Public and Private Partnerships in Mortgage
Insurance: Lessons form Mexico’s SHF
Carlos Serrano
Housing Finance in Emerging Markets Conference
World Bank, March 2006
Mortgage Insurance as a Key Element in Developing Housing Finance Markets
in Mexico
Government Role (SHF) in Developing a Mortgage Insurance Industry
SHF’s Mortgage Insurance Product
Measures Taken to Incentive Entry from Private Sector Participants in the
Mexican Market
I. What is Mortgage Insurance?
Mortgage Insurance is a financial product that offers risk coverage to
the owner of a Mortgage Loan.
Without MI
With MI
15% MI Risk
I. Mortgage Insurance: Benefits
Improves origination quality of mortgages, promoting competition in price
and quality (and not on relaxing credit origination criteria)
Improves servicing of mortgages by requiring servicers to follow loss
mitigation procedures.
Incentives the creation, analysis and dissemination of high quality credit
Promotes higher quality in appraisals.
Promotes standardization in information and credit files.
Increases accessibility to housing finance by easing the conditions to grant
low down payment mortgages and can eventually reduce interest rates.
Improves market liquidity by certifying mortgage quality to investors.
Attracts private capital to housing finance markets.
I. How does MI compare with other mechanisms to foster the
development of mortgage markets?
I. Fostering Mortgage Insurance in Mexico
Banks, Sofoles
and Pools of
Private MI
Short Term: SHF offers MI and FGI cover, looking for reinsurance with specialized
international insurance companies.
Medium Term: Private insurance companies, including affiliates of international firms,
offer cover for residential and medium segments of the market, while SHF offers cover
for social housing and special risks not covered by private monoliners.
Long Term: Private MI companies offer cover for all market segments, SHF offers
reinsurance taking those risks private entities are not willing to hold.
II. Government Sponsorship for MI
Virtually all countries where MI exists have required Government
support to create the industry.
 Evidence shows that it is extremely difficult for these industries to develop
alone. In the United States, the first country to develop an MI industry, the
product was first introduced by FHA, a Government agency.
 For these reasons, it was decided to offer MI from SHF and then to create
the necessary conditions to attract private sector participants (described
later in the presentation).
If MI is to be supplied from a Government institution, there is a need
to design an exit strategy.
 Although the need for Government participation may never disappear; the
poorest segments may not be attended by private participants, as the
United States experience shows.
II. Government Sponsorship for MI
 SHF’s counts with Full Faith and Credit from the Federal Government for all
its obligations assumed prior to the year 2013.
 The Full Faith and Credit has proven fundamental to give credibility to our
MI product and to entice private sector participation to the industry.
However, a clear sunset clause is also fundamental in order to: i) create
discipline in the Government agency and ii) assure that there will be no
unfair competition from the Government once private sector participants
enter the market.
Assuming that Government participation is required, the agency in
charge of supplying MI must be as isolated form the political process
as possible.
II. Government Sponsorship for MI
 In the Mexican case, SHF is overseen by a seven-member Board of
Directors of which one is the Governor of the (independent) Central Bank
and two are independent form the Government (the rest are members of
the Federal Government).
If a Government agency is a direct provider of MI, it must face exactly
the same regulations that private firms face.
 SHF is now regulated as a Bank. A change to the SHF Law will be
submitted before Congress in order to create a Mortgage Insurance
subsidiary that will be regulated in the same terms as private sector
II. Government Sponsorship for MI
In addition to the measures described, Governments also need to take
actions in order to incentive the acquisition of MI. In the Mexican
case, the following measures have been adopted:
 Banking regulation provides capital relief to mortgages that count with MI.
Capital requirements for loans with LTV>65% are 8% while for loans with
LTV<65% are 4%; MI counts as downpayment in order to calculate LTV.
 Conforming Mortgage-Backed Securities receive favorable regulatory
treatment. In order to me conforming, loans backing an MBS need to have
 In addition, SHF will not provide its Financial Guaranty product for
securitizations if loans do not count with MI.
