The Fund of reserve and stabilization of mortgage loans (FRECH in Spanish) provides contingent coverage granted by the National Government to Borrowers, from FRECH resources, with the aim of promoting home ownership financing. It is a swap calculated on the interest rate agreed in the mortgage loans granted for new houses, under the terms and conditions set forth in the FRECH Rules.
The Adjustment of the Required Principal Balance of TIPS A/ TIPS B is aimed at guaranteeing that in all cases the Total Principal Balance of the TIPS A and the Total Principal Balance of the TIPS B are kept in balance with respect to the Total Principal Balance of the Mortgage Loans with less than 120-day delinquency. If a situation of unbalance is identified, the principal prepayment of TIPS A will be applicable.
Mortgage-backed securities are supported by a large pool of mortgage loans and there is no straight relation between a mortgage-backed security and a certain mortgage loan. The underwriting prospectus of the TIPS establishes the mechanisms for the payment of returns and principal to investors in the case of serious payment defaults to the mortgage loans. Our issues are structured to ensure payments to the investors and all the other agents involved in the issue. Furthermore, they bear credit enhancement mechanisms such as the guarantee provided by the IFC (International Finance Corporation, a World Bank subsidiary) for the whole mortgage loan portfolio and the guarantee provided by the Nation through Fogafin for securities with underlying assets consisting of the mortgage loans for social housing. These mechanisms and structures are designed for covering any default risk that may arise from the borrowers´ payment behavior. Hence, if the collection of mortgage loan receivables at a certain time is not enough to cover the payments, the credit enhancement mechanisms mentioned above will be called to fulfill such payments.