BORHIs: Substantially different from subprime bonds
Since its beginnings in 2003, the model of securitization of mortgages or issuance of Mortgage Backed Bonds (BORHIs) in Mexico has proven to be a growing and successful mechanism to supply funds to the housing financing market.
Part of this growth and success was attributable to a healthy Mexican economy and the development of solid infrastructure of prudential practices in the mortgage sector:
• The supply of mortgages had grown in terms of quality and quantity, due mainly to stable macroeconomic conditions that favored a drop in rates and lengthening of terms.
• The Mexican middle and lower classes experienced a significant increase in their purchasing power in recent years, which in turn spurred real demand for mortgages.
These factors, added to the fact that housing prices in Mexico have not presented an inflationary bubble like that seen in the US market, have caused the model for housing financing in Mexico to differ substantially from the US model.
The main differences between the subprime market and the BORHIS market are shown below:
|
CRITERION |
BORHIS |
SUBPRIME |
|
Rate |
Fixed. |
Fixed, variable, mix. |
|
Down Payment |
All have a down payment. |
Some with no down payment ("Ninja" loans). |
|
Documentation / Credit Bureau |
All have complete documentation and credit bureau studies. |
In some cases, loans were granted with incomplete documentation or low credit ratings (lax origination criteria). |
|
LTV |
Limited to 70% combined with Mortgage Insurance. |
In some cases there is no maximum limit. |
|
Past-due payments at the time of issue |
No loan has more than 3 past-due payments. |
Various loans were accepted with several months in default. In some cases there is no maximum limit. |
|
Home value |
Housing needs in Mexico are higher than in the USA.
The performance of housing prices has not allowed a speculative bubble. |
The market does not have the kind of demand potential seen in Mexico.
Properties were overvalued, which allowed a speculative bubble. |
|
Need for housing |
First Home. |
First, second, or third home. |
|
Exchange or interest rate risk |
Inexistent. |
In some cases, presence of both. |
|
Credit rating |
AAA at the local scale and some at global scale. |
Different levels of credit rating at the local and global scales. |
|
Levels of default |
They withstand considerable levels of borrower default before they stop paying the investor. |
Lacking sufficient enhancers, the structures defaulted months after the […] |