Monday, October 27, 2008

Why the Mexico Mortgage Market Remains Healthy, Despite U.S. Turmoil

By David Schwartz, Tina M. Rebello, and Matthew A. Miller

Times are tough now‐a‐days – stock markets are in frenzy, housing markets are unpredictable, the U.S. dollar is weakened, and an overall lack of consumer confidence continues to arise even with the latest U.S. government and worldwide intervention in motion.

The first question asked by most is how we got in this mess? This can be somewhat answered by looking at the chain of events leading up to now.

A Look at the Events Leading Up to today’s Financial Crisis

·   Investors climb into CDOs which are considered as safe as U.S. Treasury Securities

·   Companies like AIG sell credit-default swaps to protect investors from failures of CDOs

·   Firms continue to borrow in order to buy CDOs

·   The housing bubble starts to show signs of busting

·   Many subprime borrowers default as their loans reset to higher interest rates and lower appraised values

·   Indy Mac fails. Countrywide is rescued by Bank of America

·   Rising defaults & delinquencies lead to declining values of CDOs. Firms that hold CDOs take large write‐down and raise capital

·   Bear Sterns is rescued by JP Morgan; Lehman Brothers falls; Fannie and Freddie are rescued by the government

·   WaMu and Merrill Lynch are rescued by B of A; Wachovia is rescued by Wells Fargo; Morgan Stanley raises capital

·   The government rescues AIG who cannot cover the credit‐default swaps made to protect investors holding CDOs

·   The credit markets freeze up with large banks skittish on lending to each other and to consumers and businesses

·   Congress passes the Emergency Economic Stabilization Act of 2008

·   The credit crisis spreads globally, with countries taking direct banking intervention measures

With the credit markets freezing up and the stock market in turmoil, the U.S. government has continued to intervene, with the latest $700 billion Emergency Economic Stabilization Act of 2008. A recently announced component of this Act includes a plan for the Treasury to take about $250 billion in equity stakes in potentially thousands of U.S. banks. The hope for the Act, also known as the “bailout,” is to unfreeze the credit markets and to reverse the panic that’s erupted nationwide – and now worldwide.

The path of events that put us in this situation seems like a continuous cycle. And, despite the fact that these events have been covered by every U.S. news outlet on a 24/7 basis, most are still left with many questions as well as significant uncertainty on the future.

One important question that does not make the daily news in the U.S., but is of course a big concern for all of us, is whether the now popular vehicle of cross‐border Mexico mortgage financing will be affected by the U.S. turmoil.

The quick answer to that question is ‘not significantly.’ Perhaps, like most, you would like to further understand how the U.S. got into this mess while lenders of cross‐border Mexico mortgages (mortgages to Americans and Canadians purchasing second and retirement homes in Mexico) are relatively unscathed. This question is one that is tackled in this article.

To best answer this question, it is important to understand the differences between the cross-border Mexico mortgage market and that of the U.S. mortgage market. Cross‐border Mexico mortgages were first offered in early 2005 and thus the market is still in its infancy. In fact, many make the comparison of the Mexico market to that of the U.S. mortgage market when it first began several decades ago (in more healthy times).

The main problem in the U.S. was the introduction of Collateralized Debt Obligations (CDOs) which are collectively known as a “secondary market.” A secondary market is one where the banks that issue the loans do not end up holding all of the loans but sell them to other investors through CDOs. CDOs are complicated securities which are based on large pools of mortgages (both prime and subprime). With the help of companies like AIG and other insurance companies who sold complicated derivatives to (supposedly) protect investors from the failures of CDOs, as well as investors and rating agencies possessing a lack of understanding the risk factors associated with these securities, CDOs were rated as the highest form of paper (at AA and AAA ratings). As a result, they were considered as safe as U.S. securities. In hindsight, this was outrageous due to the fact that these securities had significant risks which, unfortunately, we are finding out today.

To dive one more level down (stay with us here), the issue with CDOs was the type of lending behavior they fueled. Because mortgages were pooled together through CDOs and considered as very safe investments, investment firms were able to underwrite considerably more volume and higher risk (or subprime) mortgages. This included lowering many loan guideline requirements such as the amount of the down payment, credit score minimums, and supporting documentation minimums. Further, new and innovative loan programs such as interest only mortgages, teaser rates, and shorter terms (1 year) were created (as investors showed an appetite of all types of mortgage paper through CDOs). This allowed many buyers to obtain mortgages when in fact it was unlikely that they could meet the loan payments when such teaser rates and terms expired (of course this wasn’t known to all until the blow up). Further, several cases of fraud emerged as borrowers did not need to fully document their income, and thus falsified their income on their loan applications.

