Mortgage boom may come home to roost for Brazil’s banks
SAO PAULO (Reuters) – Owning their first home on the outskirts of Sao Paulo felt like a distant dream when tattoo artist Fernando do Prado and pharmacist Jenifer Ferreira got engaged in January.
They soon realized, however, that it was within their reach if they used their savings as a deposit, with mortgage payments for a similar-sized apartment on the outskirts of South America’s largest city costing less than half of the equivalent monthly rent.
“It meant a lot to us to start our life together by already owning our home,” Jenifer said after the couple’s dream came true in September with the purchase of a two-bedroom apartment.
A dramatic drop in interest rates sparked a mortgage boom in Brazil, making home ownership accessible to thousands of people like Jenifer and Fernando and tempting others to swap or spend for a house in the countryside or by the beach.
The rise is welcome for banks such as Brazil’s biggest lender Itau Unibanco, Banco Bradesco and Banco Santander Brasil, whose business loan portfolios have been put under pressure by the coronavirus crisis.
COVID-19 has also triggered record job losses and an increase in mortgage defaults on home loans, creating a potentially dangerous road for borrowers and lenders.
The last such boom in Brazil ended badly, but bankers say this one is different because it is driven by low interest rates, a deep housing deficit and supported by prudent lending models.
“The real estate market in Brazil is well below its potential, leaving plenty of room for growth despite economic stress,” said Danilo Caffaro, head of mortgages at Itau.
Home loans jumped 49% in October from a year earlier to reach their highest monthly volume since 1994, according to data from the Brazilian Mortgage Association, driven by a dramatic drop in the interest rate benchmark at 2%, compared to more than 14% in 2016.
Buying is now much more competitive and each percentage point drop in interest rates puts a mortgage within the reach of an additional 2.8 million families, according to the Brazilian Construction Association.
“The low rates make a mortgage much more acceptable and allow more and more people to take advantage of it … Thus, people not affected by the pandemic have kept their acquisition plans,” said Cristiane Portella, head of the Brazilian mortgage association Abecip.
WAR MOUTH WARNING
The Brazilian mortgage market is still in its infancy, with outstanding mortgage loans totaling 720 billion reais ($ 135 billion), or about 10% of GDP, or less than half the ratio in Chile and a fifth from the United States.
And economists estimate that Brazil is around 4.5 million units short of demand, a tantalizing gap for banks and developers.
Rafael Menin, CEO of Brazil’s largest low-income home builder, MRV, predicts that between 20 and 30 years of booming home sales await us if rates stay low.
Brazilian rates are expected to rise in the coming years, a central bank survey predicts benchmark interest rates of 3% in 2021, 4.5% in 2022 and 6% in 2023. But these are much lower to those observed during previous episodes of hyperinflation. .
For a chart on Outlook benchmark rates for Brazil:
Real estate finance has become one of the fastest growing areas of credit for Itau and its rivals hungry for secured loans as COVID-19 threatens to defeat unsecured borrowers.
But while mortgages seem like a lower risk avenue, some skeptics warn that there could be a hangover.
This is in part because unlike US banks, which sell almost all of their mortgages to third party investors, Brazilian lenders keep the majority on their balance sheets.
At state-owned bank Caixa Economica, federal mortgages account for 66% of its loan portfolio, while private sector lenders have 6-8% of their real estate finance.
Banks insist that prudent lending models and collateral will minimize risk and while Brazilian regulators prohibit borrowers from financing more than 80% of a home’s value, lenders have on average maintained this. ratio closer to 60%.
Nonetheless, defaults increased, reaching a record 6% of all banks’ outstanding mortgage loans in the first half of 2020, according to data from the Brazilian central bank.
Mortgages accounted for 61% of all loans that were extended as part of the banking sector’s broad forbearance program during the pandemic, the regulator said.
This represented a temporary setback, as 80% of those borrowers had resumed their regular payments by September, the central bank said in an email to Reuters. Mortgage holders continued to ask for grace periods, but at a slower pace.
Five years ago, a real estate boom ended with banks taking over hundreds of apartments and entire buildings that they were then forced to unload at a discount.
But banks and home builders say those mistakes won’t happen again amid low interest rates and new repossession rules.
However, risks loom and a hike in the benchmark rate, which economists see as likely amid growing fiscal concerns and inflation, could push up the cost of some mortgages.
Floating rate loans still only account for 3% of total outstanding, but recent central bank data shows they are on the rise, exposing borrowers to any increase in underlying rates.
Santander Brasil has decided not to offer variable rates because it believes customers may have problems repaying these loans in the near future, the bank’s mortgage manager Sandro Gamba said.
And a further rise in unemployment, which is already at 14.6%, could also pose a risk even for those on fixed-rate deals.
“There could be problems here and there for the banks, but I don’t see any systemic risk. Unlike the last real estate crisis, house prices and interest rates are at their lowest, ”said analyst Fabio Fonseca, partner at JGP Gestão de Recursos.
Still, there are signs of rising prices, with those in some neighborhoods in Sao Paulo increasing in 2020.
Cyrela Brazil Realty SA, Brazil’s largest homebuilder by market value, said demand had pushed up introductory prices in the Brooklin district by about 5% in less than a year, although all cities did not record such gains.
Bradesco Mortgage Officer Romero Albuquerque said that while the unrest caused by the COVID-19 pandemic has led his bank and others to tighten lending criteria, there is still a long way to go.
“The low interest rates have made real estate finance so much cheaper that the demand is huge even considering only very good payers,” Albuquerque said.
Reporting by Carolina Mandl; Editing by Christian Plumb and Alexander Smith