Mortgage-Backed Securitization:

New legal development in Mexico

By Manuel Caloca González

INTRODUCTION.

The aim of the present paper is to present and analyze the changes that since mid-90’s have been occurred in Mexico in order to adequate the Mexican legal system to the financial technique known internationally as securitization. The first chapter is dedicated to present background information and principal characteristics of this figure. The second chapter is dedicated to study the process of securitization in The United States of America, because this is the place were this figure came up and has have an outstanding success. The third chapter is focused in the Mexican Legal System in a successive order, beginning from the mortgage credit origination to the issuance and investors for Mortgage backed securities as well as giving a description of how the structure of mortgage securitization takes part after the recently changes to the respective laws.

This Paper is not intended to be an exhaustive investigation of all issues relating to securitization in Mexico, instead we treated only issues where a change in the laws is involved. The structure of our work is the following:

I. Mortgage Securitization.

a) Concept of securitization and mortgage securitization.

b). Purpose of Securitization.

c). Advantages of securitization to originators.

d). Advantages of securitization to investors.

e). Disadvantages of securitization.

II. Mortgage Securitization in the United States of America.

a). Players of securitization.

b). Structure of the process of securitization.

c). Legal isolation against originator bankruptcy risk.

III. Mortgage Backed Securitization in Mexico.

1. Introduction.

2. Mortgage Originators.

a) Public Originators.

b) Private Originators.

c) Standardization of mortgage credit origination.

3. Security interests “in rem” provided to back mortgage credits.

a). Mortgage (“Hipoteca”).

b). Guaranty trust Agreement. (“Fideicomiso de Garantía”).

c). Enforcement of mortgage.

d). Enforcement of guaranty trust.

4 Transfer of the secured Credits from originator risks (Isolation process).

Assignment of rights.

5 Special Purpose Entity.

a). Trusts as special purpose entities

b). Corporations as special purpose entities.

6. Banking secrecy reform.

7. Issuance of MBSs and their Investors.

a). Issuance of securities.

b). Investors.

8. Actual process of Securitization in Mexico.

IV. Conclusions.

I. Mortgage Securitization.

a) Concept of Securitization and mortgage securitization.

Securitization, also known as Asset-backed securitization and structured financing has been defined as:

“ a financing technique whereby a company transfers rights in receivables or other financial assets to an entity that serves as a “special purpose vehicle” (SPV) ( or as Special Purpose Entity (SPE), which in turn issues securities to capital market investors and uses the proceeds from the issue to pay for the financial assets”[1]

The source of the receivables could be any right of payment or asset that generates an income[2] with a stable cash flow.[3] The existing or future receivables could be the income generated, among others, by residential or commercial mortgages, credit card receivables, automobile loans, student loans, airline ticket payments, health care receivables, insurance fees receivables, royalties on intellectual property, sales of oil, taxes receivables or any other income source that is regular and predictable.[4] [5] All of them are attractive mid and long term investment portfolios to institutional investors.

As related to mortgages, Securitization is defined as “the financing of real estate through the nontraditional methods of stocks and bonds, known collectively as “mortgage-backed securities” (thereafter “MBS’s”) in order to expand the available lending community and to use more efficient (cheaper) primary and secondary capital sources.[6] Those MBS’s are instruments collaterized by Mortgage loans that are secured by real state.[7]

MBS’s are “securities” within the meaning of federal securities law.[8] In January 1958 the Securities and Exchange Commission stated that an offering for investment of whole or fractional interests in mortgages or deeds of trusts frequently constitutes an investment contract which is a security within the meaning of federal laws.[9] The Commission’s definition of “investment contract” was based on the Supreme Court’s decision in SEC v W.J. Howey Co.[10] [11] The Court stated that “an investment contract for purposes of the Securities Act is a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party”[12]

By difference to “Factoring of account receivables”, in Securitization “a company securitizes their future flows, as opposed to past flows, or money already due”[13]

b) Purpose of Securitization.

The goal of the Asset Securitization is to get low cost funding from the capital markets, such as Wall Street, by separating all or a portion of the originator (also known as transferor) receivables from the risks associated with him[14], i.e. Bankruptcy, in order to “generate an income stream that is more certain as to credit risk and more predictable as to timing of receipt than the company’s overall operations”[15] The originator sells the right for the receivables instead of borrowing at high interest rates, because of his credit risk.

c) Advantages of Securitization to originators.

1. “The Transferor (originator) can obtain liquidity of the assets by transferring future payments into instant cash and can diversify funding sources”.[16]

2. Securitization represents an additional source of financing for an originator, because it gives him access to lenders that otherwise would not be available to him,[17] i.e., Institutional investors in the secondary market. Also, it represents a possibility to raise capital in a foreign market such as the market of the United States, where they could obtain more attractive interest rate (low cost of capital) than in the country of origin.[18]

3. “Access to public market and private institutional financing further reduces the cost of funding, relative to traditional bank lending”.[19] The elimination of the originator’s bankruptcy risk, in conjunction with intrinsic or third-party credit enhancement, permits a higher credit rating for the asset pool than the originator’s general obligations, which in turn reduces the rate of return demanded by investors.”[20]

4. “Because a securitization is often view for accounting purposes as a sale of assets rather than a financing, the originator does not record the transaction as a liability on its balance sheet.”[21] Direct debt increases the debt ratio, while it does not happens using securitization.[22]

5. “Securitization allows the originator to transfer all or part of the credit risk associated with certain financial assets to a third party”.[23] [24]

6. “Securitization assists a financial institution in meeting its capital adequacy standard by shrinking the size of its balance sheet or permitting it to reinvest the proceeds of the securitization transaction in new assets without increasing the size of its balance sheet”.[25]

d) Advantages of securitization to investors.

“In contrast to traditional lending arrangements, a securitization is dependent upon investors’ satisfaction with the quality of the assets backing the securitization, not the credit quality of the originator. The investor, unlike traditional lenders, does not bear the risks associated with the originator and its business and instead rely upon risk-containing measures that are made a part o the transaction”.[26]

e) Disadvantages of Securitization.

1. “The mortgagor of the securitized loans can lose the close relationship and flexibility it would have with mortgagees, investors, and mortgage bankers…Mortgage bankers lose servicing as the originators securitize loans. Underwriting and servicing standards suffer where there is a surplus of capital and the originator does not retain any risk of loss. Lenders and investors will obtain lower yields as the market becomes more efficient”.[27]

2. “The significant risk to investors is that a portion of the mortgages will be prepaid when interest rates decline.”[28] “Even though prepayments are passed on to the investors, prepayments reduce the size of the pool.”[29]

3. “To the extent the assets to be securitized are not existing portfolios, additional risk to the sponsor may be associated with time delays in accumulating product for the securitization to go forward.”[30]

4. “If the assets are denominated in a currency foreign to the investor, the investor also faces currency risk.”[31]

II. Mortgage Securitization in the United States of America.

“In the simplest form, as a “stand-alone Securitization”[32], Mortgage backed securitization can be visualized:[33]

Holder of Mortgages or other income producing assets.
			Isolated Mortgages		Issuer of Securities		Investors. $

“Unless the originator is a regulated financial institution which is not subject to the bankruptcy code, the securitization will be structured to include a bankruptcy remote Special Purpose Entity (SPE)” as shown below:[34]

				Issuer of Securities. “Issuer SPE” A true Sale.		Investors $
Bankruptcy Code Originator.

a) Players of securitization:

1. “Issuer (originator). The issuer is a special purpose entity (SPE), which may be affiliated with the actual owner (the sponsor) of the underlying assets. Having an SPE is intended to eliminate disruption in the cash flow if the sponsor becomes insolvent.”[35]

2. “Servicer. The servicer performs collection and other functions required to manage the underlying assets. The servicer usually is the sponsor or an affiliate.”[36]

3. “Trustee. The trustee holds legal title to the assets and has little or no discretion in the performance of its duties.”[37]

4. “Others. The investors, underwriters, credit enhancers and rating agencies also participate in the structuring, in roles much as they do in debt financing.”[38]

b) Structure of the process of securitization.

The process of securitization can be structured as follows:

1. A pool (portfolio) of mortgages generating payments, “with similar characteristics as to quality, term and interest rate”[39] [40], which are owned by the originator[41] are sold to an entity known as the Special Purpose Entity (SPE),[42] that is an intermediary entity, which purchases those rights of payment of the mortgages by selling or issuing[43] “interests” backed by the value of the conveyed mortgages and paid through their liquidation.[44]

2. The assets are sold to the SPE in order to isolate the assets from insolvency, default, or bankruptcy of the transferor and for accounting or tax purposes.[45] The SPE is structured to be bankruptcy remote from the transferor (originator) and other parties, such as the parent of the SPE[46], which is restraint from “engaging in any activity other than owing, and perhaps servicing, the mortgages[47]. This mean that the SPE will not to be allowed to have debts and therefore, secure for any bankruptcy proceeding.

“The SPE may be a Trust, corporation, or partnership.[48] [49] More than one SPE may be required, for example, the transferor may be required to transfer the assets to a SPE which then transfers to a second SPE who issues the securities”.[50]

“When the originator of the mortgages is federally insured, the rating agency may or may not require that the mortgages be transferred to a SPE”.[51]

3. “The SPE can either directly or indirectly issue the securities.[52] The Issuing SPE either (1) sells pro rata interests (certificates) in the pool of mortgages to investors who receive their share of the principal and interest paid into the pool,[53] or (2) in a bond-type instrument borrows money from the investors, with the borrowing being secured by the assets held by the SPE. If the interests are sold to the investors this is referred to as equity and if the SPE borrows the money this is a debt transaction.[54] The issuance of the securities can either be the sale of a registered security or can be a private placement”.[55]

4. A crucial step in assuring the investors that they will receive uninterrupted payments is performed by the rating of the investment purchased by the investors.[56] The rating is done by the rating agencies and this is necessary to make the investments marketable and liquid with the result being that the yield required to sell them will be lower.[57] As part of the rating process the rating agencies will generally require legal opinions that the agreement and liens are enforceable and that the flow of payments will not be impeded by a bankruptcy of an associated agency.[58]

In addition, in order to get a better rating, a third party may provide Credit Enhancement “by issuing a Standby letter of Credit, a corporate guarantee or the structure itself may provide the enhancement through reserve accounts, cross-collateralization, cross-default, advance payment agreements, loan replacement provisions and creating separate senior and subordinated classes of securities.”[59]

“A credit rating is not a recommendation to purchase, sell, or hold a particular security. Ratings are invariably required to sell securities in the public markets. Also, many financial institutions that purchase asset-backed securities in the private markets require ratings in order to satisfy either regulatory requirements, investments guidelines, covenant restrictions, or internal policies.”[60] It is to say, that the rating issued may be downgraded if there is a substantial decline in the performance of mortgages.[61]

5. The Mortgages-Backed Securities that could be issued are divided in three general classes: a) Pass-through certificates; b) Mortgage-backed bonds, and c) Pay-through bonds.[62]

a). “A “pass-through” certificate is an instrument that gives the owner (holder) direct undivided ownership in a portfolio of mortgage loans”.[63] “Security holders receive all payments of principal and interest in an amount based on their pro rata interest in the pool, less required service fees.”[64] Originators deliver payment of principal and interests to Ginnie Mae, who in turn delivers them to the Ginnie Mae securities bondholders.[65] “If any of the mortgages are prepaid during the term of the issue the payments are passed on to the security holders.”[66]

“The Ginnie Mae pass-troughs are essentially riskless with respect to default because of a layering of financial safeguards”:[67] “First, the pass-throughs are backed by mortgage loans held in trust for the certificate (securities) holders. Second, the mortgages themselves are covered by the Federal Housing Administration (FHA) or the Veterans Administration (VA) insurance. Finally, prompt payment interest and principal is guaranteed by Ginnie Mae”.[68] “Because it is a direct agency of the United States Government, Ginnie Mae pass-throughs are backed by the full faith and credit of the federal government”.[69]

b) “Mortgage-backed bonds” (MBB’S) “are debt obligations of the issuing institution.[70] “The issuer retains ownership of the mortgage loans which collateralize (secure) the payment of the debt”.[71] “The investors receive an instrument evidencing a percentage interest in the debt of the issuer.”[72]

C). “A “pay-through bond” is a hybrid of the pass-through and the Mortgage Backed Bonds (MBB’s).[73] “Like the Pass through, the pay through bond links interest and principal income from the mortgage pool to the bond interest obligation and principal reduction”.[74] “Like the MBB, the mortgage loans collateralize the bonds and become a liability to the issuer”.[75] “Unlike either of the other bonds, however, the pay-through bond enables an institution to liquidate low yielding loans without having to write off a capital loss”.[76]

6. “After the sale, the originator usually continues to service the accounts, making collections, maintaining records, and enforcing delinquent accounts”[77]

c). Legal isolation against originator bankruptcy risk.

