The Nascent State of Real Estate Mortgages in Mexico

The entry of US lenders into Mex­ico sev­eral years back resulted in a huge influx of real estate invest­ment in many areas. Yet for all the increased invest­ment activ­ity, rel­a­tively few of these mort­gage trans­ac­tions have actu­ally been closed. Instead, a host of middle-class buy­ers with home equity in their pri­mary homes took advan­tage of low inter­est rates and no-fee loans to lock in their piece of Mex­ico. At the same time, new mort­gage com­pa­nies in Mex­ico found them­selves fac­ing unfa­mil­iar real estate prac­tices, and they have con­tin­u­ally tried to adapt to ser­vice the market.

The recent US sub-prime mar­ket deba­cle, the drop in US home prices, and the result­ing exit of a cou­ple of key US lenders have changed the Mex­i­can real estate mar­ket. With much home equity evap­o­rat­ing in a declin­ing US home mar­ket, buy­ers are under­stand­ably more cau­tious and have more lim­ited pur­chas­ing options. Those who desire to buy in Mex­ico are left with two bor­row­ing options: com­mer­cial lend­ing from the remain­ing lenders or seller-backed financing.

Com­mer­cial Lending   

As with real estate agents, Mex­ico does not have licens­ing require­ments for mort­gage com­pa­nies and agents. There are many lenders and the land­scape is ever chang­ing with new lenders, lenders who take a pause in cer­tain regions, and oth­ers who quit lend­ing completely.

There are sev­eral fac­tors that can ulti­mately affect a buyer’s abil­ity to obtain a com­mer­cial loan in this environment.

Real estate agents may avoid impor­tant issues when obtain­ing a list­ing or at clos­ing time. For exam­ple, the seller might be encour­aged to close at a price lower than the actual price in order to avoid taxes. This com­mon prac­tice in Mex­ico will reduce avail­able credit that the buyer can obtain from US financ­ing because finance com­pa­nies will only lend based on the recorded sales price, regard­less of how much was actu­ally paid.

Real estate devel­op­ments and indi­vid­ual sell­ers are noto­ri­ously slow to deliver doc­u­men­ta­tion to lenders. This is some­what under­stand­able con­sid­er­ing the bureau­cracy of the Mex­i­can legal sys­tem, so this paper­work process should be built into sales plan­ning. These delays can also be due to the fact that the seller does not have the abil­ity to trans­fer a clean title.

Bor­row­ers need to take respon­si­bil­ity to put time lim­its on the process and to actively keep the lend­ing process mov­ing once started. Bor­row­ers would be wise to put a financ­ing con­tin­gency in their pur­chase con­tract such as “sub­ject to lend­ing approval at X% for Y years.” This can avoid unfor­tu­nate sit­u­a­tions where the buyer loses deposit money because they could not qual­ify for a loan.

Seller-backed Financ­ing

In areas of Mex­ico par­tic­u­larly affected by the US credit crunch, such as Baja Cal­i­for­nia, seller-backed financ­ing is becom­ing an impor­tant tool to enable sales. Through guar­an­teed bank trusts (Fide­icomiso en Garan­tía) – the same instru­ment uti­lized by com­mer­cial lenders – buy­ers can obtain the prop­erty that they want, and the sell­ers receive the cer­tainty of income by retain­ing pri­mary inter­est in the property.

Seller-backed financ­ing elim­i­nates cer­tain fees and can pro­vide more flex­i­ble terms. On the down side, sell­ers usu­ally require a higher down pay­ment, often 50%, whereas com­mer­cial lender pro­grams tend to be 25% to 30% down.

The fact remains that in a slow mar­ket with chang­ing lender prac­tices seller-backed financ­ing may be the only way to enable a spe­cific trans­ac­tion. Such sell­ers need to come to terms with the fact that they could have the unpleas­ant duty to fore­close on a non-compliant buyer. The good news is that the guar­an­teed bank trusts make this process as smooth as pos­si­ble and avoid lengthy court cases.

The long-term solu­tion is likely to be that US-backed lend­ing will fur­ther adapt to meet the mar­ket needs.

Accord­ing to Richard Mock­abee, loan con­sul­tant for Mex­Quest Mort­gage and a long-time prop­erty owner in Mex­ico, “One rea­son­able way to look into the future is to look at the past. Mort­gage financ­ing in Mex­ico is inevitable, and Mex­ico is see­ing the same cycle as the early years of US mort­gages. Mort­gages are the nat­ural evo­lu­tion since baby boomers have used credit all of their adult lives.”