Low income moves centre stage
For years the Brazilian mortgage sector has been neglected. In a context of uncontrolled inflation and high interest rates, the sector has received no long-term investment for two decades. In 2006, the Brazilian mortgage market was worth R$9.34 billion ($5.36 billion), only 2.2% of GDP. In August 2007 alone, however, R$1.8 billion-worth of mortgages were originated. But compared with other Latin American countries such as Chile, where residential mortgages account for 15% of GDP, or Mexico at 11%, it is clear Brazil has a long way to go.
Now that Brazil’s economy has enjoyed a period of stability and interest rates have dropped into the low double digits, the residential mortgage market has taken some big steps forward. This year the first-ever Brazilian mortgage-backed securitization by a bank using its own assets as collateral has been issued, and local banking players are devoting more resources to developing their mortgage businesses.
There are significant barriers hindering Brazil’s burgeoning mortgage market, including a need for regulatory changes, further macroeconomic improvements and fiscal reforms. Nevertheless, several private sector players are gearing up to compete in residential mortgage origination, which some market observers believe could be worth about 25% of GDP in the course of 2008.
Banco Bradesco and Banco Itaú have already stepped up their residential mortgage origination activities. At the moment the largest player in the market is the state-owned Caixa Econômica Federal (CEF), which has a 59% market share. Its private sector competitors, however, are for the first time reporting substantial increases in their market shares – for example, Itaú posted a 30% increase in mortgage business (albeit from a low base) in the first quarter of 2007 over the same period in 2006.
Bradesco, one of the biggest privately owned banks in Brazil, is involved with all stages of real estate development from financing construction to mortgage lending. The bank has also opened 14 specialized real estate centres focused solely on growing its mortgage operation and to complement its branch network, which already offers mortgages. Bradesco had originated nearly R$3 billion of residential mortgage loans in 2007 by October, compared with R$700 million in 2005. Its target for 2008 is R$4 billion. Itaú, another of the top three players, has a residential mortgage portfolio of R$2.4 billion and expects similar growth rates.
Although investors and bankers agree that mortgage lending is on the rise, there is serious disagreement on statistics. Gafisa, a Brazilian residential property developer, predicts mortgage volumes will jump to R$31 billion for 2007, from the R$6.7 billion in 2003 – a 436% increase. Optimists see the market reaching 25% of GDP by 2008. Others are more conservative. Ademir Cossiello, executive director at Bradesco, thinks it will be 10 years before 25% of GDP is reached, because he doubts individual wealth in the country will grow at the speed necessary to achieve that level.
In the past two years there has been a dramatic change in circumstances for the Brazilian economy and its financial institutions. In macroeconomic terms, Brazil has experienced sustained economic growth, which has been much less volatile than in the past, as well as a steady fall in real interest rates. Interest rates have fallen from 25% in 2005 to 12% this year and could fall to single digits in 2008. Inflation is stable at roughly 3.1%. There has also been a substantial increase in formal employment and real income. The Fiscal Responsibility Act, which came into effect in May 2000, added to economic stability by imposing spending restrictions on state and municipal governments.
As Luiz França, managing director of Itaú, says: "It is the economic facts, together with the economic stability of the country, which has led us to believe a sharp increase in the demand for mortgage loans in Brazil is finally coming."
At the same time, there have been several developments aimed at making credit more widely available to a larger proportion of the population. Part of this progress is thanks to advancements in credit risk management and the introduction of new mortgage products, such as payroll-linked mortgages to reduce the chance of repayment delinquency. Legal changes and government initiatives have also helped to jump-start the mortgage market.
One reason mortgage lending had not been widely promoted in Brazil was the problem of dealing with defaults. If a mortgage fell into delinquency, it could take more than six years for the bank to foreclose on a property. In 2004, a new law gave the banks a greater hold over the asset until repayments had been completed, reducing the repossession time to less than a year, making mortgage origination less risky for lenders.
Accelerating growth
Other moves from the government to encourage the real estate market include the PAC programme – Programme for Accelerating Growth – which will provide basic infrastructure to more remote regions as well as encouraging new investment in home building. Under PAC, in 2006 the Brazilian president outlined a five-pillar programme that aims to increase economic growth in Brazil by 0.5% a year. Of the R$504 billion set aside for the programme, R$171 billion will go into social infrastructure, including housing.
Already salaries have increased and credit is becoming more accessible to a much larger proportion of Brazilian society than ever before – including lower-income individuals. So banks see mortgages as an opportunity waiting to be taken. Already competition is heating up, resulting in increased product development and innovation.
Some innovations have been relatively straightforward. Recently, tenors on mortgages have doubled to 20 years. Also, some homebuyers now need only put down 20% deposits, whereas previously they had to lay out 35%.
Bradesco fixes its interest rate for Brazilians buying their first property at 12.5% annualized for 20 years as long as the property value does not exceed R$350,000. In 2005, 12-year floating-rate loans had interest rates of at least 15%. Bradesco also stretched mortgage maturities to 25 years from 20 in July this year. Itaú followed suit, offering its first 25-year mortgage in August.