Issuers of Mortgage-backed Securities, other than regulated financial institution, are subject to the Bankruptcy Code,[78] and their insolvency raise problems such as the automatic stay and the preferential transfer problem:[79]

“The filing of the bankruptcy petition imposes an automatic stay of all actions against the debtor.”[80] This stay obviously may cause delays in payment to the holders of the securities, because the trustee of the collateral pool will be prevented from liquidating the collateral for the benefit of the security holders until they obtain relief by showing that their rights are not “adequately protected”[81]. The trustee of the collateral must show that the security holders will not be protected adequately unless they continue to receive the cash flow from the collateral, or unless they are allowed to liquidate the collateral.[82] Upon demonstration of the lack of adequate protection the stay should be lifted within a reasonable period of time.[83]

The preferential transfer problem arises when the issuer falls into bankruptcy and the trustee of the bankruptcy tries to avoid any transfer of interest that the issuer have made on or within 90 days before of the date of the filing of bankruptcy for or on account of an antecedent debt owed by him, before such transfer was made[84] “However, as long as the securities holders are fully secured creditors, and the value of the collateral is bigger than the debt amount,[85] the payments cannot be avoided as preferential transfer.[86] For that reason, “the investor in MBSs must make certain there is a valid, perfected, first security interest in all the notes and mortgages to be used as collateral for the issue”.[87] [88] “Under chapter 7 (of the Bankruptcy Code), a secured creditor’s lien must be fully recognized by the trustee to the extent of the value of the creditor’s interest in the property.”[89]

Carlos Aiza Haddad comments that “no securitization transaction will ever be successful if legal opinions are not rendered that confirms that legal title to the assets is being transferred to the SPV, which ultimately securitize them”[90]

“A crucial consideration, and perhaps the sine qua non, of (securitization) is the effort to legally separate the credit quality of the assets being securitized from the credit risk of any other entity involved in the financing.”[91] “The quality of the assets securitized should stand on their own and not be subject to being drug into bankruptcy of a related party.”[92] “The structured is designed to isolate the assets from third party creditors and from the originator.[93] The legal isolation is achieved as follows:

1. “The mortgages are transferred by sale from the originator to a SPE. The transfer is structured as a “True sale”, as contrasted with the transfer of only a security interest in the assets, in order that the transferor retains no legal or equitable interest in the asset.[94] “Thus, if the transferor later becomes insolvent or files a petition in bankruptcy the (mortgages) will have been transferred and will not be part of the bankruptcy estate of the transferor.”[95] Then, the investors will receive their payments from the SPE without any interference of the automatic stay of the originator.[96]

“To further isolate the assets (credits secured by mortgages) from the insolvency or bankruptcy of any party, sometimes two-tiers of SPE are utilized.”[97] See the next example:

“A second-tier may be used because a trustee in bankruptcy of the transferor might establish that the transfer was not a “true sale”, in which case the trustee has considerable powers to alter the amounts received by the investors. In the second-tier, the intermediate SPE (1) deposits or sells the assets to an issuing SPE or (2) borrows from the issuing SPE and pledges the assets to the issuing SPE to secure the loan. That is, the transfer from the intermediate SPE to the issuing SPE is either a sale or a debt transaction. In any event, the second SPE isolates the assets from the insolvency or bankruptcy of the issuer.[98]

“If the transferor (originator) becomes a debtor in bankruptcy, the bankruptcy trustee can allege that the transfer of the pool of mortgages or income-producing property was not a sale to the SPE but rather was a loan from the assignee/SPE to the transferor and that the transferred asset is an unperfected security interest held by the SPE.[99] “An unperfected security interest may under section 544(a) be avoided by the trustee in which case the assignee would be only an unsecured creditor in the transferor’s bankruptcy.”[100] Whether the transfer is characterized as a true sale or the transfer of a security interest depends on the intent of the parties”.[101]

Because of the risk that the true sale of the mortgages may be consider by a Court as an unperfected security interest, it is important that the trustee in the pool of mortgages has a perfected security interest in the payments of the mortgages in order to protect the security holders, “even if the transfer (of the mortgages) is structured to be a Sale”[102]

“The only way for the purchaser to protect itself completely is to perfect by taking possession of the promissory note”[103]which is collateralized with the mortgages. The trustee of the pool of mortgages will be the one who takes the possession of the promissory notes for the benefit, or on behalf, of the security holders.

(SPE as a bankruptcy remoteness entity)

2. “The transaction is also structured in such a way that the SPE itself is not likely to become a debtor in bankruptcy and further that the assets held by the SPE will not be subject to the bankruptcy of any other entity such as the parent of the SPE and that the assets not be subject to claims of creditors of the SPE”.[104] This, it is to become the SPE as bankruptcy remote entity. [105]

“The SPE must hold itself out of the world as an independent entity and must covenant that will do so.”[106] “Otherwise, a court may use the principles of piercing the corporate veil, alter ego, or substantive consolidation to incorporate the SPE and its assets into the parent’s bankruptcy proceeding.”[107]

“(i) Piercing the corporate level is the remedy the courts use when the parent and the SPE have commingled assets and businesses and the court treats the parent and the SPE as single entity.”[108] The remedy will be sought by creditors of an insolvent parent who set up the SPE in order to reach the assets held by the SPE”.[109] (ii) “The alter ego principle is used when the SPE is the mere pawn of the parent.”[110] (iii) “Substantive consolidation would be sought by the creditors of a borrower who had sold the assets to the SPE or the creditors of a parent of the SPE if either the borrower/seller or parent became a debtor in bankruptcy.”[111]

“The SPE or other issuer cannot be prohibited from filing bankruptcy. The approach to avoid voluntary filings is to require that the SPE be in corporate form and have one or more “independent” directors.[112] The independent directors are stated to have a fiduciary duty to the investors rather than the shareholders of the SPE.[113] Further, the SPE is prohibited from engaging in activities outside its stated purpose of holding the collateral assets.”[114]

III. Mortgage Backed Securitization in Mexico

1. Introduction.

President Fox’s housing goal is to build in Mexico 750,000 houses a year by 2006[115] and Mortgage-backed securitization is a good financial tool to accomplish it. It is just in its early stage in Mexico. There has been securitization of assets like oil sales receivables, toll roads receivables, credit card receivables, mining export receivables, but related to mortgages it is just beginning.[116]

Historically, the impediments that securitization had faced in Mexico were: (i) that trusts could not issue debt[117]; (ii) there were not (and still there are not) a system of security interests as developed as the one in the United States, which favors self help remedies; (iv) the foreclosure proceedings used to take long time; there was an old bankruptcy law which was not designed to deal complex multi-national corporations and sophisticated commercial financing[118], and it was ambiguous which had lead to its inconsistent application by the courts.[119]

“Because of these impediments in the Mexican market and Mexican laws, Mexican securitization transactions (were) typically set up through the United States, using American banks, currency denominated in dollars, and the American securities market.”[120] With this, the securities obtained a better grading by the rating agencies, because the Mexico’s sovereign risk (the country’s ceiling) was not taken into account.[121]

Traditionally, the Mexican securitization involved future receivables transactions.[122] The assets backing the securities do not exist yet, but they are “reasonably predicted due to the nature of the business activity that (produces) those cash flows”.[123]

Up to date, in Mexico there is no one special law for securitization transactions such as in the case of Argentina or other nations. The Mexican legislator has been amending existing laws and creating new regulations and institutions in order to allow and facilitate the adoption of the securitization financing technique in the Mexican financing system.

Among the laws importantly amended to help securitization we can mention: (1) The Law of Banking Institutions (Ley de Instituciones de Crédito) thereafter LIC for its Spanish abbreviation; (2) the Civil Code for the Federal District of Mexico (Código Civil para el Distrito Federal en material Común y para toda la República en materia Federal) thereafter CCDF for its Spanish abbreviation; (3) The Commerce Code (Código de Comercio); (4) the General Law of Negotiable Instruments and Credit Transactions (Ley General de Títulos y Operaciones de Crédito) thereafter LGTOC for its Spanish abbreviation, and (5) the stock market law (Ley del Mercado de Valores).

And as laws recently created to facilitate securitization in Mexico we can mention: (1) The Organic Law of the Federal Mortgage Agency (Ley Orgánica de Sociedad Hipotecaria Federal) and its regulatory rules, and (2) The Transparency and promotion law for competition in the secured credit ( Ley de Transparencia y de fomento a la competencia en el crédito garantizado).

Since 1994, changes have occurred in the Mexican legal system that will help to develop a mortgage-backed securities market within Mexico. These changes enclose, among others, the creation of new entities able to act as originator and/or as SPEs, and in the reduction of formalities for the transfer of loans backed by mortgages or guaranty trusts. The goal of the Mexican government is to raise funds in order to finance the construction of houses and drop the big deficit in the housing sector.[124]

2. Mortgage Originators.

Traditionally, the source of housing financing in Mexico is found in the government, at the federal and State level, and in the private sector through banks. The government in general terms used to finance low income housing for workers and for State-workers, and the private sector, represented by banks, used to finance in general terms mid and upper income housing. Things have changed and this formula is not any more operating in Mexico, the government is not able to satisfy with its own resources the demand of housing of the growing population and neither the commercial banks. The government still is the principal financing entity for low income and workers housing, but its entities are moving towards securitization in order to extend their financing, and to reduce credit risks from the government.

a) Public originators.

As Mexican government agencies originators we can list:[125]

1. The Institute of the National Housing Fund for Private Sector Workers (Instituto Nacional del Fondo para la Vivienda de los Trabajadore) thereafter INFONAVIT, for its Spanish abbreviation.

The INFONAVIT is an entity created in 1972 by constitutional mandate which purpose is the raise of a fund in favor of workers, paid by employers, to finance housing credits for the first mentioned, in the form of loans backed by mortgage (Hipoteca). The entity is funded by a bimonthly 5% payment over the wage of the workers, and it is not a tax, it is “prevision expenses (gastos de prevision) of the employers[126]. The Institution grants and services the credits according to its special law and regulations, and the institution counts with insurance paid by its own for cases were the workers fall into a disability and they cannot work any more and subsequently cannot pay the loans. Every worker may get only one credit. “During recent years, the organization has introduced a number of important reforms, including changes in top management, increased organizational transparency, and improved systems and collection procedures.”[127]

However , we consider that this originator is not, for now, an adequate candidate for the securitization of its accounts receivables, because (1) the flow of payments to the Fund depend of third party employers, who shall discount from their workers wages the amount due to the Fund, existing the possibility that they could stop paying in any time; (2) the worker who lose his job may apply for a deferment of payment up to12 or 24 months; and (3) it is not specified in the INFONAVIT law that the Institution is legally entitle to issue securities backed by its account receivables. In the year 2002, INFONAVIT extended 275,000 loans throughout Mexico.[128]

2. The Housing Fund for Public Sector Workers (Fondo de la Vivienda para los Trabajadores al Servicio del Estado) thereafter FOVISSSTE for its Spanish abbreviation.

Created in 1972, also by constitutional mandate, the FOVISSSTE is a Fund with similar characteristic to the INFONAVIT fund, with the difference that FOVISSTE only benefits workers of the Federal Government and it is paid by the federal government (actually by the tax payers) over a base of 5% the wage of the workers. The loans are secured by mortgages or by personal guaranty. The FOVISSSTE grants and services the credits and have worker’s disability insurance, as well. Every worker may have only one credit. The State or Municipal governments may agree to bring their workers to the benefits of this Fund, obviously by making the correspondent payments.

Specifically related to securitization, we consider that this originator is not also, for now, an adequate candidate, because (1) it is not expressly permitted in its law and regulations to securitize its receivables, and (2) the flow of income could be stopped by a deferment of payment up to 12 months in case that the worker stops working for the government.[129] There is no insurance against this deferment. From 1973 to 2000, FOVISSSTE has granted 532,930 credits.[130]

4. Government Very Low Income Housing Trust (Fideicomiso del Fondo Nacional de Habitaciones Populares) thereafter FONAPO.

FONAPO, created in 1981,is a public trust created to finance the construction and improvement of low-income housing. The targeted population are non-waged people with income from 2.5 a 4 minimum wages and they receive credit that is secured by mortgage or other.[131] The credits are granted and serviced by FONAPO and the borrower has to pay for insurance for the case of non-payment due to death or illness.

