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   ARTICLE   |   From Scotsman Guide Residential Edition   |   May 2007

Business Across the Border

As U.S. residents look south to Mexico for vacation properties, opportunity arises for mortgage originators

There is an opportunity for mortgage originators who wish to help the aging baby boomer population and other U.S. residents purchase vacation homes and second homes. That opportunity lies south of the U.S. border in Mexico.

Mexican Mortgages: The Basics
Mortgage originators interested in loans in Mexico should know a few key things about the Mexican mortgage market:

  • Along with Mexican banks, more than 80 percent of which are foreign-owned, limited-scope financial institutions ("sociedad financiera de objeto limitado," or SOFOLs) have emerged in Mexico in the past 12 years. These are similar to U.S. mortgage banks, and there are now nearly 20 SOFOLs in Mexico that actively lend in the country.
  • Most lenders that lend to U.S. residents in Mexico have strict lending criteria. Common requirements include a 70-percent loan-to-value ratio and a FICO score of at least 680.
  • Before 1993, non-Mexican citizens could not buy property in the "restricted zone," which is 31 miles off the coast and 62 miles off the U.S. border. Rules changed with Mexico's passage of the Foreign Investment Act, however. Foreigners can now own property in this zone through a "fideicomiso," which is a renewable 50-year bank trust. 

The term “retirement” doesn’t quite fit the baby boomer generation. As they showed throughout their lives, boomers generally do not follow the mold of previous generations. And it is unlikely that they will fit into the same “retirement” as their parents. Rather, they likely will be looking for a “second life.” That second life often means a second home — and a second mortgage.

Because of the increasing home prices in typical retirement destinations in the United States, many residents are looking for retirement or vacation homes in other countries to make their retirement experiences more affordable. And according to the Urban Land Institute, one of the top countries for U.S. retirees is Mexico. Further, the U.S. State Department reports that as many as 1 million Americans live in Mexico.

For mortgage originators who wish to tap into this market, there are a number of things to understand, from how the mortgage process works in Mexico to the importance of developing relationships south of the border.

How Mexican mortgages work

It is important to note that not all markets in Mexico are the same. In Mexico, there are 31 states, and each has its own laws. The four main areas in Mexico that U.S. residents have been buying properties, however, are: Cabo San Lucas; Cancun; northwest Mexico; and Puerto Vallarta.

Like the United States, Mexico has the concepts of a mortgage and of a deed of trust. Traditional mortgages in Mexico can be cumbersome and nearly impossible to foreclose upon in the event of a borrower default. It can take as many as five years.

Because of that, most lenders in the market today that lend to U.S. residents in Mexico use a structure called a guarantee trust, which is similar to a U.S. deed of trust. The guarantee trust allows for a nonjudicial foreclosure that protects borrowers and lenders.

Non-Mexicans who wish to own property within 31 miles of the coast or within 62 miles of the border (called the restricted zone) must do so through a “fideicomiso,” a 50-year renewable bank trust. Property acquired in the restricted zone requires a permit from the Mexican Ministry of Foreign Affairs. The guarantee trust serves for the restricted zone and as security for the loan.

In addition, the trustee in the guarantee trust must be a Mexican bank — more than 80 percent of which are foreign-owned. The administrative fees charged by the trustee bank average about $350 to $600 per year.

One peculiarity of the Mexican market is the function of the “notario publico.” The notario — a position that differs from the notary public in the United States — is a government-appointed official who certifies real estate transactions. This person is responsible for documenting the transaction, drafting the deed, and calculating and collecting the taxes. The notario also must be present at the signing to verify all parties involved.

Finally, the closing process can be cumbersome, as each party to the transaction must have a representative present at each loan closing. That includes the borrower, the seller, the trustee bank, the lender and the notario. Coordinating all the documents required and gathering all these parties to be present can make the closing process take as many as 90 days.

The originator’s role

In recent years, Mexico has become a competitive loan environment and is now within the reach of the average U.S. mortgage originator.

The current base of originators who have moved to Mexico is still fairly small. In fact, it likely comprises less than a few-hundred individuals and at most, a few-dozen companies. The market is just beginning to be defined, and the tasks that originators must do to originate loans in Mexico are changing each day.

Certain lenders ask for different documents and have different procedures. Of the U.S. lenders that have funded loans in Mexico, each has had a different set of requirements for its loans. These differences include whether the loan requires a U.S. appraisal or just the Mexican appraisal; U.S. title insurance or no title insurance; U.S. escrow or Mexican escrow; use of one trust bank or a variety of trust banks; and whether the loan will be sold into the U.S. capital markets or the Mexican capital markets.

Because each lender operates differently and approves originators by different criteria, it can be difficult for mortgage originators to enter the market. This process is changing as volumes begin to increase, however, and as the costs associated with each closing start to come down.

At this point, however, it is still expensive to originate loans in Mexico, and mortgage originators should ask themselves how capable they are when it comes to solving problems south of the border. This is where the importance of relationships comes in.

If originators have strong relationships south of the border and speak Spanish, then they may find a number of available programs with various lenders. On the other hand, if they have strong relationships with borrowers in the United States who have bought in Mexico, but they don’t know Mexico, then they should develop a relationship with a lender that does.

These lenders might allow for a referral structure and even U.S. credit-processing while it handles everything south of the border. The fees available to originators typically range from 1 percent to 4 percent depending upon the work.

•  •  •

Mortgage originators who learn about and understand the Mexican mortgage market and develop the necessary relationships could find that taking their business south of the border can be profitable. And as baby boomers continue to break the traditional mold of retirement, originators who are ready to take on mortgages in Mexico may see a boom of their own.


 


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