May 1, 2000
Publication:
Joint Center for Housing Studies, Harvard University
The Mexican mortgage market experienced significant turbulence in the 1990s allowing a newly created financial intermediary, the Sociedades Financieras de Objeto Limitado (SOFOLES) to gain entry into the low income mortgage market. The SOFOLES have instituted innovative loan origination and servicing policies and have spurred greater competition and specialization in the financial sector. Due to innovations and government rate subsidization, the SOFOLES' profits have been impressive. However, the question remains as to whether the SOFOLES can survive in a more competitive financial environment. The SOFOLES are pursuing securitization as the most desirable option for obtaining additional funding to expand their operations. The complexity of pricing SOFOLES mortgages has presented challenges to the securitization of their loans. Until recently the SOFOLES have received a government subsidy (FOVI): funding at a reduced interest rate. This subsidy is passed directly on to their mortgage holders in the form of below market interest rates on their loans. In an effort to expedite securitization, interest rate subsidies were removed and reforms were made to the design of the SOFOLES' mortgage. Switching to a new mortgage design will facilitate securitization by creating an asset that is better understood by the market and is less risky to investors. The analysis here highlights the complexities of pricing the original SOFOLES contracts and provides insight into why reforms were necessary. It also quantifies the interest rate subsidy and allows for its comparison with the new mortgage product that FOVI has begun to promote.
 
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