In respect to securitize the accounts receivables of this Trust, it could be soon if the federal government guarantees on-time payments and it grants the power to the trust to issue bonds to be sold to institutional investors. From 1982 to date, FONAPO has granted 601,082 credits throughout Mexico.[132]

Despite that the entities above mentioned are headed by government authorities “they run separate and uncoordinated direct mortgage lending programs at the federal and State levels”[133] This “segmentation of the housing finance system into a series of independently funded and administered government programs has led to a very high degree of heterogeneity of mortgage pools that are neither well standardized, documented nor serviced.”[134]

FOVI and SHF.

In addition to the originating government institutions briefly described, the Mexican federal government has established since 1963 the Housing Insurance Trust Fund. (Fondo de Operación y Financiamiento Bancario de la Vivienda,) thereafter FOVI for its Spanish abbreviation, which is a trust with the purpose of financing the acquisition and construction of low-income housing through financial intermediaries.[135] FOVI does not grant and service credits, but instead it acts as a second tier bank[136]

FOVI finances financial intermediaries that are the commercial banks and Limited Purpose Financial Institutions in the housing sector known as “SOFOLES” which are privately owned at rates below of the market through a system of auctions.[137] “The financial intermediaries originate and retain the loan, while FOVI maintains a credit line with the bank for its FOVI portfolio on exactly matched terms.”[138] “The banks and the SOFOLES get, as compensation, a commission for originating and servicing the loans, which are currently indexed to a minimum wage indicator.”[139] [140] “The bank is responsible for half of the credit risk; FOVI assumes the other half.”[141]

The Mexican government through FOVI shows its interest and trust in securitization as means of getting more financing and cheap for the housing sector, “in march 1999, FOVI received a US $505 million loan from the World Bank to promote the development of securitization in the housing industry”[142] These resources are being used to finance low income housing through the participation of the private sector, to restructure FOVI’s finances and management structure and “products and services for the primary and secondary markets”[143], and to implement a new subsidy policy.[144]

It is expected that the loans granted because of FOVI financing will be securitize and that “the proceeds of the MBS transaction will be used by the SOFOLES and commercial banks to pay off FOVI loans.[145] “FOVI will then use those funds to finance new mortgages.”[146] FOVI has been financed by the federal government and now by the World bank, as well. “Eventually the revenues from the securitization of the FOVI funded portfolio will provide most of the FOVI’s funding.[147] In the event that revenues fall short of needs in the future, FOVI may issue its own debt in the markets.”[148], but for that it is needed that FOVI counts with authorization in its deed of trust and by law to issue debt.

In October of 2001, the Mexican federal government established Federal Mortgage Institution (Sociedad Hipotecaria Federal) thereafter SHF for its Spanish abbreviation, a development bank created to grant credits and guaranties to the financing and construction of preferably low-income housing, and to help to the securitization the credits granted through the financial intermediaries.[149] Since 26 of February of 2002, SHF became the trustee of the FOVI public trust. Before that the trustee was the Mexican Central Bank.[150]

Article 4 of the Law of SHF states that the Institution is entitle, among others, to: (i) accept loans and credits, (ii) issue banking bonds, (iii) operate with securities and foreign currencies, (iii) guarantee MBSs issued by financial intermediaries, (iv) invest in these securities, (v) guarantee housing loans given by financial intermediaries, act as trustee (vi) act as a common representative of the holders of credit instruments representative of housing financing, such as “participation certificates” and “certificados bursátiles”.

In addition, article 4 third paragraph of the implementing regulation of the organic law of SHF (Reglamento Orgánico de Sociedad Hipotearia Federal)[151] states that SHF has also as purpose to promote and securitize financial assets being enclosed portfolios of credits secured with mortgage or guaranty trust originated by financial intermediaries or trusts, and to realize trust operations, mandates and commissions that help to reach its purpose.

The authority in charge to regulate the characteristics of passive operations that imply catchment of resources from the investor public, to trusts, mandates and commissions, operations in the money markets by the SHF is the Mexican central bank.[152]

As we can notice, this Institution has come to fill the gap related to the lack of government warranties that new MBSs need for their introduction to the secondary market and above all when the MBSs are a product not known and not very well trusted by the investors community yet. Mexican MBSs backed by the SHF will enjoy the creditworthiness of the Mexican Federal Government, because SHF is a corporation of majority state participation and it is considered as a Body of the Para-state Public Administration.[153] Related to the loans or credits that SHF accepts, the Mexican federal government expressly backs these obligations, but the new obligations that SHF acquires from the first of January of 2014 will not backed by the guaranty of the federal government.[154]

b) Private originators.

As Mexican private sector mortgage originators we can mention to (i) the Commercial banks and (ii) the Limited Purpose Financial Institutions (Sociedades Financieras de Objeto Limitado) thereafter “SOFOLES” for its Spanish abbreviation. Their legal fundament as financial intermediaries we can find it in the article 103 of Banking Institutions Law, that says that the (1) banks, (2) the Limited Purpose Financial Institutions (Sociedades Finacieras de Objeto Limitado) thereafter SOFOLES and (3) other institutions regulated by law may act as financial intermediaries.[155]

Traditionally, the Commercial banks have been the housing financing originators for excellence in the Mexican private sector, but due to the many economic crisis that Mexico has suffered since 1976, the origination of mortgage credits by banks has been instable[156] and it is not enough to satisfy the always growing demand for housing, above all for the low-income sector of the population.

Instead, the SOFOLES, created in 1993, are non-deposit taking institutions that are suppose to get their financing from the placement of instruments in the secondary market with the purpose of granting credits to a specific activity or sector. This is established in article 103 of the Banking Institutions Law and in their general rules.[157]

In the case of the housing sector, the SOFOLES are playing a big role in the origination of loans secured by mortgage (Hipoteca) to finance low-income housing, due to the funding from FOVI directed to this sector of the population. But the funding is temporal and is intended to originate a portfolio that can be securitized and sold as MBSs to pay off FOVI. It is expected that these institutions, which are formed as corporations (Sociedades Anónimas),[158] get their financing by their own, because they, as corporation privately owned, have a capital stock, are allowed to accept credits from national or international financial entities and have the authorization to collect resources from the issuance of securities.[159]. Their securities issuance shall be registered in the National Registry of Securities and graded by a rating agency.[160]

The authorization to operate as a Limited Purpose Financial Institution is given by the Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público), and among the requirements o get the authorization, (i) their capital stock shall be Mexican in its majority; (ii) they shall be corporations, and (iii) they shall be incorporated in the Mexican territory.[161] The supervision of the SOFOLES is in charge of the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores) thereafter CNBV for its Spanish abbreviation.[162]

Up to date, there exist 18 mortgage SOFOLES in Mexico and they have been very successful[163], they have granted in the mortgage sector 271,973[164] credits to finance mostly low-income housing and their portfolio value is equal to $58,546,757 millions of pesos.[165] Eight of them have already securitized their asset portfilo that consist in Credits backed with Mortgages and Bridge credits. They are “Hipotecaria Nacional”, “Hipotecaria Su Casita”, “Hipotecaria Mexicana”, “Hipotecaria Crédito y Casa”, “Hipotecaria Comercial America Financiamiento Azteca”, “Metrofinanciera” y “GMAC”. They have already issued securities for an amount of 1,300 million of pesos. And it is expected that for this year of 2003 the amount exceeds 10,000 million of pesos.[166]

c) Standardization of mortgage credit origination.

The standardization of documents related to the origination of mortgage credits among different originators, such as the format of mortgage credit contracts, facilitates their analysis in order to gather them together (pool them), to transfer them, to securitize them and rate them.[167] It helps the creation of mortgage credits portfolios formed by mortgage credits originated by different originators,[168]allowing a greater diversification of risk.[169]

By enactment of the Transparency and promotion law for competition in the secured credit[170] ( Ley de Transparencia y de fomento a la competencia en el crédito garantizado), which is federal law and targeted to the housing finance sector, the legislator establishes, not exhaustively, a number of “financial clauses” that every contract of mortgage credit shall have. And by regulatory rules, the Ministry of Finance and Public Credit (Secretaría de Hacienda y Credito Publico) will issue the format for the content and characteristics of such “financial clauses”. In addition, the mortgage credit appliance format and other documents of the appliance procedure will be standardized by rules issued by the Ministry of Finance as well.[171]

Article 8 of the Transparency and promotion law for the competition in the secured credit, (thereafter LTFCCG for its Spanish abbreviation), establishes those “financial clauses” that every contract of mortgage credit shall have. And as “financial clauses”, article 8 lists, among others: (i) Credit amount, (ii) the debt maturity, (iii) interest rate, and (iv) number, periodicity and amount of payments. This does mean that every mortgage credit shall be granted with the same terms or amount, instead it means that this information shall appear in a standardized format in order to let compare easily these terms among the contracts of the different mortgage originators.

The uniformity in the format of “financial clauses” in every contract of mortgage credit, will facilitate their comparison and classification in order to form credit portfolios or pools with similar characteristics in relation to interests rates, credits amounts, maturity, etc. that will be used to back Mortgage Backed Securities The pools with mortgage credits with a long maturity term, will back Mortgage backed securities with a long maturity term, the pools with high return interest rates will back Mortgage backed securities with high return interest rates, and etc.

However, there is one “financial clause” that we consider that could be problematic for the securitization of mortgage credits. That is the “financial clause” referred in article 8-V of the LTCCG, that says that the credit originator shall provide in the contract of mortgage credit his acceptance to an anticipated total payment of the mortgage credit, by the borrower or any other entity, and to assign to this entity all the rights derived from the credit. In securitization, originators transfer their rights to the receivables coming from the mortgage credits to get financing to originate more mortgage credits, and in the event of an anticipated payment, the originator simply will not be able to release the borrower from his obligation because the mortgage credit is affected to back the Mortgage Backed Securities that were issued to finance new mortgage credits.

Article 15 of the LTCCG states that when a mortgage credit is anticipated paid through a new credit granted by other entity or by loan from a third person, but with the purpose of paying the mortgage credit; the entity or the third person will be subrogated by mandate of the law in the rights of the original originator. In consequence, if a credit that is transferred to a SPE to back Mortgage backed securities is anticipated paid, this action will let the securities holders unsecured.

The anticipated payment of mortgage credits in real terms is not very common taking account the actual financial situation of the Mexican economy, but this obligation to accept anticipated payments, even with the creation of commission charges for anticipated payments, represents in our view a risk for the securities holders and it will affect negatively the rating of Mexican MBSs, unless credit enhancement[172] is applied to them, such as their backing by the Mexican federal government, by “stand by” letter of credits issued by a bank, by credit insurance companies, etc.

3. Security interests “in rem” provided to back mortgage credits.

a) Mortgage/Hipoteca.

As we know, the Mexican legal system is “drawn from the civilian tradition of continental European law and specially the Spanish and French models.”[173] “The heart of this tradition is the Civil Code which governs persons and relations between persons and property by setting down a body of rules which lays down the jus commune”[174]

“As a consequence of Mexico’s federal structure, the power to enact private law is given to the states, such that there are 32 civil codes in Mexico, for each Mexican State and the Federal District of Mexico.”[175] “Although there exists, for the most part, uniformity between the different state civil codes (which are largely inspired from the federal District Civil Code)”[176].

“The Mexican Civil Code will contain the rules applicable to property and ownership, the taking of security, and the registration, rank and enforceability of security interests in land”[177].

“Title to property in Mexico conveys unrestricted and absolute rights, in accordance with the principle tenets of ownership under Civil Law, save for standard limitations imposed by zoning or building regulations.”[178] [179] This entitles a borrower to grant a lien over his real state to secure a credit or loan as collateral.[180]. In other words, the borrower of a loan, to buy a house for example, has the right to grant a lien over the house that he bought to secure the loan which enabled him to buy that property.

The lien used by excellence in Mexico over real estate is the mortgage (“Hipoteca”) regulated in every Civil Code of the Mexican States and Federal District of Mexico[181]. By the “Hipoteca” a borrower does not convey title to property, such as in the U.S. “mortgage”, the borrower retains the title to property, and the lien is attached to the property until the loan is paid.. Article 2893 of the Civil Code for the Federal District of Mexico (thereafter C.C.D.F.) establishes that a “Hipoteca” is a security “in rem” “created on assets which are not delivered to the creditor, that grants the latter the right, in the event of default of the secured obligations, to be paid with the value of such assets in the order of preference established by the law”[182].

