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RMBS Trends: Mexican Government Agency RMBS Credit Quality Remains Stable Despite Pandemic Pressures

The credit quality of residential mortgage-backed securities (RMBS) originated by Mexican government agencies Instituto del Fondo Nacional de la Vivienda para los Trabajadores (Infonavit) and Fondo de la Vivienda del Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado (Fovissste) has generally remained stable this year, despite the COVID-19 pandemic's negative impact on unemployment rate, available household income, and the performance of the collateral backing the transactions. Infonavit and Fovissste are the largest issuers of RMBS in the Mexican securitization market both by outstanding balance and number of transactions. S&P Global Ratings believes the transactions' credit enhancement metrics will continue to support their current ratings, provided the transactions continue to deleverage or maintain their target overcollateralization levels. We do not expect to take negative rating actions in the near term.

The Mexican economy has been showing signs of improvement. We recently raised our 2021 GDP growth projections to 6.2% from 5.8%, following better-than-expected second-quarter GDP growth due to a continued recovery in consumption as lockdown measures ease in the country (see "Economic Outlook Emerging Markets Q4 2021: Vaccination Progress And Policy Decisions Remain Key To Growth," published Sept. 27, 2021). Employment levels are also returning to pre-pandemic levels. According to the Instituto Mexicano del Seguro Social (IMSS), the formal private sector increased to 20.4 million employees in August 2021--an approximately 3.3% growth compared with December 2020 and in line with December 2019 levels.

We believe the portfolios' performance recovery will ultimately depend on the pace at which the Mexican economy improves. However, certain factors could lead to rating actions. These include the transactions' increasing delinquency levels, our expectation that disposable household income will remain under pressure until the end of 2022, and the relatively high inflation levels expected for this year. In addition, our analysis shows that the significant amortization of Mexican RMBS transactions over the past two years could result in many being fully repaid 12 years on average before their legal maturity dates, exposing investors to prepayment risk.

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Solid Credit Enhancement Metrics Outweigh Performance Deterioration

Mexican government agency RMBS transactions generally continue to have solid credit enhancement levels despite the increase in nonperforming loans (NPLs) due to the pandemic and the greater proportion of securitized loans with higher credit risks. NPLs, which are calculated as delinquency greater than 90 days as a percentage of the initial balance of portfolios, increased year over year for both Infonavit and Fovissste transactions. Based on the servicers' reports, Infonavit's NPLs increased to 15.8% in July 2021 from 13.4% a year earlier, while Fovissste's rose year over year to 8.7% in August 2021 from 7.5% (see chart 1).

Chart 1

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The proportion of securitized loans that don't benefit from payroll deductions also increased year over year. According to information from the master servicers, the proportion of these special payment regime (REA) and extension of payment (EXT) loans increased in August 2021 to 11.0% for Fovissste and 31.0% for Infonavit. We believe the relatively lower defaults on the Fovissste portfolio partially reflect the greater job stability within the public sector compared to the private sector. We also believe that REA and EXT loans have a higher default risk levels than those collected via payroll deductions.

Still, despite these factors, the transactions continue to have solid credit enhancement levels. Overcollateralization levels (calculated as 1 minus liabilities divided by current assets) have improved for the Fovissste transactions due to their full turbo payment waterfalls through which all the proceeds after covering expenses and interest are allocated to amortize the outstanding note balances. As for Infonavit, seven of the 10 transactions we rate include a pro rata amortization structure, which generally maintains target overcollateralization levels throughout the transactions' life, while the remaining three transactions have a full turbo amortization structure. As of July 2021, overcollateralization levels for the Fovissste transactions were in the 21.5%-83.7% range, with an average of 53.1%; while overcollateralization levels for Infonavit were in the 23.2%-66.3% range, with an average of 34.6%.

The transactions' credit quality has also remained stable despite the deterioration in their performance. We recently affirmed our 'mxAAA (sf)' ratings on nine preferred classes issued by Fovissste (see "S&P Global Ratings confirmó calificaciones de nueve transacciones de RMBS de Fovissste," published July 20, 2021). We also affirmed our 'mxAAA (sf)' ratings on 10 senior classes and our 'mxAA + (sf)' ratings on 13 subordinate classes from 10 Infonavit transactions (see "S&P Global Ratings confirmó calificaciones de 10 transacciones de RMBS del Infonavit," published Sept. 13, 2021). These rating actions primarily reflected our view that the available credit enhancement levels are sufficient to withstand our updated stress scenarios despite the weaker performance. We do not expect widespread downgrades as a result.

