Argentina’s Banco Hipotecario (BH), as initially a government-owned and later a partially privatized state housing bank, provided medium and long term financing for construction and home loans. It became the leading mortgage originator in the country, issuing its first mortgage-backed securities internationally in 1996, with the aim of tapping into new funding sources. These securities were sold in the US with political risk insurance from Zurich US, proving that securities backed by Argentine mortgages, instead of by the government, could still attract international investors and deliver higher ratings than the country of collateral origin. BH considered this a successful way to raise funds, despite high expenses in terms of yield and degree of credit enhancement, because the demand for funds could not be met by the retail funding capabilities in the country.
Argentina’s government default and devaluation, however, coupled with the pesofication of the mortgages and the rated bonds, caused credit enhancement to decline substantially. Debt payments could not keep up with interest and the securities were downgraded to ratings of ‘D.’ Though there was political risk insurance included in the transactions, it did not include protection to investors against legal risks or deterioration in credit quality due to government actions. Though BH’s strategies were unique in many ways, they still were vulnerable to economic difficulties at the national scale.
Source:
Chiquier, Loic; Hassler, Olivier; Lea, Michael J. (2004) Mortgage securities in emerging markets (English). Policy, Research working paper series ; no. WPS 3370 Washington, D.C. : World Bank Group.
Link: https://documents.worldbank.org/en/publication/documents-reports/documentdetail/654661468765314141/mortgage-securities-in-emerging-markets