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As demand for Brazilian housing credit continues to grow at an unprecedented pace, policy makers have become increasingly concerned about the depletion of wholesale funding accessibility and are currently actively exploring alternatives.

Today, Brazilian loan to value levels are generally at 60 percent also requiring the applicant to prove that installments will not compromise more than 30 percent of income in order to be granted mortgage finance.  Interest rates for Brazilian home buyers remain comparatively high at between 11 and 12 percent – these costs, however, are based on the high charges that banking institutions are required to pay to access the national savings resources (caderneta de poupança) and the Guaranteed Fund of Service Time (Fundo de Garantia do Tempo de Serviço, FGTS) in addition to being required to pay the reference rate (taxa referencial), financial capture costs and taxes on profits.  In reality, a margin estimated at between 1 and 2 percent is netted by the home lending institution.  Whilst this dispels some of accusations of greed often made towards Brazilian home lenders (which is however justifiable if considering the extortionate unsecured rates being charged), on a medium to long term basis, the growing desire to bring interest rates to international levels recently announced by Dilma Rousseff looks unlikely to be achieved with such cost structures.

At the same time, with the ability to access national savings expected to cease during 2012, the importance of other solutions is looking at being one of the most important factors affecting sustainability– particularly for the mid-upper class sector which currently dominates the housing borrowing market.  Speaking to the Exame magazine, Eduardo Zylberstajn coordinator of the FipeZAP index recently stated: ‘the expansion of the Brazilian credit market has been the main reason why the country has been experiencing a  boom in recent years – depending on the government’s decision related to this financing situation, house prices can go one way or another.’

According to a recent article by the Valor Econômico, the main proposal under analysis is via increasing the attractiveness of placing investment funds into the national savings – however, according to other sector specialists speaking to the Exame magazine, this may divert attention from alternative public funds which could, in turn, jeapordise the servicing of Brazilian public debt.

According to Exame, one solution is to peg the return to the SELIC interest rate or charge a gains tax on applied finance.  Another suggestion – albeit a widely viewed risky one – is for the Brazilian government to reduce the level of compulsory deposits that banks need to collect together with the Central Bank which will enable the banks to be able to lend over 65 percent more to home buyers. Joe Powell from consultancy Easy Credit Finance (Crédito Imobiliário Fácil) – also speaking to the Exame magazine – suggested that a simple solution is to expand securitisation, meaning that that real estate finance portfolios can be sold to banks and investors.  The money that comes back to banks can be lent out again – increasingly the quantity of financial resources available.  Whilst commonly viewed as a risky strategy and one of the bases that fuelled the sub-prime crisis in the US, Powell retorts: ‘I do not believe the same thing will happen in Brazil as banks here are much more rigorous in their criteria on the approval of loans.’  Another proposal being made is via Banking Deposit Certificates (Certificados de Depósitos Bancários) – which are bought against security on a real estate lending portfolio benefitting from a rate of return that is higher than what is offered via the national savings as well as income tax exemption.  The final decision is expected to be taken at the start of 2012.