We consider that the Mexican “Hipoteca” is not the equivalent to the U.S. “Mortgage” if the latest represents a conveyance of title to property. But they could be equivalents if the “Mortgage” is understood to produce a lien against property to secure an obligation.[183],[184]

The mortgage in order to be enforceable needs to meet the next requirements: (1) Be granted in written form before a Notary Public[185], (2) Be file a record in the Public Registry of the Real Estate where the real estate is located[186], stating what obligation is secured by the “Hipoteca” (3) have legal capacity the mortgagor to get into obligations (to have more than 18 years of age or not to have any disabilities) and (4) Enjoy the mortgagor the power to convey the property subject to the lien, that is, to be the owner or to have a “Mandato” which enables him to convey the property on behalf of the owner[187]

Fundamental for the perfection of the mortgage is the filing of a record of it in the Public Registry of Real State where the real estate is located in order to get priority against third parties in the case that the collateral had to be sold to pay the loan. To file this record is very important, because failing to do so, the mortgage could be avoided for other creditors, even though they had liens afterwards created[188], but they had them duly registered.

The priority in the payment of one mortgage against other mortgage over the same property depends upon the date it was recorded in the Public Registry of the Real Estate; no matter if one of the other mortgages was created before, the recording is fundamental.[189]

But the priority of the first in time registered mortgage is not absolute, for example, if the borrower who has given an mortgage over his house to secure a loan and he stops paying taxes related to the property, such as the “Impuesto predial”, the Municipal treasure will have priority to recover the tax owed before the secure creditor can satisfied his debt.[190]

In addition, if the borrower has workers in his service and he owe them their wages, the workers will have priority against any other creditor and any property of the debtor could be sold in order to satisfy their credit.[191] But in our opinion, it could be controversial if certainly in cases of mortgages created because of a mortgage credit the workers are above of the secured creditor, the mortgagee.[192]

Also, in the case of selling the real estate under mortgage to pay the loan that it secures, firstly shall be paid the expenses of the trial, the expenses for the conservation of the real estate and any debt for insurance, if any, before to apply the money to pay the loan secured by the mortgage.[193]

In consequence, given that the mortgage is a security interest that secures his holder again any other creditor, as long as, the holder has a first rank in the recording of liens, and that the legal causes in which a holder (mortgagee) can be superseded by the government or workers in the payment of his credit; may be avoided by means of the investigation of the creditworthiness of the borrower and by means of overcollateralization, we consider that the mortgage is a secured security interest “in-rem” to back mortgage credits expected to be securitized in MBSs.

b) The Guaranty Trust Agreement.

The trust is a contract by which a person (i) designs property of him to a special and licit purpose, (ii) transfers title to that property to a fiduciary institution (trustee) to get the purpose done, and (iii) appoints a cestui que trust (beneficiary person) to get the benefits of the trust.[194]

Three parts intervene in the Trust contract:

1. Trustor (“Fideicomitente”) who is the owner of the property delivered in Trust.

2. Trustee (“Fiduciario”) which could be a Banking institution and it receives the property under Trust.

3.Cestui que trust (“Beneficiario”) who is the one in whose benefit the Trust is created.

The law governing trusts is the General Law of Negotiable Instruments and Credit Operations (LGTOC) which has the character of federal law, meaning that it is binding in the whole United Mexican States. This is important, because in this field exists regulatory uniformity for every trust constituted in Mexico or under Mexican laws.

In the case of the guaranty trusts, the contract of trust is utilized as a security interest to back an obligation of the trustor in the benefit of the Cestui. It works like this: a borrower agrees to transfer title of assets of his estate[195] to a fiduciary institution (trustee) in order to secure an obligation (i.e. a credit backed by a guaranty trust) and its payment priority in benefit of his lender[196]. The borrower becomes the trustor, the fiduciary institution becomes the Trustee and the lender the Cestui (beneficiary). The fiduciary institution (trustee) receives the transfer of title to property of the assets, but the assets form an independent estate from trustee’s estate who receives them under management.[197]

The trustor, in a guaranty trust, does not deliver the physical possession of the property, which could be real estate or movable goods; instead he could agree that in the case of his delinquency in the payment of the loan, the trustee is allowed to sell the real estate in an auction in order to pay off the credit to the lender.

In order to create an enforceable guaranty trust, the next requirements shall be meeting: (1) The trustor shall have capacity to make the transfer of title that the trust implies; (2) the guaranty trust agreement shall be made in written form; (3) In the case of Real Estate the guaranty trust shall be formalized before a Public Notary in a notarized document (Escritura Pública), being valid among the parties since the signature of the contract; and (3) to file a record in the Public Registry of Commerce of the debtors address, in the case that the collateral are movable property, or in the Real Estate Public Registry where the real estate is located in the case where property of this gender is offered as collateral.[198]

The filing of a record of the guaranty trust over real estate in the Public Registry of the Real Estate where the property is located is fundamental for the perfection of this security interest such in the case of the mortgage. By filing, the guaranty trust is published and the interest of the cestui (beneficiary of the trust) obtains its priority over any other lien or guaranty trust that later could be attached over the same property. But the filing is valid since the date it is done, and it does not have any retroactive effect to the date creation of the guaranty trust[199] It is important to say that a duly recorded guaranty trust has priority even over other liens previously created but not recorded.[200]

In May of 2000, through a reform to the LGTOC, the trust section was expanded to add a special section for the guaranty trust. Before of the reform, the guaranty trust had been used widely, but it was not specifically regulated as it is now. This reform has been criticized, because it restraints the parties to freely negotiate the agreement and because a series of provisions that cannot be waived by the parties.[201]

However, the reform has brought some interesting advantages to the use of this security interest over mortgage. Article 347 of the LGTOC which is applicable to the guaranty trust by mandate of article 414 of the same law, states that the creditor secured by a guaranty trust will receive the principal and proceeds of his credit with absolutely exclusion of any other creditor of the borrower. Even better is what is stated in the last paragraph of the same article cited above, it says that when the collateral has been acquired with the credit yields, the priority over that collateral prevails even against labor claims. That means that if a borrower buys a house with the credit granted by the bank or the SOFOL and the credit is backed by a guaranty trust over the house, then the creditor is secured and has priority against any other creditor inclusive workers of the borrower. In the case of the mortgage and with respect to the same situation the law is uncertain in our opinion, but in this case is very clear.

A previous reform of 1996 has changed the traditional rule in the Mexican trust that the trustee is not allowed to be trustee and cestiu (beneficiary of the trust) in the same trust, because it could create conflicts of interest, now a trustee can be cestui in the same trust.

In addition, the reform of 2000 has granted to the SOFOLES, besides banks and other institutions, the authority to act as trustees (instituciones fidiciarias) in the case of garanty trusts created to secure credits in their favor.

Now with those changes, when banks and SOFOLES originate credits to finance housing, they can secure the credits with guaranty trusts being the house financed the collateral for such a security interest. The banks and SOFOLES as trustees and cestui in the same guaranty trust will hold title to property of the real estate and in the event that the borrower fails to pay the credit, they will sell the collateral in public auction to pay themselves the credit.

Nevertheless, the reform of 2000 protects the borrower, as well. Article 412 of the LGTOC establishes a Nonrecourse clause for every guaranty trust. The statute says that in case that the proceeds from the sale of the collateral are not enough to pay fully the loan, the borrower will be realesed from paying the difference, considering extinguished the rights of the debtor to claim the difference. In other words, the borrower is not anymore personally liable in a debt secured by a guaranty trust, the property under trust will be the only one guaranty for lender’s credit. And by provision of the last phrase of the same article, this nonrecourse clause cannot be waived in any guaranty trust. So, it is very important to be aware of this situation in case the credit or loan is to be secured by guaranty trust. For originators banks and SOFOLES this restraint could be solved by means of overcollateralization.

But the introduction of the non-recourse clause to the guaranty trust has not been seen actually as a protection for the borrower, instead it has been designated as the “most important obstacle to the use of guaranty trust agreement as a security interest”[202]. This is so, because of the restraint coming from the non-recourse clause to lenders to only recourse against the collateral given in trust.[203]And if lenders feel unsecured by using this legal figure, they are not going to use it and the legal reform will result useless.

With respect to mortgage, the Civil Code for the Federal District of Mexico (C.C.D.F.F) and the Civil Procedure Code for the Federal District of Mexico (C.P.C.D.F.) do not restraint the lender from recurring to other assets of the borrower, if available, to get his credit paid. Article 2964 C.C.D.F. establishes that debtors respond from their obligations with all their assets. But it does not mean that in any case the non-recourse clause does not exist in mortgage statutes. As we see above, the mortgage is regulated in every Mexican state by their own Civil Codes and every state legislature is free to make the amendments that they may think reasonable and, in concrete, we have found that in the Mexican state of Jalisco, the local Civil Procedure Code has been amended and the non-recourse clause has been introduced to benefit borrowers whose credit was granted to obtain a low or mid income house.[204]

Nevertheless, we consider the new regulated form of guaranty trust as beneficial for securitization, because it allows originators banks and SOFOLES to create a security interest by which they as trustees will receive transfer of title of property from the borrower to secure their loans, and in the event of default they as trustees will dispose of the property to pay off to themselves or to someone else the amount of the loan. Securitization requires good recovery systems in order to show investors quality in credit portfolios and credits secured by guaranty trusts have the advantage that they could be foreclosed without going to trial, if the borrower (trustor) does not oppose it.

c) Enforcement of Mortgage.

In the event that a borrower of a credit secured by mortgage (mortgagor) defaults payments, the mortgage shall be foreclosed by the mortgagee by means of a judicial foreclosure proceeding, contained in the local Civil Procedure Code (Código de Procedimientos Civiles) where the collateral is located. The lapse to exercise this civil action is ten years from the time the mortgagee could legally claim the enforcement of the mortgage.[205]

The procedure to be followed is a special summary procedure called mortgage trial (juicio hipotecario) which is shorter than the ordinary civil procedure and enables the mortgagee to claim payment of his credit through a forced sale of the property given as collateral in public auction, or the mortgagee could become owner of the collateral by appropriation (adjudicación) in the absence of bidders to the auction or by agreement with the borrower at the moment of claiming payment.[206] In such a case the mortgagee, now with character of owner, could sell later the property in private sale. It is to say that appropriation of collateral by the mortgagee is not a self help remedy; the appropriation shall be authorized by Court.

In spite of the mortgage trial is regulated in every civil procedure code in every Mexican state, it does not differ substantially among jurisdictions, it follows a series of steps that are standardized such as (1) filing of a complaint, (2) the filing of a record in the public registry of the real estate where the real estate given as collateral is situated in order to prevent any third party from levying, taking of possession or doing any act that could disturb the proceeding; (3) the service of the complaint, (4) the counterclaim, (5) the offering, acceptance and presentation of proves, (6) the rendering of a judgment and (7) its execution.

“The time required for the mortgage executory procedure (mortgage trial) theoretically should last no longer than 11 months…However, it should be noted that in practice the mortgage executory procedure can last as long as 3 to 4 years”.[207]

d). Enforcement of Guaranty Trust Agreement.

Through amendment published in the Official Diary of the Federation at May 23 of 2000, the Mexican Commerce Code was reformed in order to regulate the legal procedure according to which guaranty trusts are enforced. It is to say that the Mexican Commercial Code is statutory federal law binding in the whole United Mexican States. Therefore, the procedure to enforce guaranty trusts is uniform in every Court, but the jurisdiction to know of these cases as well as other commercial cases has been delegated to States’s Trial Courts that can be specialized or not in commerce law. The specialization in fields of the courts depends on the size of the population where they are located.

The reform to the Commercial Code establishes two proceedings to claim for payment of a credit secured by a collateral given in guaranty trust: Firstly, “the extrajudicial execution procedure of guaranties given by floating lien pledge (Prenda sin transmición de posesión) and guaranty trust”, and secondly, “the judicial execution procedure of guaranties given by floating lien pledge and guaranty trust”.

