Mortgage banks will soon be expanding their reach by making loans to U.S. citizens on vacation homes in Mexico.
That's the forecast from Standard & Poor's Corp., which has released its first formal analysis of the Mexican marketplace and given a qualified thumbs up to rating loans that banks may make there.
Mortgage bankers interested in the Mexican market welcomed S&P's analysis, saying it spotlights a nascent business. The report "brings credibility" to lenders' exploration of the Mexican market, said the president of a mortgage company who, citing competitive considerations, didn't want to be identified.
So far, no mortgage bank has made such a loan. But lenders' interest is keen, as shown by the turnout expected for next month's Latin American lending conference sponsored by the Mortgage Bankers Association.
Mortgage banks will be lending on vacation properties by early next year, predicted Diane Audino, the S&P director who wrote the analysis. "This is a good way for them to get their feet wet" in the Latin American market, she said.
S&P has been informally coaching mortgage banks about Mexico for the past year, but an increased volume of inquiries spurred a decision to prepare a more definitive study, Ms. Audino said.
And after an assessment of the marketplace, S&P said it believes securities backed by mortgages on Mexican vacation homes can be rated. A rating agency's support of such lending is crucial, since the grades these firms give the loans make them salable in the secondary market.
While stating that the loans could be securitized, S&P also offered a litany of warnings to lenders.
S&P said it expects lenders to use underwriting guidelines similar to those used for U.S. homes. But the criteria must be adjusted to weigh the risk of lending on vacation homes, the S&P report stated.
"Loan-to-value ratios should be conservative to discourage buyers from defaulting and to reduce the negative effects of declining property values," the report said.
Since Mexico is a new area for lenders, there is no track record of how vacation home loans perform. Although Mexican developers have made loans on these properties, "their data on historical borrower behavior are limited," the S&P report stated.
Reliable price information on Mexican properties is also in short supply, the S&P report stated, and "without such data it is difficult to determine the severity of loss that may result from mortgage defaults."