How to solve the mortgage market's looming financing problem

Friday, August 12, 2011

Earlier this month, Brazilian real estate credit and savings institute Abecip presented a proposal to the country's central bank on how to solve a future financing problem in the fast-growing local mortgage market.

By law, most mortgage loans are today financed by savings deposits, but mortgage lending is growing at much higher rates then savings deposits, and at some point in the future, there will be a shortage of available financing.

Abecip's proposal addresses this problem through creating covered bonds that will be guaranteed by the mortgage lender and the mortgage loan.

BNamericas spoke with Abecip president Luiz Antonio Nogueira de França about the trends in the local mortgage market and the association's proposal to the central bank.

BNamericas: The mortgage loan segment has grown very quickly in Brazil over the last several years, with an average growth rate of 45% a year since 2007. How long can the segment continue to grow at such high rates?

Nogueira de França: We expect mortgage lending to continue to expand at annual rates of 40-50% until 2014. That year mortgage loans as a percentage of GDP will represent approximately 11% compared to only 4% today.

BNamericas: What are the main growth drivers of this expansion?

Nogueira de França: The fast growing Brazilian middle class is a very important driver of mortgage loan demand. Economic growth, low unemployment and relatively low inflation are also important drivers. It's also interesting to note that in the past mortgage loan growth was concentrated in the most developed states and cities like São Paulo, Rio de Janeiro and Brasília, but today we see mortgage loan growth across all the country.

BNamericas: Is there not a risk of a bubble with such fast growth?

Nogueira de França: The situation in the Brazilian mortgage market is very sound, but it's of course important to ensure that it continues like this in the future as well. The non-performing ratio for mortgage loans overdue more than 90 days is only 1.5% in Brazil, we have a good legal framework regarding collateral, and the maximum loan amount is 80% of the property's value.

BNamericas: Do most people go for 80% when it comes to financing their purchase of a property?

Nogueira de França: Actually the average is 62% and the average loan maturity is only eight years, which is very good for the soundness of the market. Banks offer mortgage loans with maturities of up to 30 years, but most Brazilians prefer to pay off their mortgage loans as soon as they can.

BNamericas: Do you expect Caixa Econômica Federal's dominant role in the mortgage market to decrease in the coming years, as private banks are now more aggressive in terms of mortgage lending?

Nogueira de França: Caixa has done a very good job for many years in the mortgage market and is a member of Abecip. However, it's not good for one bank to command 50% of the market, and I do expect private banks to increase their market share in the coming years, as they're now very aggressive mortgage lenders.

BNamericas: Besides Caixa, what banks are currently most aggressive in Brazil's mortgage market?

Nogueira de França: Caixa and fellow federal bank Banco do Brasil. And in the private sector, basically three banks are the main players in the mortgage market - Bradesco, Itaú Unibanco and Santander.

BNamericas: How do you think your proposal will be received by the authorities, and when do you expect it to be approved?

Nogueira de França: It's a very good and necessary proposal, so we expect everyone to be in favor of it. There will also be a natural pressure to adopt, since it will be impossible to reach a mortgage ratio of 11% with savings deposits as the only financing instrument. That being said, the proposal will be studied by the central bank and then by all stakeholders within the government, so this could mean it will take some time before it obtains final approval.

It's also important to consider that covered bonds are used to finance several asset classes in Europe. And that could be the case here in Brazil as well, which would allow our development bank, BNDES, to reduce its long-term financing commitments.

About Luiz Antonio Nogueira de França

Nogueira de França has been a director and manager at Banco Itaú since 1995, where today he is the head of the bank's mortgage area. Previous jobs include director at Credit Lyonnais Securities Corporate Finance in New York.

He also holds positions on Brazilian banking federation Febraban's executive business committee and São Paulo state's housing council.

About the company

São Paulo-based Abecip was founded in 1967. Its members include public and private sector banks, as well as a range of non-bank financial institutions and companies that are active in the mortgage and real estate market.