We expect the Fovissste transactions to continue increasing their overcollateralization ratios, which could allow them to withstand higher levels of losses due to their full turbo amortization structures. However, some challenges loom ahead for Infonavit. The Infonavit transactions that have pro rata amortization structures could face negative rating actions if the nonperforming loans continue to increase beyond our expectations, hampering the transactions' credit enhancement metrics. However, the early amortization triggers related to the transactions' performance could mitigate this risk. If the triggers are activated, the payment waterfall would be modified to sequential and interests on the mezzanine classes would be capitalized, which could rapidly deleverage the transactions. We will continue to monitor the performance of the securitized portfolios and take rating actions as we deem appropriate.

A Close Look At Our Credit Loss Assumptions

We analyze portfolio characteristics at a loan-by-loan level to determine our assumptions for foreclosure frequency, loss severity, and the required credit coverage levels. As of June 2021, the portfolios backing the Fovissste transactions we rate comprised 122,642 securitized mortgage loans with an unpaid balance of Mexican pesos (MXN)53.65 billion, while the Infonavit transactions comprised approximately 93,397 loans with an unpaid balance of MXN26.16 billion. The infographic below shows the credit characteristics of the securitized portfolios.

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Our credit loss assumptions are generally lower for the Fovissste transactions than those for Infonavit. This is mainly due to the lower proportion of NPLs and loans in arrears, as well as the higher proportion of loans that benefit from payroll deductions.

Our required credit coverage levels for the current rating levels were in the 15.3%-32.5% range, with an average of 25.1% for Fovissste; and in the 19.8%-43.9% range, with an average of 31.0%, for Infonavit. These levels compare favorably with the current credit enhancement available for the transactions, which allows them to withstand our stress scenarios consistent with the current ratings.

Our foreclosure frequency assumptions primarily reflect the relatively high levels of original loan-to-value ratios and the portfolios' current delinquency levels, nonperforming levels, and debt-to-income ratios. These factors were offset by the relatively high seasoning of the loans and the proportion of loans that still have payroll deductions. We did not identify significant concentrations geographically or by employer in the portfolios.

Issuance And Demand Are Expected To Remain Steady, But Amortization Could Reduce Outstanding Transactions

In recent years, Fovissste has taken the lead in terms of new issuance volume, issuing one or two RMBS transactions totaling between MXN12 billion and MXN14 billion each year. Conversely, Infonavit has stopped securitizing its portfolio since 2015, mainly due to its high liquidity levels (see chart 2). While we do not expect Infonavit to return to the market in the near term, we foresee Fovissste maintaining its issuance pace over the next two years, according to its 2020-2024 plan. We have also seen some new entrants in the market, such as Fideicomiso Irrevocable F/2061 (FHipo), a real estate investment trust (REIT) that has started to securitize its participation on loans originated by Infonavit during the past two years.

Chart 2

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We have also seen a considerable increase in the number of transactions that have amortized over the past two years due to their full turbo payment waterfall and available excess spread. If the Infonavit and Fovissste transactions we rate maintain their current amortization pace, we believe they could fully amortize in 2031 for Fovissste and in 2026 for Infonavit--12 years on average before their legal maturity dates. This could expose investors to prepayment risk, which may prompt them to reallocate resources to other asset classes. Available performance information will also decline as fewer transactions remain outstanding in the market, negatively affecting investors' decision-making process.

We could also see more Mexican peso-denominated securitizations from Infonavit and Fovissste--to the extent these portfolios reach a sufficient level of seasoning. Historically, Mexican pesos-denominated loans have had better performance than those that are adjusted based on inflation or the minimum wage, which generally resulted in lower loss assumptions and credit enhancement requirements.

From an asset-liability management perspective, the use of securitization could be beneficial for originators whose main source of funding are short-term deposits for the long-term loans they finance. There could also be a need to finance the outstanding mortgages that have been returned to Infonavit's and Fovissste's balance sheets because the notes those mortgages served as collateral for have been fully redeemed. From an investor perspective, we also believe the demand for instruments such as government agency RMBS will continue, mainly driven by investors such as pension fund managers (AFORES) needing to allocate their investments in long-term assets while seeking attractive yields.

