Wednesday, 15 August 2018

RMBS rescue, Mexican style

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When the US securitisation market started showing signs of fatigue, few were surprised when its Mexican counterpart duly began gasping. Yet Mexican authorities showed themselves ahead of the curve – ahead, even, of their northern neighbour – by stepping in to save the precious mortgage-backed securities market. It has helped fuel a strong expansion in the local housing sector, as Christopher Langner reports.

The fruits of Mexico’s labours in protecting its MBS market have been mixed: mortgage-backed issuance has remained afloat, though only commercial banks and Infonavit, the local version of the FHA, have been able to price deals.

Investors have tended to steer clear of anything issued by mortgage-only lenders, known as sofoles. In early September, rating agencies warned, not for the first time, that some of the sofoles, which until last year had driven most of the growth in the securitisation market, face serious liquidity problems. It predicted a round of consolidation, and maybe even defaults, loomed in their near future.

Standing between sofoles and Armageddon, however, is the federal mortgage authority, Sociedad Hipotecaria Federal (SHF). It has provided liquidity by guaranteeing some notes and buying other issues, or by lending money to the sofoles outright. It has meant a metamorphosis, rather than death, for the securitisation market in Mexico, thanks to the efforts of local regulators, working in tandem with banks.

An offer investors couldn’t refuse

The survival of the Mexican MBS market was ensured principally by two items: additional credit enhancements in new issues; and more flexibility to buy on the investors' side.

Infonavit led the shift on the issuer side, creating novel structures that made its deals more attractive. As early as January, the agency started studying the viability of issuing covered bonds to sidestep investor fears of non-performing loans in the underlying assets of MBS. After several months of deliberation, however, Infonavit settled for something simpler: it chose to offer securitised notes, to which investors could not say no.

This translated into the first time-tranched RMBS in Mexico's history, issued by Infonavit in April. By selling two-pari-passu tranches, but having one amortise before the other, the agency reduced the prepayment risk for investors looking to hold the securities for longer periods. It offered a shorter maturity for those worried about the long-term volatility. The deal was a success, breaking the local record of largest MBS deal.

In June, Infonavit repeated the trick with another, even bigger transaction, leading the private banks to follow the trend: the first was BBVA Bancomer, which took Infonavit's record with a Ps4.8bn (US$453m) deal; HSBC followed. ING and Scotiabank are expected to follow.

Infonavit’s addition of significant credit enhancements was also instrumental in creating the environment in which the deals attracted bids. All the successful transactions this year included double-digit overcollateralisation and a subordinated first-loss tranche, which is held to maturity by the issuer. All were issued by solid banks, or by Infonavit, which deducts monthly payments on loans it holds straight from workers' paychecks.

Easier to buy

A regulatory amendment, which relaxed the rules on how pension funds can invest in securitisations, also helped the market. In May, Consar, the pension fund regulator, changed the "K annex" of its rules, allowing funds to increase their exposure to a single RMBS deal. Previously funds could only allocate up to 15% of their assets to a single name. Now there is no limit per issuer in securitised deals, although a fund can only buy up to 20% of a single issuance.

If Su Casita, Mexico's biggest mortgage-only lender, issued 10 RMBS deals, any given fund would have to spread out its allocation among the 10. Now, with each deal accounted for individually regardless of the name behind it, the pension funds have greater investment flexibility. But there is a caveat: it applies only where deals follow the guidelines set out by the regulator.

The guidelines include better disclosure of details about the underlying mortgages and of the process the agencies used to rate the transaction. They call for more over-collateralisation and a higher percentage of insurance in the underlying assets. Moreover, the issuers have to hold a first-loss tranche to maturity. The size of this tranche increases as the level of insurance on the underlying mortgages drops.

While issuers are not forced to follow these guidelines, they are likely to do so, as Mexico's biggest securities buyers are pension funds.

Sofoles have still not issued any deals within the new regulatory framework. However, upcoming deals are expected to follow the template created by Infonavit.

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