Banks, government agencies, and builders in several Latin American countries have been scouring the U.S. market for mortgage financing in recent months, so far without much success.
But the drought may come to an end soon, with the help of a report issued Monday by Duff & Phelps Credit Rating Co., New York.
The report catalogues the "sovereign risk" presented by securities backed by home loans in nations such as Argentina, Mexico, Brazil, Colombia, and Jamaica. That's the risk that a devaluation, currency controls, policy changes, or economic turmoil could affect the flow of cash from the emerging market to international investors.
The authors, optimistic that issuers will soon achieve top ratings soon despite this risk, offer some guidance.
To successfully market mortgage-backed securities from these nations to U.S. investors, sovereign risk must be quantified and in a sense tamed, the report says.
One of the authors, Henry W. Hayssen, a Duff & Phelps vice president, said securities issuers can manage these risks by creating a reserve fund from which to pay international investors during economic or currency crises.
Indeed, with enough reserves, mortgage-backed securities from these emerging markets can obtain higher ratings than the debt of the country in which the mortgaged properties are located, he said. That means lower risk to investors and better prices for homeowners in those countries, he said.
Within a couple of years, $1 billion of these securities will have been brought to market and purchased by U.S. insurance companies and some mutual funds, Mr. Hayssen said.
The securities are expected to be priced comparably to "future flow" securities from emerging markets. These securities, typically backed by assets such as credit card payments from U.S. issuers, have financed resort restaurants, hotel chains, and export businesses in Latin America, Mr. Hayssen said.
U.S. companies have expressed growing interest in making mortgages in Latin America, but so far the involvement has been sparse. Some have begun to offer loans to Americans who want to buy vacation homes in Mexico. But lenders also have their eyes on the rapidly growing middle class in developing countries. A secondary market for foreign mortgages could encourage participation.
To overcome sovereign risk, the Duff & Phelps report says, primary credit enhancement will be needed, along with a mechanism to address external problems such as convertibility restrictions.
"In the end, it is simply a question of information, analysis, and expense," the report concludes.