I have an investment idea. Just this year Mexico started allowing for tax deduction of mortgage insurance. Last year the government committed to spend a lot more money on giving homebuilding incentives and to try to seed some money to get home mortgage lending moving along, most likely resulting in a Fannie Mae kind of institution. Mexico's banks are coming out of a slumber that was an overhang from 1994's peso crisis where for 7 years they made almost consumer or small business loans to an almost scary degree. The banks are now almost all foreign owned or controlled so they have the necessary capital and shareholder value mandates to create some business.


Looking forward I see favorable factors. One is that Mexicans rarely move, their moving patterns are like that of Europeans where one family will hold onto a house for generations. As it is now though, many of these people are mere renters of their homes or they are forced to live in inadequate homes they build by hand instead of buying something their income should allow them to. Improved mortgage access would find a huge market almost immediately of people that can afford to buy the houses on credit, but not on the current terms which are generally 35% down, 10 or 15 years long, and only houses in middle or upper class neighborhoods. Due to their relative lack of movement, mortgages are extremely safe for banks because families aren't going to give up their homes when they are places that have been held a long time. Besides homes are very cheap in most of the country, banks would have a big portfolio of loans in the range of $20k-50k, so the diversification works nicely because now they only carry houses around $100k and more which have limited resale value due to lack of buyers at that price range. The interest rates are falling fast in Mexico, but the spectre of inflation is always there so at least for now the mortgage rates they would charge have huge spreads compared to the US market and are all variable so they pick up the spread anyways even if inflation goes up. Just imagine how profitable Wells Fargo or Washington Mutual would be if they charged 90 day treasury rate + 900bp on their loans, adjusted quarterly! They would be cash cows to the point where maybe we wouldn't be paying the damn $2 to use the ATM. Right now that equates to 15% in Mexico and that is considered a fair rate. Even with more mortgages meaning lower rates, I think there will still be a higher than necessary spread and that means fat profits once the whole system gets going.


I own a house in Mexico so I am well aware of a lot of these things first hand. My neighbors there said that the house I bought was held by a family for about 50 years, they built and three houses next to it themselves. The family left because they bought a big house in a neighboring town and their son wanted to move to Mexico City for his career. Over time they had sold off all the houses, but most of the families were renters for many years until they had saved enough to buy the houses, which they did with 100% cash! Imagine if they had mortgages, those houses would have sold sooner and banks would have been making money all that time. I just rent out rooms to my friends and make a fat profit on it, I may never even live there, but for now I have an idea of how much money there is to be made in real estate.


With this in mind, I think buying up the sector works. Buying Mexican stocks is a bit tricky, but there are ADRs for some of them. The best one I like is Elektra, EKT in the US. They just got a banking license about a week ago and they have a ready made database. They are like the Best Buy of Mexico, except almost all their business is done on credit with harsh terms. Still people pay their bills to them, even though its mostly low income people facing effectively 50-60% annual interest. This stock has nothing but upside for the long term. I bought it about 3 months ago when it was really cheap, at $7.20 and I just quadrupled my stake last week. Might take a little while to have the numbers work out, but I think all the convergence makes this a huge long-term success. You get a lot of angles, the banking, the mortgage, the retail sales which should pick up as the economy improves. Also I think the sales will also increase as tariffs go down and make electronics more affordable in Mexico; right now it costs at least 30% more for things that were state of the art here 2 years ago. Buy a DVD player down there and it will cost about $150 for something equivalent to what Walmart sells for $80, so almost no one has DVDs yet.


All in all, this is my fundamental analysis play, sort of doing what Peter Lynch says about buying what you know. Its ADR sells for about $9/share right now. I would be surprised if it didn't at least touch $20 within 12-18 months.