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Box 4. Main Characteristics of Mexican MBS Issues
The main features of the MBSs in the market have reflected, to a large extent, the type of originating
institution. MBS issues by Sofoles are typically denominated in UDIs and thereby are inflation-linked. The
underlying loans are mostly standardized, and carry enhancements purchased through SHF or other insurers (see
below). Issues originated by Infonavit
1
tend to have underlying loans more diverse in nature, although, reportedly, all
sharing the same duration of the structured paper that was issued. Typically the characteristics of INFONAVIT’s loans
depend on the borrowers’ income level and the size of the house to be purchased.
1
These issues carry no direct
financial guarantees but include over-collateralization as a form of credit enhancement. Because INFONAVIT is a
government-sponsored institution, there is a perception on the part of investors that these products also have an
implicit government guarantee. Diversified MBS issues by commercial banks have emerged at a fast pace. Such issues
are mostly structured to reflect the fixed peso characteristics of the mortgages extended by banks. Interestingly, not all
of these RMBs carry mortgage insurance and guarantees offered by SHF. Instead, the enhancements in a number of
commercial bank issues consist of extended liquidity facilities (or total financial guarantees) by large international
insurance institutions and tranched structures to support the credit ratings.
Coupon: Interest rates on MBS issues have averaged between 5 to 6 percent in real terms. More recent issues have
carried lower coupons reflecting both an easing of real rates in the economy and a compression in MBS spread vis-à-
vis their benchmark UDIbono bonds. While early issues carried a significantly higher spread (around 120–140 basis
points) with respect to the UDIbono yield curve, the more recent ones which ranged around 80–90 basis points. Over
time the spreads for Sofoles-issued MBSs have been compressed owing to the greater demand and higher liquidity of
the market provided by SHF’s activity on the secondary market. However, the compression in spreads also reflected
changes in the structure of the RMBS, in particular, the increased use of mezzanine tranches as the market developed
(see below). More recent issues have also benefited from a total financial guarantee (rather than just the partial GPO
guarantee) on the senior notes which brought a further decline in issuance spreads to around 40–50 basis points above
the UDIbono benchmark.
Term : RMBS term has ranged from 10 to 30 years with most of the most recent issues around 30 years. They carry
the longest maturities available for a private (and public) sector security on the market. The typical term for other
types of asset-backed issues in Mexico has been from five to seven years.
Credit Enhancements: Most of the issues by Sofoles are structured so as to comply with requirements to qualify for
the SHF partial financial guarantee (GPO). The qualification requirements for GPO are that the holders underlying
mortgages need to hold a UDIs-VSM swap and that underlying mortgages are covered by the mortgage insurance
guarantee (GPI). There are also loan-to-value ratio requirements which cannot exceed 80 percent for UDI-
denominated mortgages and 90 percent for peso-denominated loans. Most MBSs have over- collateralization (OC)
implying that the value of the principal assets backing a certain issue exceeds the value of the security outstanding.
The OC levels have been variable in the order of 0.8 up to 15 percent. In more recent deals, the initial collateralization
has been close to 1.0 percent with the over-collateralization expected to build to a higher target value as the bond
principal amortizes. Most recently, several issues appeared a total financial guarantee (so called full wrap), which
covers 100 percent of shortfalls in principal and interest payments. Such guarantee is a liquidity guarantee that does
not cover against losses due to default but ensures timely payment. However, the issues carrying such guarantee had a
subordinated structure (see below) that would be the first to absorb the credit losses.
Structure: Given the absence of a market for below investment grade rated securities, early issues were single-
tranched with credit enhancements provided by SHF in the form of mortgage insurance (GPI) and a financial
guarantee (GPO). A small equity position, typically around 4 percent was retained, and fully provisioned for, by the
originator. More recently, issues have had a senior and a subordinated (or junior) tranche structure as typical in
mature debt markets and a broader variety of credit enhancements. When issues are tranched, receipts are distributed
by tranche seniority, i.e. accruing to the senior tranches first, while losses are distributed inversely. Because , in
general, mortgages in these securitizations have mortgage insurance for the first 35 percent of the losses, junior
tranches typically have still qualified for an A rating on a local scale.
1
As the junior tranche, or mezzanine, effectively
provides an additional buffer for the senior tranches, these tranches do not need a financial guarantee to attain a AAA
local rating. Some senior tranched with a total financial guarantee (100 percent fullwrap) qualified for a AAA global
rating. The senior tranches have represented about 80 percent of the portfolios while junior or “mezzanine” tranches
have ranged between 3 to 12 percent. Equity positions between 4 and 8 percent have been retained by the originating
institution.