More information

MBIA

By DANIEL DROSDOFF

The average home buyer is probably not aware of it, but he might be a participant in a sophisticated financial process called secondary mortgage market development and securitization. New for Latin America, this innovative way of incorporating mortgages into the financial system is both creating investment opportunities and reducing housing costs.

How this is happening and what can be done to extend the use of these financial instruments was the subject of a conference titled "The Development of Mortgage Securitization in Latin America and the Caribbean," held in November 1998 at the IDB's Washington, D.C., headquarters. According to participants, the growth of secondary mortgage markets already has brought down housing costs and extended home ownership in the United States. Now the concept is gaining ground in Latin America and the Caribbean, Europe, and Asia.

In his opening address, IDB President Enrique V. Iglesias said the new mortgage-based financial instruments can supply the three elements the Latin American housing market currently lacks: private sector participation in mortgage financing, more efficient housing finance systems and a competitive building industry.

Iglesias described these opportunities as added benefits for countries that have already carried out extensive reforms and achieved macroeconomic stability, which are prerequisites for entering into this new financial field.

The IDB's traditional work in the housing sector has focused on the primary market, that is, providing decent shelter for those who lack it. Now the Bank is helping countries to develop the underpinnings that secondary mortgage markets require, such as the ability to perform consumer credit analyses; develop data bases with mortgage credit histories; and strengthen legal, regulatory and institutional frameworks.

Conference participants also heard from Martin Levine, managing director of international housing finance services for Fannie Mae, the now privately owned mortgage financing company that was founded by the U.S. Congress in 1938. According to Levine, Latin America and the Caribbean might be able to "compress history" and develop in a few years what it took decades to achieve in the U.S. --a highly liquid secondary mortgage market that allows a greater number of low-income families to own affordable homes.

In the 1980s, the United States learned a painful lesson in mortgage finance with the failure of many savings and loans institutions that had borrowed short-term but loaned long-term, according to Robert Van Order, chief economist of Freddie Mac, the sister institution to Fannie Mae. It is precisely this kind of credit exposure that mortgage securitization and secondary market development seeks to correct, he said.

To meet new challenges, U.S. mortgage-based financial institutions now limit their risk through "unbundling," a process whereby different firms carry out different functions in the mortgage delivery process, such as originating the mortgage, servicing, accepting risk of default, and funding, Van Order explained.

Vicente Lozano, president of the Inter-American Housing Union, outlined some of the problems that need to be overcome before a secondary market and mortgage securitization can be achieved in most Latin American and Caribbean countries: lack of standardized documentation, lack of historical records on loan performance, unstable macroeconomic conditions and lack of a critical mass of mortgages, especially in the smaller countries.

Kenroy Dowers, IDB financial specialist, told conference participants that Latin American and Caribbean countries should develop mortgage-based financial systems to fit their own needs. He noted that recent reforms in the region, in such areas as pensions, insurance and capital markets, are resulting in more interest in long-term mortgage-based financial instruments.

"There is an appetite," he said. "There is supply and demand in the area of housing and mortgage markets."

Countries that already have taken steps toward developing secondary mortgage markets and securitization are Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico and Trinidad and Tobago.

Tobias Mackie, head of economic affairs for the European Mortgage Federation, said mortgage securitization in Europe so far has had only limited results. But he expects that to change with the introduction of the euro as the common currency for 11 European countries. The single currency will bring about "a culture of low inflation, low interest, long-termism and stability," he said. Such developments will make "large-scale development of mortgage-backed securities more likely."