The notoriously weak mortgage market in Brazil finally looks ready to grow. The first RMBS transaction done by a local bank securitizing its own mortgage portfolio should be the first of many similar transactions.
In August, ABN Amro’s Brazil subsidiary, Sudameris, took the plunge and issued a R$100 million ($51 million) RMBS. This made it the first retail bank to securitize its own portfolio of mortgages. Several RMBS have already been issued in Brazil, although always by real estate developers, not banks. Caixa Econômica Federal, a government-controlled bank, should be the second to issue, as it plans to bring its inaugural transaction to the market by the year-end. Despite the market turbulence, these deals are expected to sell well and it is hoped that this will encourage more retail banks to bolster their mortgage exposure.
An improving macroeconomic environment is supporting these transactions. The interest rate has fallen markedly over the past few years and now stands at 11.25%, the lowest in a decade and a far cry from the 45% following the financial crisis of 1999. High interest rates left the mortgage market floundering throughout the 1990s and early 2000s. That hasn’t stopped the government from trying to encourage its growth. In 1997 it introduced CRIs (créditos recebíveis imobiliários): investment funds for mortgage receivables. But banks were not enticed by them.
Until two years ago the law in Brazil was very protective of the consumer. This meant that it could take banks up to five years to repossess a house after payments had fallen delinquent. But a new law reduced this to about six months and is now considered a crucial trigger that has made banks consider mortgages with renewed vigour.
A final trigger is the growing middle class in Brazil. The country’s private wealth market has increased to $1.1 trillion from $570 billion, according to Boston Consulting Group’s annual global wealth report – a compound annual growth rate of 14.2%.
All of these factors should mean that the development of a broad and deep mortgage market is realistic. Bradesco, Brazil’s largest private sector bank, is offering the first 25-year mortgage, for example. It is only a matter of time before other large consumer banks follow suit, especially as the RMBS market now means these assets can be securitized and made yet more valuable to the banks involved.
At 2.2% of GDP, Brazil’s domestic mortgage market contrasts poorly with peers such as Mexico, where the booming market accounts for nearly 20% of GDP. With the rapid progress that the market has made in the past two months, there are clearly plenty of opportunities for banks in this market.