The extrajudicial execution procedure is followed when there is no controversy among the parties about the enforceability of the credit, the amount claimed and the taking of possession by the trustee of the collateral given in guaranty trust.[208] The proceeding begins with a formal requirement from the trustee to the trustor (borrower) to deliver possession of the collateral that secures the credit. The requirement shall be done through a public Notary.[209]

Once the trustee is in possession of the collateral and its value (price) has been determined by an expert (by a “perito”), the collateral shall be sold in public auction.[210] If the sale price of the collateral is superior to the credit amount and its returns and sale expenses, the trustee will deliver to the trustor (borrower) the surplus that correspond to him. But, if in the first public auction the collateral is not sold, then, every week will be offered again, but with a subtraction of 10% of its minimum sale price until the price of the collateral amounts the same of the credit and its returns. In such a case the trustee will be able to gain title to property of the collateral and to dispose of it freely.[211]

In the event that the trustor (borrower) opposes to deliver possession of the collateral or to the value given t to the collateral by the expert, the extrajudicial procedure will be ended and the trustee will have to claim payment of the credit secured by the guaranty trust and the delivery of possession of the collateral through the judicial execution procedure. In order to initiate the judicial execution procedure there is no need to go first for the extrajudicial procedure; the trustee is free to go directly to the judicial execution procedure.[212]

The judicial execution procedure is a special commercial trial designed exclusively to claim for payment of a credit secured by floating lien pledge or guaranty trust and to obtain possession of the collateral given in such security interests.[213] It begins with the filing of the complaint, followed by the formal requirement to the trustor (borrower) by the authority to pay the defaulted credit and, failing to do so, to deliver possession of the collateral to the trustee.[214] For the case of real estate given as collateral, that is the case in which we are interested, the borrower will be left in the possession of the property until the judgment, if the borrower agrees to possess the real estate as depositary.[215]

The borrower, after the requirement of payment and delivery of the possession of the collateral, will have a term of five days to present his counterclaim and oppose all the defenses that he may have.[216] After that, the judge will cite the parties to a hearing where the proofs, offered at the moment of filing the claim and counterclaim respectively, will be presented, the parties will have the opportunity to present oral arguments and finally, the judge will render his judgment.[217]

The judgment will declare the payment of the credit through the collateral given as security interest. In the case of real estate, the borrower will be ordered to deliver the possession to the trustee. The trustee, once in possession of the real estate, will proceed according to article 1414 bis 17 of the Commercial Code in benefit of the cestui (lender beneficiary of the trust) of the guaranty trust:

If the value of the real estate is equal or less to the credit amount, the borrower will be released of his obligation according to the nonrecourse clause and the trustee will be able to dispose freely of the collateral,having the possibility to sell it in a private sale.

If the value of the real estate given as collateral is higher than the amount of the credit, the collateral will be sold in public auction and the borrower will receive the surplus in his favor. But, as it was explained above when talking about the extrajudicial execution procedure, if the collateral is not sold in the first offering, it will be offered weekly with a discount of its price of ten percent in every time that it appears in auction. In the event that the collateral’s price falls until the value of the credit, the trustee will be entitled to gain title to property of the collateral and to dispose of it freely.

In addition, it is important to comment that the action of a lender secured by a guaranty trust to claim payment of the loan can be avoided because of its lapse, if it is not intended during the term of three years counted since the moment the loan could be enforced. In this case, the lender will lose his right to claim the payment of the loan and the borrower will have the right to take back the property under trust to his estate.[218] Then, for the case of housing finance, if a trustee in a guaranty trust in case of delinquency in the payment of the borrower, does not claim the payment and does not begin the extrajudicial or judicial execution procedure to foreclose the guaranty trust, the trustor (borrower) will be release of his obligation to repay the loan and the real estate given as collateral will be taken back to the borrower’s estate.

This reform intended to introduce regulation by statute to the foreclosure of guaranty trusts has limited to the parties the freedom to decide by agreement the procedure to follow in the event that the borrower falls into delinquency of the loan, as it was before of the reform. Carlos Aiza Haddad expresses that before the reform “upon the occurrence of default, the trustee would simply sell the assets that it received and apply the proceeds of that sale toward payment of the secured obligation. Thus, the case was clean-cut and the court system would not intervene in a foreclosure”.[219] Now, the law establishes under what specific circumstances the foreclosure has to be extrajudicial or judicial, giving to the parties no margin to decide. But, as it was before the reform as it is today, court intervention cannot be avoided if one of the parties feel that his rights has been diminished, such as the right of due process, or oppose resistance to the delivery of the collateral given as security. Even before the reform, the trustee was not entitled to just take possession of the collateral and sell it in private sale, such as the case of the self-help remedies.

We consider this foreclosure reform beneficial to securitization, because now the foreclosure procedure for guaranty trusts has been standardized, giving to portfolios of credits secured by guaranty trusts a uniform and predictable foreclosure procedure that can be used in the rating of MBSs backed by this security interest called guaranty trust. In the event that every originator would negotiate or design the foreclosure of its guaranty trusts, there would be discrepancies among the loans secured by the guaranty trusts and there would be difficulties in pooling together those credits, because of the discrepancies.

However, article 83 of the Banking Institutions law allows banking institutions to agree with their borrower to a consensual foreclosure procedure for guaranty trusts, and the extrajudicial and judicial execution procedures mentioned above will be applied in the absence of such a conventional procedure.

4. Transfer of the secured Credits from originator risks (Isolation process)

Assignment of Rights.

Fundamental for a Securitization is the transfer of the loan secured by mortgage or guaranty trust to a Special Purpose Entity (SPE)[220]in order to isolate it from the originator ‘s risks that could jeopardize punctual payments to the investors of MBS’s. In the event that the originator falls into Bankruptcy, his creditors would not vacillate in trying to consolidate into the originator estate the accounts receivables coming from the origination of mortgage credits, in order to affect them to the payment of all their credits. Through the transferring of title to property of the accounts receivables to a SPE, the accounts receivables leave the estate of the originator and become part of the estate of the SPE for the benefit of the MBSs investors. However, in cases of insolvency of originators, it is foreseeable that their creditors try to void such transfers to SPEs and therefore, it is very important that the transfer of assets to the SPE represents a true sale where the transferred assets stay secure from such contingencies and affected to back the MBSs.

In addition, by transferring the mortgage credits from the originator to an SPE, the rating of the Mortgage Backed Securities issued, may be higher than the rating of the originator of those assets. In other words, a transaction with assets of an entity are graded better that the entity in itself[221], because of the risks inherent to it, such as bankruptcy.

In the U.S. the transfer of the loans secured by mortgages is done through “true sale” of those assets to the SPE, and it should be structured very carefully in order to survive the claims of a trustee in the case of Bankruptcy of the Originator. In Mexico, as a Civil Law Country, the transfer of property is regulated by the Civil Code and more specifically, the statutes related to the transfer of credit rights rest in the Law of the Obligations (“Derecho de las Obligaciones”), which establishes the legal figure of the assignment of rights (“Cesión de derechos”) as the vehicle to transfer credits.[222]

We consider that the assignment of rights regulated in all the Civil Codes of Mexico has an equivalent effect to the U.S. “true sale” in relation to the transfer of credit rights backed by mortgages, because the assignment of rights is a transfer of property contract and it is not for free, in spite it could be. With the assignment of rights contract, the loans secured by mortgage leave the estate of the originator and he receives a payment, that in the case of securitization, the price will be paid through the placement of the MBS’s with the investors. The originator transfers without recourse of any kind.

Under the Mexican civil law legislation, the creditor has the right to assign his right to a third party, unless the assignment if forbidden by law, the parties agreed to not assign the credit or the nature of the right does not allow its assignment.[223] And in general terms, assignment of credits includes all its accessory rights, such as mortgage, guaranty trust, pledge, bailment, etc[224]

The credits (or rights to payment) to be transferred in our context of securitization for the purpose of housing finance will be credits secured by mortgage and by guaranty trust over the real estate that the borrower has acquired or renovated with the proceeds of the credits.

For the case of mortgage, the Civil Code expressly regulates the assignment of credits secured by mortgage through article 2926 of the C.C.D.F.; but for the case of guaranty trust, the General Law for Negotiable Instruments and Credit Operations (LGTOC) is silent in respect a specific rule about the transferring of a credit secured by guaranty trust. But, by analogy we can determine that the rules for the assignment of a credit secured by mortgage apply to the assignment of a credit secured by a guaranty trust over real estate, as well. This is so, because the LGTOC applies the Civil Code legislation with respect to the creation of guaranty trusts over real estate. It provides that guaranty trusts over real estate shall be notarized and registered in the public registry of the real estate where the collateral is located, as in the case of mortgages. Then, the same reason to make use of the civil law legislation shall prevail in the assignment of credits secured by guaranty trusts over real estate.

But, we do not have to appeal only to analogy interpretation to consider that the specific statute for the assignment of credits secured by mortgage applies to the assignment of credits secured by guaranty trusts over real estate, as well. Article 2 of the LGTOC, which regulates guaranty trusts, states that in the defect (omission or uncertainty) of this law, the legislation applicable in a successive order is (1) the other related special laws (such as the banking institutions law), (2) the Commercial Code, (3) the banking or commercial uses; and (4) the civil legislation, specifically, the Civil Code for the Federal District of Mexico (C.C.D.F.).

Therefore, we consider, for the purpose of securitization, applicable to the assignment of the secured credits by mortgage and guaranty trust, the Civil Code for the Federal District of Mexico and more specifically its article 2926 amended by decree published in the Official Diary of the Federation (D.O.F.) at May 24 of 1996.

Article 2926 C.C.D.F. establishes that a credit secured by mortgage in order to be assigned, the formalities for its constitution shall be accomplished, plus the advise to the borrower of such a transfer and the filing of a record in the Public Registry of the Real Estate where the real estate is located. In other words, this article imposes to the transfer of each loan secured by mortgage: (1) to go before a Public Notary to get the transaction notarized, (2) to show the legal capacity to make the assignment, (3) to have it recorded in the Public Registry of the Real Estate, and (4) to advise the borrower about the assignment judicially or extra-judicially, before two witnesses or a Public Notary.[225]

But for this general statute has an exemption which makes Securitizations easier in Mexico: It consists in the amendment to the article 2926 C.C.D.F. cited above, and by which two paragraphs has been added to the article that can be read as follows:

“(The Mexican banking system institutions), while acting on their own behalf or as trustees, other financial enterprises, and social security institutions may assign their credits secured by mortgage (“Hipoteca”) without notice to debtor nor a public notarial instrument and without recording in the Public Registry as long as the assignor (originator) shall continue to administer (service) the credits. If the assignor stops administering the credit, the assignee need only notify the debtor in writing.

In case of the two preceding paragraphs, the recording of the mortgage(/Hipoteca) in favor of the original mortgagee shall be deemed to be in favor of the assignee(s) referred to therein, who shall have all the rights and causes of actions derived therefrom.”[226]

In consequence, now it is permitted to (i) banks, as trustees or by their own, (ii) to financial enterprises such as the Limited Purpose Financial Entities (SOFOLES) and to (iii) public social service institutions, such as INFONAVIT, FOVISSSTE; to assign credit obligations secured by a mortgage without the general formalities for someone else that we read above, as long as the originator continues to service the credits assigned.

If the originator stops servicing the loans, the new servicer needs only advise the borrower in writing about the change in the servicing.[227] The Author Wendy Vargas states that a borrower could waive his right to receive this notice at the moment of the creation of the mortgage (“Hipoteca”)[228]. We do not share her view, because article 2926 does not say that this right is subject to a waive of it by the parties, as it says for other cases, and also, article 2040 C.C.D.F establishes that unless the borrower is advised by the assignee, he will be released of his obligation by paying to the original creditor, and article 2041 C.C.D.F. says that once that is done the advise, the borrower is released from his obligations by paying to the assignee.

In addition, the amendment to article 2926 C.C.D.F., last paragraph, states that in the case of assignment of credits secured by mortgage, the priority in the rank of liens is preserved to the benefit to SPE assignee, as he had been the original originator.

Therefore, this amendment is very important to reduce costs and time constraints relating to the assignment of credits secured by mortgage. In the absence of such amendments, every mortgage in order to be assigned it should have to be “individually notarized” and recorded in the Public Registry of the Real Estate[229]; and taking into account that the assignment of credits for the purpose of securitization is massive, then, it is clear that such a burden implies a considerable cost in time and money, because the public notary fees are high and the recording procedure in the public registry of the real estate is slow.[230]

However, this amendment only benefits securitization of credits secured by mortgage which takes place in the Federal District of Mexico, and if the benefits of securitizations are intended to be for the whole Mexico, every single Civil Code of each State shall be amended in the same way in order to avoid these costs to securitizations intended nationwide. We have notice that 27 of the 31 State’s Civil Codes of Mexico have been amended in this way[231], but all of them are needed in order to avoid low ratings of Mexican’s MBSs because of the lack of uniformity in this aspect, and also to bring this method of financing to the whole country, because de home deficit is found in every State.

