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Owning
a home has long been an American ideal that we all strive to accomplish. Since
World War II, home ownership has become a fundamental goal in our quest to
achieve the "American dream". And yet we, as a buying public, often
take this wonderful opportunity for granted and do not realize that it doesn't
exist in most of the other countries in the world. Certainly not to the extent
we have become accustomed to here in the United States. For
every 10 U.S. residences, nine have mortgages on them. We have created a system
that affords longer terms of debt repayment at low interest rates, coupled with
interest deduction on the note against our personal tax liability. But what is
most important is the fact that through our mortgage system, we have established
the basis for creating "personal net worth" through home ownership.
For the most part, this incredible financing vehicle simply is not available in
other countries and particularly not in Mexico for Mexican citizens. By
contrast, for every 10 residences in Mexico, only one has a mortgage. This
unfortunate fact may finally begin its needed evolution in the coming months due
to the recent elections and a marked change in political party dominance. In
order for mortgage markets to emerge and have the ability to sustain themselves,
there are many primary requirements that must be in place. The U.S. mortgage
system has become the benchmark model for other loan origination programs in the
world. In the United States, the mortgage market can be explained as a "360°"
process and any buying public, U.S. or otherwise, should understand its basic
components. First, financial institutions that originate loans must qualify
prospective borrowers relative to their assets, debts and the requested loan
amount. Subject to this assessment is the loan to value ratio and the required
down payment. In essence, lenders arrive at a profile of the borrower's overall
credit worthiness and determine the acceptable parameters for a given mortgage. Once
the mortgage has been originated, the loan will be pooled with other mortgages
and the loan portfolio will be rated according to the specific lender, borrower,
financing terms, the asset itself and the "age" of the mortgage. The
rating that is placed on the loan pool will determine the "discount
rate" for selling the portfolio. Selling the loan portfolio in the
secondary mortgage market and offering mortgage backed securities to investors
on Wall Street completes the cycle of liquidity in order to re-capitalize
primary mortgage lenders across the country. Though
this explanation is extremely simplistic, it the basis for how the U.S. mortgage
system thrives. In
order for the system to thrive and moreover to survive, certain assurances and
guarantees must be in place. Investors in mortgage backed securities don't know
local market conditions where the mortgages originate but they do know they will
receive a certain yield on their investment and that the investment is
guaranteed and secure. These assurances would include private mortgage
insurance, title insurance, FHA and VA guarantees, as well as a non-judicial
foreclosure process, deeds of trust and other standardized mortgage instruments. Unlike
the United States, Mexico has no primary mortgage market nor does the country
have a secondary market. The peso devaluation in 1994 further compounded the
matter leading to a banking crisis of major proportion that has reduced the
liquidity of Mexican banks. Resources for new lines of credit have largely
disappeared. As a result, there is an estimated pent up demand for 6 million
dwelling units in the country today due to the country's inability to finance
housing. However, U.S. buyers of Mexican residential real estate don't face this
same situation. There is an ever-growing awareness among U.S. purchasers that
financing is available on Mexican properties. Several lenders, like Bank United,
MetroCiti Mortgage and Collateral Mortgage, have established Mexico lending
programs for U.S. and Canadian buyers. Financing residences in Mexico have
inherent advantages when weighed against the additional costs associated with
mortgages, i.e., origination fees, discount points, bank appraisals and
processing fees. All
residential transactions in Mexico (regardless of who the purchaser is)require
payment of a transfer tax on the declared value of the operation(which should be
the purchase price and not what the seller or developer declares to minimize the
capital gains tax), notary fees, and recording costs. These expenditures are the
norm in any Mexican property transfer and they are not inexpensive by U.S.
standards. Foreign buyers must also pay for the permit from the Ministry of
Foreign Affairs, a bank appraisal fee and an annual bank trust fee to administer
the fideicomiso. These expenditures are also customary and required. At the end
of the day, the comparative expense of a cash transaction should run between 5-7
percent whereas financing will average about 8-10 percent of the purchase price,
the difference being the cost of the mortgage origination as previously
mentioned. You, the buying public, must realize that real estate deals in Mexico
are just more expensive than what we are accustomed to in the U.S. There
is a distinct and protective benefit that purchasers receive in financed
operations. That should be noted and understood by foreign buyers.
In order to finance Mexican residential properties, first and foremost,
there must be a transfer and conveyance to a Mexican bank trust protocolized by
the notario publico that establishes a recorded and renewable beneficiary
interest for 50 years for the non-Mexican buyer. This is a legal concept
mandated by Mexico's foreign investment law on property within the prohibited
zone. The
bank trust or "fideicomiso" does not apply to property in the interior
of Mexico being acquired by non-Mexicans. In a seller financed deal or as is
sometimes referred to as a "seller carry back", there is no conveyance
to the buyer. Since the seller is financing the residence, they will retain the
title to the property until the debt obligation has been paid off, then transfer
title. One can easily see the risk associated in these transactions over several
years of repayment and they are unlike what we are accustomed to in the U.S.
through a deed of trust conveyance.
Also, the interest rate commonly charged by Mexican developers will
normally exceed U.S. interest rates on Mexican property. Secondly,
U.S. financial institutions, like those mentioned above, require a more detailed
process to originate loans in Mexico. Possession of the property is not
tantamount to ownership. Lenders must be assured, through a competent title
search of the property and issuance of a Commitment for Title Insurance, that
there is a complete chain of title for the respective residence. They want to
know how the title is vested and that it is valid. Lenders
are going to rely on the company investigating the title that a subdivision has
been approved and published or that a condominium development has a condominium
regime filed of record. Escrow considerations and escrow agreements are common
with U.S. lenders on Mexican transactions as well. Certified surveys should be
provided and that ultimately the lender can receive a Loan Policy of Title
Insurance protecting their priority of lien interest as filed of record by the
notario in the public registry of property. All of these elements work toward
the protection of the borrower as well as the lender. As has been said before,
Mexico is not the "Wild West" as many perceive. Lenders want a higher
standard of assurance that the loans they originate are secure and that the
public deeds vesting the bank's lien interest are in fact valid and enforceable.
Again, this works to the benefit of the borrower. Mr.
Vicente Fox, the Mexican President-elect, has already vowed to make mortgage
financing available to Mexican citizens. He has indicated that it is of prime
importance to start reforms on a securitization process and has said FOVI (Fondo
de Operacion y Financimiento Bancario a la Vivienda, Mexico's governmental
guarantor of loans) needs to make funds available to Mexico's SOFOLES (financial
loan institutions) for affordable housing loans. This
is certainly a step in the right direction. Mexico can only realize the
government's goal of providing affordable housing through secured lending
transactions once legislative changes are initiated at the local and state
levels and a viable secondary mortgage market is created. U.S. buyers don't have
to wait though. Anyone acquiring residential real estate can at least have the
opportunity to check with U.S. based mortgage lenders on the availability of a
Mexican home mortgage. Loan transactions for Mexico are originated and processed
every month. Hopefully it will become an even more common concept with U.S.
purchasers. We, Stewart Title Guaranty, are betting on the emergence of the
Mexican mortgage market. And, on both sides of the border! |
