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Prior to the passage of the Plano Real in 1994, secured loan lending and mortgage refinancing was not viable in Brazil due to the country’s general economic instability (the country was recovering from the effects of hyperinflation with much attention being focused on macroeconomic stabilization). The stability stimulated by the Plan lead to an increase in the demand for housing which in turn boosted the demand for long-term funding. However, in spite of the more favorable economic condition for mortgage lending, Brazil’s housing finance regime (codified under Brazil’s Housing Finance System) could not satisfactorily accommodate this increase in demand.

Background

The housing finance system depends on 2 basic funding sources: saving deposits held by central bank authorized financial organisations as well as compulsory deposits made by employers in accounts held in the names of their employees.  However, several prospective borrowers were not eligible to get loans from these sources of financing due to apprehensions over the complexity and expense involved in foreclosing on property. This ineligibility led to the creation of a new source of funding: real estate developer finance.  Contracts would be exchanged and payment installments would be made to fund construction costs.  These were, therefore, unsecured loans and were not backed by collateral which, in turn, resulted in a huge volume of receivables held by real estate developers. The developers have turned into such a dominant force in the mortgage lending field that around 85% of Brazilian homes are financed by them. However, this method of financing, too, proved less than ideal. The loans suffered from a number of flaws, such as high transfer taxes and problems in separating the loan risk from that of the developer. Moreover, while it was not essential to set up a foreclosure proceeding, and the eviction process could take as long as 2 years. Note that today the process of developer finance has become far more sophisticated and extensive background and credit checks are undertaken.

The driving force behind the change

Lula’s pro-market reforms have significantly helped expand Brazil’s mortgage market. The first big change was the government’s sanction of fiduciary alienation, whereby the buyer becomes the owner of the property only after it has been wholly paid. The lending institution holds ownership of property, whilst the loan is being repaid. This gives banks security, if borrowers default. Earlier, banks were hesitant to lend, as Brazilian courts were biased in favor of borrowers.

CIBRASEC (Companhia Brasileira Securitização) or The Securitization Company-was set up in Brazil for the purpose of creating a secondary mortgage market where mortgage loans are purchased and sold. A secondary market allows for allocation of the risk and returns of the mortgage market amidst more participants than would be possible in a primary market. Therefore, although mortgages in Brazil are quite recent, the Brazilians are becoming gradually more interested on home loans, mortgage refinancing, and etc. Proof of this can be found in mortgage figures for March 2010, which is supposed to be the best month in the history of the Brazilian mortgage system. In March, mortgages were approved to the value of R$4.1 billion, a massive 82% more than March 2009.