage loans.

The builders are putting up low-cost housing because there is financing available through two government agencies, called INFONAVIT and FOVI. INFONAVIT obtains its funds from mandatory pension deposits from private employers; FOVI is funded primarily by the Mexican Central Bank, with support from the World Bank and other miscellaneous sources. Where FOVI originates loans through intermediaries, INFONAVIT originates its loans directly.

Until recently, INFONAVIT loans represented more than double the market share of FOVI. In 1998, the two institutions split market share relatively evenly. This is because of the increasing activity of the SOFOLES (nonbank lenders) and also problems with the quality of the INFONAVIT portfolio. Assuming that INFONAVIT works out those problems soon, it will remain a formidable competitor to any private-sector lender in Mexico because of its heavily subsidized interest rates, capped monthly payment (maximum 25 percent of wages) and flexible collection policies. There have been signs, however, that the...

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