With respect to the assignment of credits secured by guaranty trust over real estate, the adoption of this reform by the complete states of the Mexican republic is not necessary, because in their case is applicable only the Civil Code for the Federal District of Mexico, as it was already explained above.

5. Special Purpose Entity.

As in the United States, in Mexico trusts and Corporations are used to act as SPEs. Trusts are known in Spanish Mexican Legal terminology as “Fideicomiso(s)” and Corporations as “Sociedad(es) Anónima(s)”.

To get bankruptcy remoteness from the originator is the purpose of using a Special Purpose Entity or Vehicle to structure the securitization transaction.[232] The assets that back the securities shall be safe in an entity which purpose is to keep those assets away from originator estate’ risks for the benefit of the securities’ investors. Investors in order to invest their money in asset backed securities want to have certainty that they are going to be paid no matter what happens and that they have a first security interest in those assets in the case that the assets are sold to pay the securities. They want the assets being hold by an entity or vehicle separated from the originator estate in order to secure that the originators do not compromise the same assets in other transactions or that a trustee in the case of bankruptcy of the originator might bring the assets into the bankrupt’s estate and leave the investors unsecured in the payment of their securities.

The originator in order to isolate the assets from its estate sells them to an SPE or vehicle. In Mexico the sale takes the legal form of an assignment of rights from one creditor (the originator) to a new one (the SPE).

a) The Trust as Special Purpose Entity.

The trust (Fideicomiso), included in the General Law of Negotiable Insruments and Credit Operations (LGTOC) since 1932, “has been used as SPE in some of the asset securitizations done in Mexico, such as the case of highways cuotas”.[233]

Its principal advantage comes from its flexibility, “all of its operations can be set forth in the trust agreement”.[234] “The scope of the activities of the trust, as well as the responsibilities of the trustee can be clearly specified. In respect of management of the cash flow and generation of information, the trust agreement may provide very clear instructions to the trustee.”[235]

As trustees only can act financial institutions and, among them, the banking institutions (commercial and development banks) are the most used for this purpose, “although the law permits a securities firm (“casa de bolsa”) to act as a trustee for a trust that holds securities.”[236]

But, the Mexican trust has been criticized as unsuitable for complex securitization transactions because of the lack of regulations for the issuance of securities (debt instruments) by trusts[237]; and because the trust respond to its liabilities with only its own trust assets, that is, the fiduciary property (the property given in trust), so the MBSs issued by a trust will not give rise to a recourse against the originator in case of insufficiency of the assets backing the MBSs.[238]The fiduciary property is all what the investors have as collateral.

In the case of the first constraint, debt instruments issued by trusts is now permitted through the issuance of “Certificados bursátiles”, referred below; and about the problem of the non-recourse against the originator or trustee, “this should not be a real problem since over collateralization and other means of credit enhancement may resolve this apparent constraint.”[239]

Related to the instruments that may be issued by trusts, the LGTOC contemplates the emission of “Participation Certificates” (Certificados de participación) which are credit instruments that represent a share (parte alícuota) of the property under trust. Then, because of their nature, the Participation certificates are equity instruments and not debt instruments.[240]

And by recent amendment to the stock market law (“Ley del Mercado de Valores”)[241], articles 14-6 bis, 14-7 bis and 14-8 bis contemplate the newly created credit instrument called “Certificados bursátiles” that can be issued by (1) Corporations, (2) government entities, (3) States and municipalties and (4) financial entities when they act as trustees.

“Certificados bursátiles” are debt instruments created to be traded in the stock markets, and when they are issued by trusts created for the purpose of issuing securities, the “certificados bursátiles” are backed by the property that has been transferred to the trust. The trust shall be characterized as irrevocable.[242]

Both, Participation Certificates and “Certificados bursátiles” shall have with certificate holders’ common representative who shall sign the certificates issuance and must declare that he has verified the constitution and existence of the property affected in trust and he is aware of all his obligations and entitlements.[243]

With respect to bankruptcy, trust are not subject to bankruptcy laws, “because trust are contractual arrangements and not recognized legal entities , it is unlikely that a trust could be subject to the bankruptcy laws.”[244]

b) Corporations as SPEs.

The principal advantage of using a corporation (“Sociedad Anónima”) as SPE is that “the corporation is not restricted as to the type of instruments that it may publicity issue”[245] “As a result, the corporation could issue short or long term debt instruments as well as enter into special contractual arrangements for the transfer of cash flows, such as participation agreements”[246]

However, the use of a Corporation to act as a Special Purpose Entity could be problematic for investors due to the fact that Corporations are subject to bankruptcy law whereas trusts are not, and because there is a difficulty “in isolating a pool of assets from claims of other security holders where different residential MBSs are issued by the same corporation”[247]

With respect to the bankruptcy issue, it could be solved by limiting the activities of the corporation at the moment that it is created in its bylaws, for example it could be not allowed to borrow funds or to dispose of the property granted to secure the securities.[248] With respect to the other concern, it should not be a problem neither, at the moment to issue the securities; it could be determined specifically which assets back them and create a guaranty trust in favor of the security holders with those assets as fiduciary property to secure the payment of the securities.

The SOFOLES as it was stated above are corporations and they may act as generators and as SPE’s[249]. They are supposed to originate mortgage credits through financing obtained from the placement of MBSs in the secondary market. As SPEs the SOFOLES gather the mortgage credits together into portfolios, transfer their rights over the mortgage credit to a guaranty trust in order to isolate them from their risks as originators subject to bankruptcy, and then the SOFOLES issue the MBSs.

It is to say that the issuance of the credit instrument “Certificados bursátiles” is available to corporations as well.[250] The SOFOLES may issue their MBSs through through this debt instrument.

6. Banking secrecy reform.

In 1996 took place in Mexico another important amendment for the development of Securitization, it is about Bank secrecy. Article 93 of the banking institutions law was amended in order to allow banking institution, in the case of credits to be transferred, to share information about its customer credit operations.[251] This is intended to facilitate the access to credit information needed to analyze credits secured with mortgages or guaranty trusts for its gathering in pools to back MBSs.[252]”Moreover, potential investors must have available to them information at relatively low cost about the issuers of the securities and borrowers”.[253]

7. Issuance of MBSs and their Investors.

a) Issuance of Securities.

“Apparently some Mexican securitization transactions through trusts involved the use of ordinary participation certificates (“CPOs”) as security instruments. The nature of this instrument, will have to be considered in light of possible restrictions on foreign equity investments in Mexico in order to ensure that these CPOs will be legally available to foreign capital markets”[254]

According to article 11 of the Stock Market Law (Ley del Mercado de Valores), only instruments recorded in the National Registry of Securities (Registro Nacional de Valores) can be offered publicly in order to be traded in the public securities market. If the MBSs are intended to be sold by public offer, then this requirement shall be accomplished.[255] The same article establishes that if the securities are intended to be sold publicly abroad is subject to the same requirement of recording, as well. (debe haber una circular de la CNBV respecto de la emisión de valores respaldados por activos hipotecarios) ( tambien debe haber reglas acerca de la suscripción o venta de valores mexicanos en el extranjero.)

“Securities include stocks, bonds and other instruments that grant their holders credit rights, property rights or participation in the capital stock of a corporation or other legal entity”.[256] “The procedure to register securities with the (National banking and securities commission) CNBV are generally the same regardless of the nature of the issuer or the type of security being offered. However, for specific types of securities (such as commercial paper) the CNBV has put forth circulars that provide more specific guidance. It should be noted that there is no such circular for CPOs, which instead have been issued under the general guidelines applicable to equity securities”.[257]

The issuance of Participation certificates shall be notarized, authorized by the CNVB as well as be evaluated by the Mexican development banks “Nacional Financiera, S.N.C. or by “”Banco Nacional de Obras y Servicios, S.N.C.[258]

b) Investors.

The targeted groups of investors for MBSs are “institutional investors” and especially the Inversion Entities Specialized in Pension Funds (“Sociedades de Inversión especializadas de Fondos para el Retiro”) thereafter SIEFORES for its Spanish abbreviation. They are in charge of investing resources coming from workers pension funds.[259] Their purpose is to invest the workers resources in secure and profitable instruments as well as to increase internal savings and to develop a long term instruments market according with the pension system.[260] Among the targeted sectors where the pension funds are encouraged to invest, it is the housing financing sector.[261] The inversions are done by acquiring securities, among other instruments, that shall be graded by internationally recognized rating agencies.[262]

According to the investment special rules for the SIEFORES (“Reglas generales que establecen el régimen de inversión al que deberán sujetarse las sociedades de inversión especializadas de fondos para el retiro” [263]), the long term Mexican securities, in which the SIEFORES may invest, shall have a grade from “AAA(mex)” (Fitch Mexico). “Aaa.mx” (Moody’s) and “mxAAA” (Standard And Poor’s) to “A-(mex)” (Fitch Mexico), “A3.mx” (Moody’s) and “mxA-“ (Standard and Poor’s).

Therefore, MBSs issued, no matter by which entity or institution, shall be graded by a recognized rating agency, and get the grade, specified above, in order to be able to be sold to a SIEFORES.

8. Actual process of securitization in Mexico.

Private originators, banks and SOFOLES, but specially SOFOLES are the pioneers of mortgage securitization in Mexico. The actual process of securitization of mortgage credits secured with mortgages and guaranty trusts begins with the origination of those credits.

Once the SOFOLES have originated enough mortgage credits, the next step is gather together all the mortgage credits with similar terms of maturity, interest rates, credit amounts, type of security interest (mortgage or guaranty trust), etc. to create uniform portfolios of mortgage credits. With the enactment of the Transparency and promotion law competition in the secured credit, it is provided that the “financial clauses” of the mortgage credits will be standardized, helping the creation of mortgage portfolios of credits coming from different originators.

Having the portfolios classified, the originators shall transfer their rights over the mortgage credits to a Special Purpose Entity in order to isolate those assets from the originators risks, especially bankruptcy. The transfer is made through the legal figure of the assignment of rights, that is a conveyance contract (“contrato traslativo de dominio”) by which the assets leave the originators estate.

The Special Purpose Entity is the entity that will hold title to property of the mortgage credits and will issue the Mortgage backed securities backed by the mortgage portfolios that it received. It should be determined which portfolio backs which issuance in order to avoid confusions. In the case of SOFOLES, they are able to act as originators and as Special Purpose Entities, so they will not have to assign their mortgage credits to a third entity (and they can purchase portfolios from other originators ?.) But, in order to reach the isolation of originators risks’s goal, the SOFOLES need to create guaranty trusts in benefit of the bond holders of the securities. Every portfolio destined to back determined issuance of Mortgage Backed Securities should be affected to a guaranty trust where the portfolio leave the estate of the SOFOLES and form part to an independent estate made to secure the rights of the bondholders. By means of the guaranty trust, the portfolio is isolated from the originator business and it will give to the trustee a first security interest over the mortgage credits contained in the portfolio in benefit to the bondholders. In addition, at the moment of originate the credits and their security interest “in rem”the SOFOLES could name the trustee of the guaranty trust created to back the bonds as the mortgagee in the mortgages or as cestui que trust (beneficiary) in the guarant trusts created as security interest to back the mortgage credits.

The SPE will issue securities that will be backed by one or more mortgage portfolios. The issuance is likely to be through “Certificados bursátiles” which are debt instruments. Previously to the offering of the Mortgage backed Securities, they have to be graded by a rating agency and recorded in the National Registry of Securities (“Registro Nacional de Valores”).[264]

Once the securities are recorded, the they will be graded by a internationally recognized rating agency, such as Moody’s, Fitch and Standard and Poor’s. If the MBSs obtain the grade required by institutional investors’ regulation to invest in securities, the the MBSs will be sold to institutional investors such as the SIEFORES and with the income obtained by the placement of the securities, the originator recover the value of the mortgage portfolios in order to finance more origination of credits and securitize them, as well. The profit for the banks or SOFOLES originator is not anymore do intermediation between depositors and mortgage borrowers, instead the profit will come from commissions charged by credit origination (paid by the borrowers) and the commission charged by servicing the credits (paid by the investors).

It is to say that “the transactions are not peso-denominated, adding to their security. They are denominated in Unidades de Inversión (UDIs), which are investment units that indexed to inflation, thus maintaining the value of the debt in real terms regardless of inflation in that country.” UDISs are not stable as the dollar but are much so than the peso.”[265]

IV. Conclusion.

The legal regime for securitization in Mexico is moving forward, every change in the correspondent laws is solving the problems that previously faced securitization for its introduction to the Mexican financial and legal system.

