One of the hottest markets for American lenders isn't in America – it's actually in Mexico. Thanks to a combination of political, social and economic factors on both sides of the border, mortgage lending has taken on an aggressive new degree of cross-pollination between the two countries.
Â Â Â There are two simultaneous stories taking place here: the rapid maturity of Mexico's residential lending industry and secondary market activities, and the flow of Americans seeking retirement and vacation homes south of the border.
Â Â Â First, the Mexican story. Today's Mexican mortgage lending market is, in large part, a creation of Vicente Fox, whose six-year presidency ended in December 2006. Unlike his predecessors, Fox placed an unusually strong emphasis on the financing of residential housing. In fact, when he came to office, he boldly promised increasing the level of new residential construction to an average of 750,000 homes per year. During the Fox presidency, Mexico saw the construction of more than three million new residential units.
Â Â Â This period also saw a new age for secondary market activity involving Mexico's financial institutions, beginning with the issuance of Mexico's first mortgage-backed security (MBS) in December 2003. The MBS activity has been dominated by non-bank home finance companies, including the government-run lenders Instituto del Fondo Nacional de la Vivienda and Sociedad Hipotecaria Federal. But the commercial banks have finally begun to catch up: the first Mexican commercial bank to issue an MBS was Banorte in November 2006 with a $181 million offering. The country's first real estate investment trust (REIT) was issued in March 2006.
Â Â Â The boom in Mexico's mortgage market has not gone unnoticed by overseas investors, and foreign funds are helping to boost that sector. Last November, Merrill Lynch Mortgage Capital Inc. and International Finance Corp., the private sector arm of the World Bank, signed an agreement to provide a $100 million warehousing line of credit to Metrofinanciera S.A. de C.V. to fund loans in Mexico and maintain Metrofinanceria's securitizations program. A month earlier, Metrofinanciera had obtained $105 million in partial credit guarantees from the Inter-American Development Bank that enabled it to issue MBSs totaling $800 million.
Â Â Â This secondary market activity was a by-product of a highly active lending industry. "It's growing so quickly that these institutions were unable to finance their lending through deposits," explains Ed Skelton, international financial analyst with the Federal Reserve Bank of Dallas. "So they've turned to securitization."
Â Â Â Skelton adds there is no sign that the residential lending activity will abate. "The government has made it a goal to continue growing the mortgage market and make it easier to buy and sell homes," he says. "Politically speaking, it's extremely popular – it's one of Fox's biggest achievements and the new president, Felipe Calderon, said he will continue with this."
Â Â Â Simultaneous to this is the second aforementioned story. In the past few years, Mexico has quietly become the hot spot for Americans looking for a place to set up either vacation homes or retirement housing. Several American lenders have begun to concentrate more aggressively in this area by offering cross-border mortgages.
Â Â Â Brian Chiswell, chief financial officer for Meridian Development Group, notes the economic climate has been a major drawing point for attracting American borrowers. "The pricing is comparative to the States," says the Mexico City-based Chiswell. "It is between 35-45 percent of what you'd pay in the States for something similar. Also, Mexico is much more stable as an economy and a country today. People have confidence living in Mexico."
Â Â Â Meridian Development Group and GE Capital are helping to grow this market via their jointly operated Finasol Mortgage, which sells U.S. dollar mortgages to Americans buying Mexican properties (the company also offers peso-denominated mortgages for Mexican borrowers). Other lenders in this sector include GMAC International Mortgage (which recently introduced a 30-year fixed-rate mortgage for Americans purchasing property in Mexico), First Capital Mortgage, CS Financial Inc., LEI Financial and the WMC Mortgage Unit of GE Capital. The newest American lender, Chelsea Financial Services, entered the market last month.
Â Â Â The Mexican market is not without idiosyncrasies. Mexican law forbids foreigners from directly owning property within 62 miles of Mexico's land borders and 31 miles of the coastlines. However, a loophole in the law allows foreigners to use a bank trust to purchase and own the property on behalf of its foreign beneficiary. But this doesn't appear to have cooled American interest here: the Wall Street Journal reports that mortgages for Americans with Mexican properties totaled $100 million in originations during 2006.
Â Â Â Mexico also lacked mortgage insurance up until two months ago. Genworth Financial Inc. of Richmond, Va., received a license from the Mexican Ministry of Finance last December to issue mortgage insurance, a first for that country. Genworth's license was achieved only after the Mexican government passed legislation allowing the introduction of mortgage insurance to their market.
Â Â Â Within Mexico, a potential wild card has been dealt into the banking mix: Wal-Mart. While the mega-retailer was stymied in its efforts to create an industrial bank at home, it had no problems obtaining a retail banking charter south of the border. The new Banco Wal-Mart de Mexico Adelante is set to open this spring, with branches across Mexico.
Â Â Â Mortgage bankers and secondary marketers can breathe a sigh of relief for now, since the new Wal-Mart bank will not include mortgages as part of its initial product offerings; savings accounts and consumer loans will be its primary product thrust. The omission of mortgages is intentional: Wal-Mart is trying to build a culture of banking among the country's lower-income working classes, a demographic most Mexican banks have chosen to ignore. An estimated 80% of the Mexican population do not have bank accounts (high fees and minimum balance requirements have been the main barrier to establishing banking relationships). If Wal-Mart can create a new bond with this customer base, it would not be inconceivable that their bank loyalty will carry to mortgages if residential lending becomes part of the Wal-Mart offering.