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For all the ink spilled over the recent defeat of President Bush’s attempt at immigration reform, surprisingly little attention has been paid to the fact that the immigration bill wouldn’t have solved the problem it was supposed to address. That’s because economic conditions in the developing world (especially Latin America) continue to spur immigration regardless of whether we build a border fence, increase the number of Border Patrol agents or adopt a guest worker program. As the disparity in personal income grows between the United States and, say, Mexico, so does the pressure to migrate. One study found that a 10% decrease in Mexican wages results in an 8% increase in apprehensions at the U.S.-Mexico border. No immigration policy can succeed without addressing the state of the Mexican economy. Addressing the economic “push factors” that drive Mexican workers to migrate to the United States does not require direct foreign aid or even trade liberalization per se, but merely a dose of financial modernization. A recent World Bank study found that a major reason Mexican workers here remit large chunks of their wages to Mexico is to make mortgage payments on homes in Mexico, suggesting that these workers are frozen out of a Mexican mortgage market that does not provide adequate credit for those who stay home and work at the domestic wage scale. Encouraging increased home ownership in Mexico through the modernization of its mortgage lending infrastructure is therefore an obvious place to start addressing the economic causes of immigration. The Mexican mortgage market is anemic by U.S. standards. In 2005, Mexican lenders securitized a mere $1.7 billion in mortgages, compared with $1 trillion securitized that year in the United States. But a combination of shifting demographics and planned structural changes to Mexico’s state-owned lending institutions has placed the mortgage sector on the verge of explosive growth. The housing deficit in Mexico is estimated to be 5 million units. This shortage, which will only worsen, reflects a shortage of mortgage credit. The state pension system, Infonavit, which originates nearly 60% of all new loans in Mexico, pegs mortgage rates to wage inflation and thus impedes market-based price competition that would benefit borrowers. And staples of the U.S. mortgage market, including 30-year fixed-rate mortgages, are largely unavailable. Thus, huge swaths of the population are overcharged for mortgage credit or are priced out of the market altogether. Moreover, Sociedad Hipotecaria Federal (SHF), Mexico’s version of Fannie Mae, will phase out its lending operations by 2009, creating significant liquidity constraints for local lenders attempting to meet the increased housing demand. The World Bank predicts that “sofoles,” privately held nonbank lenders that make up a small (17.3%) but rapidly growing portion of new loan originations, are still years away from their own portfolio securitizations. Although private investors have begun to enter the market, the void is still substantial and mortgage-backed securities issuances remain negligible. The legal conditions are also ripe for a Mexican mortgage boom. Reforms in the Mexican foreclosure laws have reduced the average foreclosure time from five years after default to two, providing comfort to secondary market investors that they can speedily resolve bad loans. State and local governments have improved property registries. Likewise, the development of a mortgage insurance market has helped improve credit quality for securitizations. These conditions create a significant economic opportunity. SHF estimates that Mexico’s total mortgage portfolio as a percentage of GDP will increase from 11.1% in 2004 to 27.7% by 2019. The Treasury Department, its Latin American counterparts and the international development lending community can play an important role in facilitating the conditions for growth. Several important initiatives are already under way, including recent commitments by Treasury to promote small-business lending and private-sector financing for infrastructure projects. An initiative to modernize the Mexican mortgage market would be even more beneficial to those who view immigration as the best way to achieve self-sufficiency. As the Federal Reserve Bank of Dallas succinctly put it, “More credit, less poverty.” How much will this cost? Mere pennies compared to the border control strategies at the heart of the immigration debate. Congress recently proposed to build a 700-mile border fence with price estimates running from a $2.2 billion to more than $49 billion. Every new mortgage originated in Mexico in 2005 could have been securitized for less than that. The timing is right for such an initiative. Mexico’s president, Felipe Calder�n, is committed to revitalizing the Mexican economy and solving the immigration problem. And local sentiment may push him to spur change on his own initiative. To be sure, effective border security is critical to our national interest. But by focusing solely on keeping foreign workers out, without modernizing the financial infrastructure that will ultimately encourage these same workers to invest in their home communities, we are treating the symptoms when the cure is well within reach. Brian P. Brooks is a partner, and Schan Duff is an associate, in the Washington office of O’Melveny & Myers.

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