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Housing Finance Mechanisms in Brazil
Housing Finance Mechanisms in Brazil
MECHANISMS IN
BRAZIL
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Disclaimer
The designations employed and the presentation of the material in this publication do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers of boundaries. Views expressed in this publication do not necessarily reflect those of the United Nations Human Settlements Programme, the United Nations, or its Member States. Excerpts may be reproduced without authorization, on condition that the source is indicated. Cover photo: Celso Pupo/Shutterstock
Acknowledgements:
Director: Principal Editor and Manager: Principal Author: Contributor: English Editor: Design and Layout: Oyebanji Oyeyinka Xing Quan Zhang Joo da Rocha Lima Jr. Claudio Acioly Tom Osanjo Andrew Ondoo
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FOREWORD
At the dawn of this At the dawn of this new urban era, U N - H A B I TAT research shows that by 2030, two-thirds of humanity will be living in towns and cities. We thus live at a time of unprecedented, rapid, irreversible urbanisation. The cities growing fastest are those of the developing world. And the fastest growing neighbourhoods are the slums. Indeed, the global number of slum dwellers is now at or close to the 1 billion mark. Excessive levels of urbanization in relation to the economic growth have resulted in high levels of urban poverty and rapid expansion of unplanned urban settlements and slums, which are characterized by a lack of basic infrastructure and services, overcrowding and substandard housing conditions. Yet housing and the services that should be provided with it are one of the most basic human needs. It is enshrined in various international instruments, including the Habitat Agenda. And reducing the number of slum dwellers around the world is a cornerstone of the Millennium Development Goals set to fight poverty around the world. So if we fail to achieve the Goals in towns and cities, we will simply fail to achieve them at all. It was with this crisis in mind that the United Nations General Assembly decided in its resolution of 26 February 2002 to transform United Nations Commission on Human Settlements into a fully pledged programme. The General Assembly in its resolution called on UN-HABITAT to take urgent steps to ensure a better mobilization of financial resources at all levels, to enhance the implementation of the Habitat Agenda, particularly in developing countries. It also stressed the commitments of member states to promote broad access to appropriate housing financing, increasing the supply of affordable housing and creating an enabling environment for sustainable development that will attract investment. The Habitat Agenda recognizes that housing finance systems do not always respond adequately to the different needs of large segments of the population, particularly the vulnerable and disadvantaged groups living in poverty and low income people. It calls UNHABITAT to assist member states to improve the effectiveness, efficiency and accessibility of the existing housing finance systems and to create and devise innovative housing finance mechanisms and instruments and to promote equal and affordable access to housing finance for all people. In our quest to reach as many people as possible, a cornerstone of our agencys new Medium-term Strategic and Institutional Plan is partnerships. We have no choice but to catalyze new partnerships between government and the private sector. This is the only way to finance housing and infrastructure at the required scale the scale needed to stabilize the rate of slum formation, and subsequently reduce and ultimately reverse the number of people living in life-threatening slum conditions. It is clear that in the coming 20 years, conventional sources of funds will simply be unavailable for investment at the scale required to meet the projected demand for housing and urban infrastructure. Many countries around the world continue to face deficits in public budgets and weak financial sectors. Local governments have started to seek finance in national and global markets, but this is only in its initial phase.
New mortgage providers have emerged, including commercial financial institutions and mortgage companies. But only middle and upper income households have access to such finance, while the poor are generally excluded. Although social housing is becoming less important in Europe and in countries with economies in transition, the need to provide shelter that is affordable to low income households still exists, including in developing countries. This is why the exchange of information and knowledge on human settlements finance systems is so important. It is why it receives increased recognition in facilitating the development of human settlements finance systems and in turning knowledge into action for developing practical human settlements finance methods and systems for these pressing problems. Our Human Settlements Finance Systems series documents the state, evolution and trends of human settlements finance in member states, and examines the factors and forces which drive the development of human settlements finance systems and the roles of different institutions and actors in shaping the systems and trends, and reviews human settlements finance systems. It presents an interesting review of policies, instruments,
processes and practices. It examines the strengths and weakness of these systems and practices, their relations to the housing sector and the broad economic and social sectors, and lessons learned from practices. Indeed, the country review studies we present are a valuable resource for member States because it is a body of work that also shows how human settlements finance systems and models can be applied to local use and thus provide a wider range of options for human settlements finance. The series also serves as guidebooks for policy makers, practitioners and researchers who have to grapple daily with human settlements finance systems, policies and strategies.