In general, we believe the utilization of the Mexican RMBS market is well below its full potential, based on the amount of securitized loans and the loans on the balance sheets from Infonavit, Fovissste, and other market participants such as retail banks. Better utilization of the securitization market could help reduce the country's housing deficit by providing mortgage originators with attractive financing sources while widening the range of asset classes available for investors.

Mexican Government Agency Transactions Rated By S&P Global Ratings
Class Type Current rating Legal maturity date Outstanding balance (mil. UDIs)(i)
Fovissste - Bursatilizaciones de Hipotecas Residenciales
TFOVIS 12-4U Senior mxAAA (sf) Sept. 27, 2042 134.48
TFOVICB 13U Senior mxAAA (sf) March 27, 2043 323.39
TFOVIS 13-2U Senior mxAAA (sf) July 27, 2043 113.58
TFOVICB 13-3U Senior mxAAA (sf) Nov. 27, 2043 247.15
TFOVIS 14-2U Senior mxAAA (sf) March 27, 2044 435.08
TFOVIS 14-3U Senior mxAAA (sf) Sept. 27, 2044 356.98
TFOVICB 15U Senior mxAAA (sf) Jan. 27, 2045 1,013.62
TFOVICB 15-2U Senior mxAAA (sf) May 26, 2045 651.65
Infonavit - Bursatilizaciones de Hipotecas Residenciales
CEDEVIS 08-6U Senior mxAAA (sf) Aug. 20, 2030 61.23
Constancia Preferente Subordinated mxAA+ (sf) Aug. 20, 2030 49.04
CEDEVIS 11U Senior mxAAA (sf) March 22, 2039 76.05
Constancia Preferente Subordinated mxAA+ (sf) March 22, 2039 83.15
CEDEVIS 11-2U Senior mxAAA (sf) June 24, 2039 67.09
Constancia Preferente Subordinated mxAA+ (sf) June 24, 2039 86.76
CEDEVIS 12U Senior mxAAA (sf) Feb. 20, 2040 259.08
Constancia Preferente Subordinated mxAA+ (sf) Feb. 20, 2040 36.54
Infonavit Total - Bursatilizaciones de Hipotecas Residenciales
CDVITOT 11U Senior mxAAA (sf) July 20, 2039 80.62
CDVITOT 11-2U Subordinated mxAA+ (sf) July 20, 2039 5.11
Constancia Preferente Subordinated mxAA+ (sf July 20, 2039 4.26
CDVITOT 11-3U Senior mxAAA (sf) Dec. 20, 2039 35.26
Constancia Preferente Subordinated mxAA+ (sf) Dec. 20, 2039 5.50
CDVITOT 12U Senior mxAAA (sf) March 20, 2040 8.26
Constancia Preferente Subordinated mxAA+ (sf) March 20, 2040 17.95
CDVITOT 12-2U Senior mxAAA (sf) June 20, 2040 85.64
Constancia Preferente Subordinated mxAA+ (sf) June 20, 2040 10.44
CDVITOT 13U Senior mxAAA (sf) Oct. 21, 2041 236.20
CDVITOT 13-2U Subordinated mxAA+ (sf) Oct. 21, 2041 13.63
Constancia Preferente Subordinated mxAA+ (sf Oct. 21, 2041 13.83
CDVITOT 15U Senior mxAAA (sf) Sept. 21, 2043 204.21
CDVITOT 15-2U Subordinated mxAA+ (sf) Sept. 21, 2043 13.68
Constancia Preferente Subordinated mxAA+ (sf Sept. 21, 2043 9.35
(i)Mexican inflation-linked units (UDIs) balances as of September 2021. As of Sept. 30, 2021, 1 UDI = MXN6.922358.

Related Research

This report does not constitute a rating action.

Editor: Georgia Jones

Primary Credit Analyst:Antonio Zellek, CFA, Mexico City + 52 55 5081 4484;
antonio.zellek@spglobal.com
Secondary Contacts:Filix Gomez, Mexico City + 52 55 5081 4490;
filix.gomez@spglobal.com
Jose Coballasi, Mexico City + 52 55 5081 4414;
jose.coballasi@spglobal.com
Leandro C Albuquerque, Sao Paulo + 55 (11) 3039 9729;
leandro.albuquerque@spglobal.com

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