NEW YORK--(BUSINESS WIRE)--Mexico's relatively benign inflation environment and sustainable residential property appreciation rates are credit positives for RMBS, Fitch Ratings says.
Nominal housing prices in Mexico rose 4.1% in 2013, according to Sociedad Hipotecaria Federal (SHF), a Mexican national development bank. Fitch's calculated annual real increase was 0.4% and has averaged 1.2% over the past eight years, demonstrating that home prices continue to grow at levels slightly above inflation.
This contrasts with price declines seen in the U.S. housing market in recent years. While U.S. property prices rebounded in 2012 and 2013 from their trough, they remain down approximately 23% from their peak in 2006 according to the 3Q13 national Case-Shiller House Price Index.
Stable price growth trends have and will encourage borrowers with highly seasoned mortgage loans to stay current as equity continues to increase. For the large levels of real estate-owned (REO) assets, mostly related to defaulted mortgage loans in the low income sector, house price stability provide some support to mitigate overall loss severity levels.
Last week, SHF published its House Price Index (SHF Index) for 2013. Fitch notes real house prices increased 0.9% in the high income property segment while in the low income segment they decreased by a modest 0.3%. While both segments have recovered from the second half of 2012 (average of negative 0.3% and negative 1.7%, respectively), the high income segment has rebounded more rapidly.
We attribute this divergence in recovery trends to recent housing policies that encourage new construction closer to city centers (where most residential properties are located). In addition, large construction companies' financial difficulties halted building activity and created a temporary supply shortage during 2012-2013. The annual construction sector GDP contracted by 6.8% during 3Q13 and new home inventory decreased by 55%, according to INEGI and BBVA Bancomer, respectively. Finally, the glut of abandoned/repossessed houses in the low income sector might pressure prices in that segment.
A benign macroeconomic environment coupled with favorable supply-demand fundamentals will likely drive housing appreciation in Mexico over the coming years. On the demand side, the formal workforce has grown steadily at an annual rate of 3.9% over the past 10 years according to IMSS (the Mexican Social Security Institute). Fitch expects this pace to continue. Additionally, nominal household income has been growing since 2012 after faltering in the post-crisis years. On the supply side, Fitch expects government agencies and the banking sector to consistently provide credit to the market.
The vast majority of bank-sponsored RMBS issued during the latter part of the last decade are performing consistently well. Low unemployment levels within the middle and high income segment have supported relatively low delinquency levels. Overall leverage has been improving as home prices increase and underlying loans amortize consistently. Average loan-to-value ratios are now in the high-40% range, improving from the mid-60's at the time of closing.
Conversely, most low income housing RMBS sponsored by non-bank financial institutions in the mid- 2000s continue to increase their exposure to REOs. Despite positive growth in national average house prices, the states holding the largest volume of securitized REOs saw overall prices decline by 0.7% during 2013. Servicers are starting to implement more aggressive quick sale adjustments to reduce their inventory and overall exposures in these segments. According to Fitch's loss severity analysis on 3,265 properties, market value declines on sold properties was 37% in 2013, up from 23% in 2010.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.