However, there is still work to do in order to adopt this financial technique and develop the secondary mortgage market that we need to finance our housing deficit. In the field of the origination of credits, it is required that not only the credits appliance forms, some documents and the mortgage credit contracts are standardized, the standardization of mortgage credit servicing is very important as well. In the event that one originator is required to stop servicing a portfolio of mortgage credits, because have bankruptcy problems, strike, or other problems; there should be a quick and effective substitution of servicer in order to not delay the income cash to the bondholders. Rating agencies take into account the circumstance when grading issuance if securities, and if a good grade is desired for the Mexican MBSs, this should be taken into account.

INFONAVIT and FOVISSSTE are still the major mortgage originators in Mexico, and curiously their laws and regulation are not changing in order to allow these workers funds to modernize and look for extra funding sources for the benefit of workers. Up to date, it is difficult to workers to access to these credits, because there is a lot of demand and the requirements are cumbersome, and they are allow to get just one credit in their lifetime. With securitization, these institutions would get cheap and more financing to raise their credit offering. We suggest first, that these entities, as governmental entities, come together and agree to standardize their formats and servicing methods, second, that these entities improve the quality of their portfolios by granting credits transparently and by servicing properly, not allowing unjustified delinquencies and third, that the laws and regulations of these entities are amended in order to allow them by their own or indirectly to issue securities backed by their portfolios.

There is no doubt that the most important of the most recently efforts to bring securitization into Mexico, is the creation of National Mortgage Society (“Sociedad Hipotecaria Federal”). This development bank will issue, buy and back Mortgage back securities. It was created specifically to develop the secondary Mexican mortgage market. It is expected that this agency became as the “Mexican Fannie Mae”

With respect to the securities interest “in rem” that Mexican law provides, our legislation has been enriched by regulating the already existing guaranty trust. Now, this special figure represents a security interest that Banks and SOFOLES, among others may use to create a security interest administered by them that could be enforced in a out- of- court proceeding. But, it is to say that this figure do not represent a self-help remedy as known in the American Legal system, the out-of-court proceeding depends a lot in the good cooperation of the borrower, any difference with respect to the debt, the proceeding shall be taken to the court.

The transfer of credit mortgage to an SPE in order to isolate them from the creditor’ risks, it is done in Mexico, through the legal figure of the assignment of rights, we consider that have an equal effect that the “True sale” in the United States, because the assets leave the estate of the originator and there is no recourse from the investors against him.

It is still pending that the reforms to the civil legislation in order to allow transfer of credits secured by mortgages without the expensive and time consuming general formalities, are enacted by the total of the civil codes in Mexico in order to facilitate securitization nationwide. With respect to credits secured by guaranty trust, we consider that the Civil Code for the Federal District applies to them by means of analogical and suppletory interpretation, allowing that the new transfer rules for assignment of credits secured by mortgage apply to them notwithstanding where the credits were originated.

With respect to the issue that in Mexico trusts were not able to issue debt instruments, the legislator amended the stock market law in order to let trusts to issue “certificados bursátiles”, which are debt instruments in addition to the already in use Participation Certificates (“Certificados de Participación”).

In consequence, we consider as positive the legal development that is having the introduction of securitization in Mexico, but not ended. Securitization is just beginning and the changes are going to be tested in practice, and they will be improved.

---

[1] Yuliya A. Dvorak, Student Author, Transplanting Asset Securitization: Is the Grass Green Enough on the Other Side?, 38 Hous. L. Rev. 541, 545 (2001).

[2] Baxter Dunaway, The Law of Distressed Real Estate, 4 L. Distressed Real Est. § 56:2

[3] Arthur S. Katz, Latin Finance, p. 1.

[4] Id.

[5] Robert Dean Ellis, Securitization Vehicles, fiduciary duties, and bondholders’ rights, 24 J. Corp. L. 295, 300 (1999).

[6] David Alan Richards, “Gradable and Tradable”: The Securitization of commercial real estate mortgages, 16 Real Est. L.J 99. (1987)

[7] Dunaway, supra no 2, at 56:11.

[8] Paula C. Murray and Beverly L. Hadaway, Mortgage-Backed Securities: An investigation of legal and Financial issues, 11 J. Corp. L. 203, 13 (1986)

[9] Id.

[10] 328 U.S. 293, 298-299 (1946).

[11] Paula C. Murray and Beverly L. Hadaway, supra n. 8 at 13

[12] Id.

[13] Erica W. Stump, Securitizations in Latin America, 8 U. Miami Bus. L. Rev. 195, 198 (2000).

[14] Dunaway, supra n.2, at § 56.5.

[15] Arthur S. Katz, supra n. 2, p.2.

[16] Id. The author cited: Stuart M. Salins et al., "Alternative Strategies to a Public Distribution of Commercial Mortgage-Backed Securities" in Jess Lederman, Handbook of Commercial Mortgage Finance: Primary and Secondary Markets 247 (Mortgage Bankers Ass'n of Am. 1997).

[17] Id. at § 57:3.

[18] Erica W. Stump, supra n. 13 at 199.

[19] Robert Dean Ellis, supra n. 4, at 300-301.

[20] Id..

[21] Dunaway, supra n.2, § 57:3.

[22] Tamar Hahn, Mexico: Securitization is Here to Stay, Asset Sales Rep. Int’l, July 31, 2000, available at 2000 WL 4069513.

[23] Id.

[24] “Befote the existente of aset-backed securities or securitization, the full risk of lending resided solely with the bank making the loan. Bankers would sell shares in the bank to investors worldwide. These investors bore only a minor portion of the risk of the loan. By contrast, through securitization, if a malor borrower becomes insolvent, that business is probably just a $ 1,000 mortgage-backed bond handled by some portfolio manager, where the rest of this portfolio remains unaffected.” See Guadalupe Ornelas. Paving the way, p. 1735.

[25] Id.

[26] Dunaway, supra n.2, at § 56:6. The author cites: Lois R. Lupica, Asset Securitization: The Unsecured Creditor’s Perspective, 76 Tex. L. Rev. 596, 610 (1998).

[27] Dunaway, supra n. 2, at § 56:7.

[28] Id. at § 56:9

[29] Id.

[30] Arthur S. Katz, supra n. 2, p.3.

[31] Id at 2-3

[32] Erica W. Stump, supra n.13, at 200.

[33] Dunaway, supra n.2, at § 56:2. The figure is takes from the same source.

[34] Id. Including the figure as well.

[35] Arthur S. Katz, supra n. 2, p.2.

[36] Id.

[37] Id

[38] Id.

[39] Murray and Hadaway, supra n.8, at 13.

[40] “These loans may or not have been originated with the expectation of being securitized”. See Dunaway, supra n. 2, at § 56:14.

[41] Also known as the transferor or Sponsor.

[42] Dunaway, supra n. 2, at §56:2.

[43] The Issuing of the securities do not have to be directly, it could also be done by a government agency as Ginnie Mae or through a private conduit. See Murray, supra n.2.

[44] Robert Dean Ellis, supra n 4, at 300.

[45] Dunaway, supra n. 2, at § 56:2.

[46] Id.

[47] Joseph C. Shenker & Anthony J.Colleta, Asset Securitization: Evolution, Current Issues and New Frontiers, 69 Tex. L. Rev. 1369, 1378 (1991)

[48] Dunaway, supra n. 2, at

[49] In the U.S. the SPE are usually structured as private trusts, see Yuliya A. Dvorak, supra n.1, at 559.

[50] Dunaway, supra n. 2, at § 56:2.

[51] Id.

[52] Id.

[53] Dunaway, supra n. 2, at § 56:9.

[54] Id.

[55] Id.

[56] Id.

[57] Id.

[58] Id.

[59] Id. at § 56:14.

[60] Dunaway, supra n.2 at § 56:23.

[61] Erica W. Stump, supra n. 13, at 202.

[62] Murray and Hanaway, supra n. 8, at 206.

[63] Id. at 207.

[64] Dunaway, supra n. 2, at § 56:19.

[65] Jorge Siegrist Prado & Luis Dantón Martínez Corres, Consideraciones respecto de la bursatilización de los créditos hipotecarios en México, in Estudios de derecho bursátil en homenaje a Octavio Igartúa Araiza, 493, 499 (Editorial Porrúa, 1997)

[66] Dunaway, supra n 2, at § 56:19.

[67] Murray and Hanaway, supra n. 8, at 207.

[68] Id.

[69] Id.

[70] Id. at 208.

[71] Dunaway, supra n. at § 56:19.

[72] Id.

[73] Murray and Hadaway, supra n. 8, at 208.

[74] Id..

[75] Id.

[76] Id, at 208-209.

[77] Dvorak, supra n. 1, at 548.

[78] Dunaway, supra n. 2, at 56:19.

[79] Murray, supra n. 8, at 210.

[80] 11 U.S.C. § 362 (1982). See Murray and Hadaway, supra n. 8, at 214.

[81] Murray and Haddaway, supra n. 8, at 218.

[82] Id. at 218-220.

[83] 11 U.S.C. § 362(d) (1) (1982). See Murray and Hadaway, supra n.8, at 218.

[84] Section 547(b) Bankruptcy Code.

[85] 11 U.S.C. § 5478(b) (5) ; See Murray and Hadaway, supra n.8, at 218.

[86] Murray and Hadaway, supra n. 8, at 218.

[87] Id..

[88] “In general terms, bankruptcy aims at an equitable, ideally a pro rata, distribution of assets among creditors. However, valid and enforceable secured claims generally must be satisfied dollar for dollar and to this extent secured claims undermine the equitable distribution goal” William Boyd, The complete article nine, 230.

[89] Murray and Hadaway, supra n. 8, at 215.

[90] Carlos Aiza Haddad, The Securitization of Assets in Mexico, 7 U.S.-Mex. L. J. 141, 144 (1999). “The rationale behind this true sale concept is that the ultimate investor Hill need to look at the assets that are held (in property) by that SPV, and in particular, to the cash flows that Hill arise from those assets. The investor will not be relying on direct recourse against the assets of the originator of the loans.”

[91] Dunaway, supra n.2, at § 56:24.

[92] Id.

[93] Id.

[94] Id.

[95] Id.

[96] Id.

[97] Dunaway, supra n. 2, at § 56:25.

[98] Dunaway, supra n. 2, at § 56:25

[99] Id. at § 56:35.

[100] Id.

[101] Id. “Notwithstanding the terms of a written agreement, a court sitting in equity may look to the practices, objectives, relationship, and intention of the parties in determining the true meaning of a document”.

[102] Id.

[103] Dunaway, supra n. 2, at § 56:37.6.

[104] Id., at § 56:24 and § 56:28.

[105] Id., at § 56:26.

[106] Id., at § 56:27.

[107] Id.

[108] Id., § 56:32.

[109] Id.

[110] Id.

[111] Id., at § 56:32.

[112]Id., at § 56:38.

[113] Id.

[114] Id.

[115] Euromoney, Mexico Preps. For Fannie Mae, Latin Finance, (November 1, 2002). (available at www.securities.com )

[116] Tamar Han, Country profile: Mexico: Securitization is here to stay, 7/31/00 Asset Sales Rep. Int’l (pg. Unavail. Online) 2000 WL 4069513. “We are about to see a real domestic securitizaton market,” said Eugenio López from Fitch in Mexico. “But before that happens issuers and investors need to get more familiar with the instrument. It is happening, the market is maturing but it will not happen overnight”.

[117] Stump, supra n. 14, at 204.

[118] Id., at 206.

[119] Id.

[120] Id.

[121] Jorge Siegrist Prado & Luis Dantón Martínez Corres, supra n. 55, at 497.

[122] Legal and Regulatory Obstacles to Securitization in Mexico,- An Analysis, prepared by the Ministry of Finance and Public Credit (Hacienda), the National Banking and Securities Commission and the Mexican Central Bank (1999)

(available at http://www.securitization.net/international/latinamerica/mex_LeRegMex.asp p. 4

[123] Id at p. 4.

[124] See Standard and Poor’s, Securitization in Latin America 2000, at 15-16. “(Mexican) government estimates put the deficit at close to 3 million units. This figure does not consider the needs of single individuals old enough to marry and find a home. Moreover, of the 19.4 million households in the country considered in a 1995 census, 4.6 million homes were not in adequate condition. Additionally, there have been changes in the population growth rates by age group, with a larger increase among the younger age groups, meaning that more households usually are needed. Currently, around 60% of the population of Mexico is under age 24, which will result in additional housing demand in the future. Also, as in many other emerging markets, the general economic conditions in Mexico have prevented the country from developing a long-term mortgage market, mainly because of interest of rate volatility and high inflation.”

