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January 23, 2008updated 04 Apr 2017 1:15pm

The home loans boom in Brazil

Rodrigo Amaral talks to Jos Pereira Gonalves, general superintendent of ABECIP, Brazils savings and loans association, about the strong prospects for future home loan growth. Brazils domestic mortgage market is booming, generating good opportunities for the countrys growing banking industry, according to the Associao Brasileira das Entidades de Crdito Imobilirio e Poupana (ABECIP), the Brazilian Association of Home Loans and Savings Banks

By Rodrigo Amaral

The Brazilian mortgage market has become big business, boosted by improved market conditions and recent legislative changes. Rodrigo Amaral talks to José Pereira Gonçalves, general superintendent of ABECIP, Brazil’s savings and loans association, about the strong prospects for future home loan growth.

Brazil’s domestic mortgage market is booming, generating good opportunities for the country’s growing banking industry, according to the Associação Brasileira das Entidades de Crédito Imobiliário e Poupança (ABECIP), the Brazilian Association of Home Loans and Savings Banks. The non-profit organisation was founded in 1967 to promote the availability of home loans.

It reported that Brazil’s banks granted home loans totalling BRL2.39 billion ($1.37 billion) in November 2007, almost 200 percent higher than in November 2006. Mortgage advances amounted to BRL17.54 billion, up 94 percent year-on-year, with 177,200 new mortgages approved, up 73 percent compared with the same period in 2006.

In an interview with RBI, José Pereira Gonçalves, ABECIP’s general superintendent, said that the Brazilian credit boom is due to a combination of favourable factors. “The stars have got in line. We have observed the recovery of the purchasing power of the population, and that is a very important variable,” he said.

In particular, the home loans market has accelerated off the back of the gradual reduction in interest rates – one of the central bank’s main pillars in its drive to reduce inflation – from a high of 26 percent in 2003 to 11.25 percent now. More significantly, according to Gonçalves, the booming mortgage market is in its infancy. He forecasts that mortgage advances will grow 25 percent a year until 2010, taking annual mortgage advances to BRL36.4 billion.

Boosted by legislative changes The county’s housing market has been boosted by a number of legislative changes designed to stimulate demand and increase consumer protection, helping to restore confidence in an industry that was hit by some high-profile scandals in the 1990s. Fresh legislation has also concentrated on simplifying the procedure for transferring property ownership and the law relating to repossession.

The country’s banks have been quick to tap into the growing home loans market, developing new products to meet the demands of the country’s growing middle class.

“Only five years ago, a good commercial bank loan for homebuyers would finance no more than half the value of the property, with a repayment period of ten to 12 years. But now banks are starting to offer 80 percent loans with payments spread over up to 30 years. Some products offer the option to pay lower interest rates in the first few years of the loan,” said Gonçalves.

“These improvements and others have enlarged the potential numbers of customers for home loans. In 2002, you could get a BRL80,000 loan at 12 percent a year to be paid in 120 months. The minimum income required to be eligible for a loan like that would equal 12 times the minimum wage. Today you can borrow the same amount at 10 percent a year and pay it back in 300 months, and you can apply for the loan even if you earn less than the equivalent of eight times the minimum wage,” said Gonçalves.

The banks’ main source of mortgage funds is money deposited in savings accounts (caderneta de poupança). As a result of higher incomes and improving economic conditions, Brazilians have been able to save more, increasing the pool of resources banks are required to earmark for home loans – banks have to direct at least 65 percent of funds deposited in savings accounts to fund mortgages.

After registering a drop in deposits in 2005, the Brazilian banking system posted a major increase in deposits in 2006 and especially in 2007, with BRL18.35 billion deposited in savings accounts in the first 11 months of the year. According to Gonçalves, total savings now exceed BRL177 billion, but total home loans advanced represent less than BRL48 billion, or 27 percent of total deposits.


Another source of loans

Another source of loans is the Fundo de Garantia do Tempo de Serviço (FGTS), a fund made of contributions paid by employers on behalf of their employees. It is managed by Caixa Econômica Federal, the state-owned bank and long-time principal provider of housing loans in Brazil.

Now commercial banks are also offering such loans. Banco Itaú, the second-largest private sector bank, started to offer FGTS-based products at the end of 2007; rivals such as Banco Real, Santander and Bradesco are expected to follow suit.

Mortgage default rates have been moving in the right direction, at a level now below 4 percent, providing another stimulus to banks to focus on increasing mortgage sales. Higher income levels and legislative changes have played their part in reducing foreclosures.

Gonçalves said that measures are needed to “reduce the still annoyingly high amount of red tape involved in the process of buying a home, to give a new boost to the market. It would help, too, if the interest rates for savings accounts and the rate charged on home loans were left to the market, instead of being set by law,” he added. Current rules mean banks are restricted to charging between 8 percent and 12 percent a year.

With mortgages becoming increasingly affordable, analysts expect the country’s banks to play an active role in fighting Brazil’s chronic housing deficit, estimated at 7.9 million homes.

It has also been estimated, however, that only 3.7 percent of the families who do not have a home of their own earn more than five times the minimum wage a month, currently regarded as the minimum income to be eligible for a mortgage.


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