Moody's gives thumbs up to proposal to finance mortgages with covered bonds

Monday, August 1, 2011

Brazilian real estate credit and savings institute Abecip's proposal to central bank BCB to create a local version of covered bonds to support the fast growing mortgage loan market would be positive for the country's banks, ratings agency Moody's said.

"The proposal is credit positive for Brazil's banks because it introduces an alternative long-term funding instrument to complement savings deposits, which have been the primary source of mortgage financing in Brazil," analysts Maria Celina Vansetti and Ceres Lisboa wrote in a research note.

The covered bonds, to be called letras financeira imobiliarias (LFI), are structured as debt securities that will be guaranteed both by the issuing banks and the pool of assets.

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Abecip's proposal also includes tax exemptions for long maturity investments, primarily those with five or 10-year tenors, with the purpose of creating additional incentives for investors.

Brazilian banks are mandated to invest at least 65% of their savings deposits in real estate lending, either by directly financing consumer mortgages or developers, or by investing in third party-issued, mortgage-backed securities. Banks also have to allocate 30% of their savings deposits at BCB as reserve requirements.

Failing to comply with the real estate lending requirements results in banks' having to deposit equivalent amounts at BCB with little or no yield, Moody's noted.

Vansetti and Lisboa added that even though the real estate sector has been growing robustly in the past years - with mortgages growing an average 45% per year since 2007 - savings deposits have expanded 18%, which has resulted in diminishing use of the latter as a mortgage-funding source.

"The development of the LFIs is a welcome move because it introduces another funding instrument that will allow banks to serve the growing housing demand, estimated today at about 8mn units," the analysts wrote, noting that failing to attract market interest will result in an increase in the 65% investment mandate in the short term, thus reducing reserve requirements.