II. Government Sponsorship for MI
A fundamental factor in order to have sound underwriting procedures
for MI companies is to have reliable appraisals. Therefore, we think
that, at least in initial stages, the appraisal industry must be regulated
by the Government.
III. SHF’s Mortgage Insurance Product
SHF designed it’s MI product resembling the main characteristics of
MI offered by Private Mortgage Insurers in the United States but with
some necessary adaptations for the Mexican market, such as
definition of claimable events, income verification for informal sector
workers among other factors.
A fundamental factor when introducing MI in a market is to build
credibility. This is why contracts are very clear on the fact that
payment of SHF’s product is totally unconditional.
If a Government agency offers MI, prices need to be actuarially based.
This is of fundamental importance because if prices are subsidized i)
distortions will be introduced to the markets and ii) private sector
entrance will be disincentived. SHF’s prices are actuarially based and
dependant on coverage and LTV. They can be paid annually or upfront
III. SHF’s Mortgage Insurance Product
SHF’s MI provides coverage up to 35% of unpaid loan balance. It was
concluded that a 100% coverage was not a good idea; partial
coverage keeps lenders’ incentives to originate and service the loans
We insure loans with maximum LTV’s of 90%. Recommendation is to
begin with maximum LTV’s for which there’s enough data and then to
gradually increase max LTV.
SHF’s MI is mandatory during the entire life of the loan. Initially this is
a good idea as it promotes standardization and adequate loss
mitigation efforts.
SHF’s MI claimable events are: i) foreclosure, ii) Deed-in-lieu, and iii)
shortsale. Advantages are: no obligation to go through the judicial
system and no need to wait until eviction to present a claim .
III. SHF’s Mortgage Insurance Product
Coverage is transferable. This is a necessary condition for
Every single loan is underwritten by SHF. The importance of MI lies
no only on the coverage it provides but also in the fact that it assures
investors, lenders and regulators that the information contained in the
mortgage files is accurate.
In the underwriting process, SHF reviews each loan in order to verify
if they comply with the underwriting guidelines contained in the MI
contract. The following items are revised:
 Credit Score: Borrower must be scored using a proprietary FICO
score developed by Fair Isaac for SHF.
III. SHF’s Mortgage Insurance Product
 Appraisal: The appraisal of houses must follow the appraisal rules
issued by SHF and be conducted by specialized entities licensed also
by SHF.
 Credit Bureau Check.
 Standard Documentation: The documentation in the loan files must
follow the origination policies issued by SHF. Of special importance in
this regard is the proof of income and mortgage inscription in the
Public Registry of Property.
IV. Creating Incentives for Private Sector Entry
SHF contacted all 7 Private Mortgage Insurers that participate in the United
States market in order to present them the potential of the Mexican market
and the model designed to develop it.
We were looking for firms that could eventually create a permanent
presence in the country.
Two firms expressed more interest in participating: United Guaranty and
Genworth Financial.
We have shared all our statistical information with these companies. This is
one of the most important elements that an MI firm will look when
considering entry into a market.
SHF’s underwriting guidelines were also presented to the Private Mortgage
Insurers and changes were made until an agreement on these guidelines
was reached.
IV. Creating Incentives for Private Sector Entry
It was agreed that a good first step for these firms to enter the market was
to subscribe reinsurance contracts with them. The advantage of this
mechanism is that it allows private companies to acquire knowledge about
the market before an adequate legal and regulatory framework for them to
operate is put in place.
Last year SHF began reinsuring 70% of the risks its takes through its MI
product with these companies.
In addition, last week a change to the Insurance Law that creates the
Mortgage Insurance line of business was approved by Congress.
Secondary Regulations are now being drafted that all companies offering
MI, including SHF, must observe.
Companies offering MI will be supervised by the Insurance Commission.

Sociedad Fipotecaria Federal, S.N.C. (“SHF”)