So what does this have to do with Mexico you may be asking? While U.S. mortgages are usually held by the bank that issues them for only a certain period of time and then sold on the secondary market (through CDOs), there is as of yet an established secondary market for cross‐border Mexico mortgages. This is mainly due to the fact that the U.S. mortgage market dwarfs the Mexico mortgage market when comparing volume. An estimated 2,000 Mexico mortgages have funded to date as compared to a $150 billion dollar a year business in the U.S. Therefore, Mexico has a long way to go until a secondary market is created. And, most assume that when a secondary market is established, Mexico mortgage lenders will not repeat the mistakes made in the U.S.

Due to the lack of a cross‐border Mexico secondary market, loan program guidelines are not as competitive in terms of rates and programs (translation – only strong credit borrowers may obtain one). On the more positive side, it is safe to say that Mexico mortgages are here for the long term due to the fact that the borrowers are so strong. To specify further, a lack of a secondary market has forced Mexico mortgage lenders to stick to an “old school” type of loan programs and thus creating significantly safer or less risky mortgages when compared to the U.S. This includes:

·   Credit score minimums of 650 (as compared to high 500s/low 600s in the U.S.)

·   Average credit scores of approximately 700 (as compared to the low 600s in the U.S.)

·   Down payment minimums of 20% (as compared to 0% to 5% in the U.S.)

·   Average down payments are approximately 30% (as compared to about 10% in the U.S.)

·   Standard and easy to understand loan programs such as fixed rate mortgages as well as 3, 5 and 7 year adjustable mortgages (as compared to newly created teaser rate mortgages which reset at very high rates and are hard to understand by the typical borrower, 1 year adjustable mortgages and interest only mortgages, all of which were created and available in the U.S. over that last several years)

·   Documentation type which mainly includes full documentation, with only some alternative and stated/no documentation loans (as compared to alternative or stated/no documentation loans becoming more of norm in the U.S.)

With only strong borrowers applying for and obtaining cross‐border Mexico mortgages, due to the more rigid loan guidelines (as noted above), the risk of default is considerably less and should fuel a healthy market mortgage going forward.

With that said, a few cross‐border Mexico mortgage lenders have been affected, however, that is only due to their strong ties to the U.S. credit markets.

Last year, GMAC closed its doors as the mortgage market in the U.S. began to cave. GMAC was of course very much invested in the U.S. mortgage market leading to its pullout in Mexico. IMI International who was tied to Countrywide also failed as Countrywide ran into its problems. Most recently, Lehman Brothers will no longer roll out its widely expected entrance into the Mexico market due to the firm’s bankruptcy filing.

While there have been some casualties, ConfiCasa’s business has not been affected due to the fact that the Mexico mortgage lenders that ConfiCasa uses are standing exceptionally strong. These banks are less vulnerable as the result of having only small fragments of their investments held on Wall Street (if any) as well as the fact that these lenders hold their mortgages and thus require only A paper borrowers with substantial down payments (minimum 20%).

ConfiCasa’s exclusive lender specifically stands out. While mostly Mexico focused and only slightly U.S. driven, they have proven time and time again that they are one of the strongest banks in the market. This is demonstrated by being rated in the highest category by the FDIC.

As loan commitments continue to come through our door, we at ConfiCasa personally feel fortunate to be in this market today … a healthy and quickly emerging cross‐border Mexico mortgage market. You should too!

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David Schwartz, ConfiCasa’s Puerto Vallarta Division Director; Tina M. Rebello, ConfiCasa’s Los Cabos Division Director; and Matthew A. Miller, ConfiCasa’s President and CEO, contributed to this article.

This article is reprinted, with permission, from the October 2008 Newsletter of ConfiCasa Mortgage International.  ConfiCasa Mortgage International, LLC is a U.S.-based company with office locations in Houston, Chicago, Cabo San Lucas, Puerto Vallarta and Cancun (Fall 2008), plus it maintains a diverse range of strategic partner relationships throughout North America. ConfiCasa offers the broadest array of financing products for cross-border Mexico property ownership including an exclusive loan program, as well as the information, tools, support and professional guidance needed to enable its clients to successfully finance the purchase of their Mexican dream home. As the pioneer in financing Mexican properties for American and Canadian dreamers, the Company has closed more than 1,500 cross-border Mexico mortgages since its founding in 1997. To learn more visit www.conficasamortgage.com.