(available at www.standardandpoors.com)

[125] Id, at 17. “INFONAVIT and FOVI together account for more than 75% of the total financing provided by agencies”.

[126] See article 29-II of the Law of INFONAVIT.

[127] Standard and Poors, supra n.124, at 17.

[128] http://www.infonavit.gob.mx/

[129] See the law of the Instutute of Welfare and Social Services of State Workers ( Ley del Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado), chapter VI, third section.

[130] http://www.issste.gob.mx/

[131] http://www.fonhapo.gob.mx/pagina/reglasdeoperacion1.htm

[132] http://www.fonhapo.gob.mx/pagina/acciones.htm

[133] The World bank, Project appraisal document on a proposed loan in the amount of US$505.05 million to Banco Nacional de Obras y Servicios Públicos, SNC with the guarantee of the United Mexican States for the FOVI restructuring project, (February 3, 1999), at 7,(available at www.bancomundial.org.mx).

[134] Id, at 9.

[135] http://www.fovi.gob.mx/,.

[136] Standard and Poors, supra n. 124 at17.

[137] http://www.fovi.gob.mx/

[138] World bank, supra n. 133, at 46.

[139] Id.

[140] The commission for originating the credit is paid by the borrower and the commission for servicing is paid by the investor (the holder of the MBSs).

[141] World bank, supra n. 133, at 46.

[142] Standard and Poor’s, supra n.124, at19.

[143] World bank, supra n. 133, at 6.

[144] Id.

[145] Id. at 14.

[146] Id.

[147] Id.

[148] Id.

[149] http://www.shf.gob.mx/

[150] The Law of the SHF was Published at 11 October of 2001 at the Federation Official Diary

[151] Published in the Federation Official Diary at 9 April of 2002.

[152] See article 6, second paragragh of the Law of SHF.

[153] See articles 45 and 46 of the Organic Law of the Federal Public Administration. (Ley Orgánica de la Administración Pública Federal).

[154] See article transitory Second of the law of SHF.

[155] Jorge Siegrist Prado & Luis Dantón Martínez Corres, supra n. 55, at.501. “financial intermediation is the collection of resources from the public in order to grant credits”.

[156] World bank, supra n. 133, at 7 “Bank new mortgage origination grew very rapidly in the period of 1991-94 to a 55% market share in 1994, but fell to zero in 1995”

[157] Published in the Federation Official Diary at June 14, 1993.

[158] See rule Third - I of the General rules for the SOFOLES.

[159] See rule Eighth – I and II of the General rules for the SOFOLES.

[160] See Rule First and Nineth of the General Rules for the SOFOLES.

[161] See article 103 LIC and Rule Third of the General Rules for the SOFOLES.

[162] See Rule Sixteenth last paragragh of the Genaral Rules for the SOFOLES.

[163] See Standar and Poors, supra n. 124 at 19 “SOFOLES have been able to implement rigorous underwriting and servicing procedures and have maintained good asset quality indicators to date. Some of the factors that give SOFOLES an edge when it comes to servicing loans are a strict credit approval process, payment booths at the developer’s sites, and good monitoring and collection procedures”

[164] Numbers until November 2002,

(availabe at http://www.amsfol.com.mx/interior/frame_finan.asp?libro=balance.xls, last updated February 7, 2003).

[165]. Numbers until November 2002,

(available at http://www.amsfol.com.mx/interior/frame_finan.asp?libro=cartera.xls, last updated February 28, 2003)

[166] Manuel Campos, SOFOLES, activos participantes en el Mercado de deuda, www.eleconomista.com.mx, (last updated February 28, 2003)

[167] See Jorge Siegrist Prado & Luis Dantón Martínez Corres, supra n. 55, at 502.

[168] Id.

[169] Legal and Regulatory Obstacles to Securitization in Mexico, supra n. 122 at. 11. “This can diversify risks related to the originator (i.e. poor origination practices) as well as regional risks from a concentration of loans from one part of the country”.

[170] Published in the Official Diary of the Federation at December 30 of 2002.

[171] See articles 6 and 8 of the Transparency and promotion law for the competition in the secured credit

[172] Legal and Regulatory Obstacles to Securitization in Mexico, supra n. 122 at 25: “Credit enhancement refers to measures that are taken in connection with a securitization to ensure that securities have an investment grade rating”.

[173] Shahir Guindi, Legal and regulatory considerations for residential mortgage backed securitization in Mexico, (June 2000), The world bank, Land and Real Estatte Iniciative, Background series, at 2.

[174] Id.

[175] Id. at 3.

[176] Id.

[177] Id.

[178] Id. at 4

[179] Article 830 of the Civil Code for the Federal District of Mexico establishes that the owner can enjoy and convey his property except by the limitations and modalities stated by law. For example, the article 834 of the same Code establishes a limitation by stating that an owner of property with notable characteristics of the national culture cannot sell it or lien it without previous authorization of the government.

[180] Shahir Guindi, supra n. 173, at 4.

[181] The applicability of every State Civil Code depends on the location of the real estate property subject to the mortgage. See Carlos Aiza Haddad, supra n.90, at 146-147.

[182] Translation taken from Carlos Aiza Haddad, id.

[183] See Black’s Law Dictionary 1026 (Bryan A. Garner ed., 7^th ed., West 1999): “Mortgage is defined as: 1 “ A conveyance of title to property that is given as security for the payment of a debt or the performance of a duty and that will become void upon payment or performance according to the stipulated terms. 2 “A lien against property that is granted to secure an obligation (such as debt) and that is extinguished upon payment or performance according to stipulated terms”.

[184] Property under mortgage can be sold but it remain subject to the lien. See article 2894 of the Civil Code of the Federal District of Mexico.

[185] This formality of granting the mortgage before a Notary Public actually depends on the value of the collateral, if the value is worth more than 365 times the Minimum daily wage in the Federal District at the moment of the operation. See article 2320 of the Civil Code for the Federal District of Mexico.

[186] See Article 2919 of the C.C.D.F.

[187] See article 2906 the C.C.D.F. which states that only who can convey property is able to grant an mortgage, and only the goods that can be conveyed are subject to the mortgage. In other words, this article say that only who has title to property is able to grant a mortgage and for a property to be under mortgage, It needs to be subject to the commerce, it means that the property should be able to be freely exchanged, for example, in Mexico is not subject to the commerce the beaches, because they are property of the Nation, and in consequence they are not subject to any mortgage. It is simple; one only can convey what one owns. See article 2269 C.C.D.F.

[188] Article 3007 C.C.D.F. establishes that documents that shall be reordered according to the Civil Code, but they are not, then they have no value against third parties, they are considered private document between the creditor and the borrower and they do not rank with other recorded mortgages. See Carlos Aiza Haddad, supra nota 90, at 147.

[189] Article 3013 of the C.C.D.F.

[190] Article 2980 of the C.C.D.F.

[191] Article 2989of the C.C.D.F.

[192] Id.

[193] Article 2985 of the C.C.D.F.

[194] Amado Athié Gutierrez, Derecho Mercantil, at 199 ( Second edition, 2002)

[195] Carlos Aiza Haddad, Mexico’s attempt to reform the guaranty trust agreement and to create the floating lien pledge, 10 U.S.-Mex. L.J. 107 at 110.

[196] See article 395 LGTOC.

[197] See Carlos Aiza Hadddad, supra n. 195 at 110.

[198] See articles 396, 407 and 410 of LGTOC.

[199] See article 388 of LGTOC.

[200] See article 414 in relation to article 371. of LGTOC.

[201]See Carlos Aiza Haddad, supra n. 195, at 111.

[202] See Carlos Aiza Haddad, supra n. 195, at. 110.

[203] Id. at 109.

[204] See article 576 of the Civil Procedure Code for the State of Jalisco, amended by decree of December 29, 2001.

[205] See article 2918 of the C.C.D.F.

[206] See article 2916 of the C.C.D.F.

[207] Legal and Regulatory obstacles to securitization in Mexico, supra n. 122, at. 37.

[208] See article 1414 bis of the Commercial Code.

[209] See article 1414 bis 1 of the Commercial Code.

[210] See articles 1414 bis 4 and 1414 bis 17-II.

[211] See article 1414 bis 17-II paragraph fifth.

[212] See article 1414 bis 2, 6 and 7.

[213] See article 1414 bis 7.

[214] See article 1414 bis 8. of the Commercial Code.

[215] See article 1414 bis 9 last paragraph.

[216] See articles 1414 bis 8, second paragragh and 1414 bis 10.

[217] See articles 1414 bis 14, 15 and 16.

[218] See article 409 LGTOC.

[219] Carlos Aiza Haddad, supra n.195, at.110.

[220]Shahir Guindi, supra n. 173, at 5.

[221] Brigitte Posch and Tiziana Ditullio, Moody’s: Metodología para la calificación de títulos respaldados por Hipotecas en América latina, at 21 (Moody’s investors service, August 7, 2002)

[222] See Title Third, chapter 1 of the book of the obligations in the Civil Code of the Federal District of Mexico.

[223] See article 2030 of the C.C.D.F.

[224] See article 2032 of the C.C.D.F.

[225] See article 2036 C.C.D.F.

[226] 1996 WL 918312, *1 (C.C.D.F.) This translation has been modified by the author of this paper. The modifications are in brackets.

[227] Note that this article waives also the burden to the assignee to advise the borrower through a judicially advise or an extra judicially advise before two witnesses or a Public Notary.

[228] Wendy Vargas-Cartaya, Student Author, “En ruta hacia el Desarrollo: The Emerging Secondary Mortgage Market in Latin America, 34 Geo. Wash. Int’l L. Rev. 257, 273 (2002)

[229] Shahir Guindi, supra n. 173, at 8.

[230] “The Average time required to register a mortgage in the federal district (of Mexico) is approximately four months” See Legal Regulatory and Obstacles to Securitization in Mexico, supra n. 122, at 14.

[231] Guadalupe Ornelas, Paving the way for Cross-Border Securitization, 7 Inter-American Trade 1735,1736 (2000).

[232] Shahir Guindi, supra n. 173, at 9

[233] Jorge Siegrist Prado & Luis Dantón Martínez Corres, supra n. 55, at 508, translation by this author.

[234] Legal and Regulatory obstacles to Securitization in Mexico, supra n.122, at 19.

[235] Id.

[236] Id.

[237] Shahir Guindi, supra n. 173, at 9.

[238] Id.

[239] Id.

[240] Jorge Siegrist Prado & Luis Dantón Martínez Corres, supra n. 55, at 508.

[241] Amendment Published in the Federation Official Diary at June first of 2001.

[242] See article 14 bis- 7 of the stock market law.

[243] See article 14 bis-7 of the market stock law and article 228-M (XI) of the LGTOC.

[244] Legal and Regulatory obstacles to Securitization in Mexico, supra n.122, at 20.

[245] Id. at 21.

[246] Id. at 21.

[247] Shahir Guindi, supra n. 173, at 9

[248] Id. at 10.

[249] Jorge Siegrist Prado & Luis Dantón Martínez Corres, supra n. 55, at 507.

[250] See article 14 bis 7 of the stock market law.

[251] See article 93 and 117 of LIC.

[252] Jorge Siegrist Prado & Luis Dantón Martínez Corres, supra n. 55, at 506.

[253] Guadalupe Ornelas, supra no. 231 at 1735.

[254] Shahir Guindi, supra n. 173, at 10.

[255] Jorge Siegrist Prado & Luis Dantón Martínez Corres, supra n. 55, at 509.

[256] Legal and Regulatory Obstacles to Securitization in Mexico, supra n. 122, at 22.

[257] Id.

[258] Jorge Siegrist Prado & Luis Dantón Martínez Corres, supra n. 55, at 509.

[259] See article 39 of the pension system law (“Ley del Sistema de Ahorro para el Retiro”) thereafter LSAR for its spanish abbreviation.

[260] See article 43 of the LSAR

[261] See article 43 (c) of the LSAR.

[262] See article 43, third paragraph of the LSAR.

[263] “Circular CONSAR 15-8” Publisher in the Federation official Diary at 29^th Novemeber of 2002.

[264] Jorge Siegrist Prado & Luis Dantón Martínez Correst, supra n.55, at 496.

[265] Chris De Reza, A door opener?, 18 Real Estate Finance Today 9, 9-10 (August 27, 2001) (http:// proquest.umi.com)

National Law Center for Inter-American Free Trade

E-mail