Anna Tibaijuka,
Under-Secretary-General, United Nations Executive Director, UN-HABITAT
CONTENTS
FOREWORD CONTENTS ABBREVIATIONS AND ACRONYMS LIST OF TABLES AND FIGURE PART I THE CURRENT HOUSING FINANCE SYSTEM: STRUCTURE
Introduction Sistema Financeiro da Habitao-SFH Funding Guarantee Fund for Length of Service - Retirement Institutional Fund Leverage in the Sistema Financeiro da Habitao-SFH Sistema Financeiro Imobilirio-SFI Funding The Currency of the Systems PART II LOW INCOME HOUSING Introduction The Federal Government Support Program
III V VI VII 1
1 2 6 6 8 9 15 15 16
21
21 28 29
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SOCIAL INVESTMENT FUNDS A TOOL FOR POVERTY REDUCTION AND AFFORDABLE HOUSING
INTRODUCTION
The real estate credit system used in Brazil for residential housing (known as the Housing Finance System-SFH), was created in 1964. Previously, there was no organized system for housing financing in Brazil. Its structure has changed since then (1964-2009), on matters of formal guarantees, limits and definition of the adjustment of payments. However, the core of the system has not changed and there is no perception of movement, whether from the State or private agents, so that sensitive changes occur in its structure. This system, when in conjunction with market fundraising systems, via targeted instruments to raise conservative savings funds in the market, is known as the Brazilian Savings and Loans System - SBPE. The SFH was complemented over time with topical rules, and a new parallel system, the SFI, was established in 1997, including rules that facilitate foreclosure in the event of default, and the creation of a differentiated structure of fundraising for the funding of the system, constituting mechanisms, which together are called the Real Estate Financing System-SFI. The SFI has served more like a supplement of the SFH than a system that could replace it in the medium-long term, being used more extensively for commercial real estate, rather than residential. The SFH is established on a predominant action of the State, and it is acknowledged that the SFI can operate as a fully private system, similar to what is practiced in the USA. The SFH resources, although private, are administered by the State, either by direct and indirect action, this being represented by
the systemic function of the Caixa Econmica Federal (CEF). The transaction of SFI funds occurs fully into the environment of the agents of the private financial system, representing only the normative function undertaken by the Central Bank (BCB) and the Securities Commission (CVM). CEF is a commercial bank, controlled by the State, which has ancillary functions as the managing agent of certain functions in the SFH. The Central Bank is the manager of Treasury funds, the disciplinary agent and controller of the currency and the manager of all the Brazilian financial system. The Securities Commission has the control and regulative functions on the Brazilian capital market, and has the authority of issuing and circulation of private securities in the market. SFH and SFI have different funding structures, with different means for adjusting the payments of housing financing in the long term. While the legislation created a "specific currency" to the SFH, SFI operates within the parameters of the financial and capital markets. This condition should be the premise for the SFI to find easier funding, but the weakness of the secondary market for investment vehicles designed in it makes the system not to achieve proper relevance. Therefore, the market focused mainly on the SFH. The SFH funds its operation in private savings resources in Cadernetas de Poupana (CP), which are savings private accounts, used by medium income families to preserve their savings and are fully Federal Government
guaranteed. The system, for low income housing, uses funds deposited monthly in private accounts of all employees by the employers, constituting the Fundo de Garantia por Tempo de Servio (FGTS), designated to be a retirement fund under government administration. Generally, the construction finance is done by using the CP funds, the mortgages for medium and high income uses the CP resources, and the FGTS funds have the destination of low income mortgage funding. The SFI is funded trough investment instruments that securitize mortgages, called Certificados de Recebveis Imobilirios (CRI). In this system, which is very inexpressive, when compared to SFH, for construction, the banks use regular funds to finance and the proceedings of CRIs placement with investors (pension funds in majority) to finance the acquisition of the homes.
the resources raised. Among the biggest players in Brazil SFH are banks controlled by the Federal Government: Caixa Econmica Federal, Banco do Brasil e Nossa Caixa. There are also several private banks operating in the SFH.
Savings Accounts (Cadernetas de poupana - CP) The savings accounts (CP) are savings instruments with free deposit and withdrawal, unlimited scope and bearing an important incentive in the market - their income is exempt from income tax. CP represents the easier access to financial markets and are used by the majority of the population able to make savings, especially the middle-income strata. The balances of the CP are guaranteed by the Federal Government, without limitation. The CP pay interests that are ruled by law. Therefore, there is no competitiveness to be pursued by banks to increase their fundraising level. The interest rate paid for CP savers has always been 0.5% month, plus an index that represents the inflation, which means that CP pays an effective 0.5% month of interest. Real Estate Securities (Letras de Crdito Imobilirio -LI) The LI are debt securities with fixed-term, monthly income and free depreciation system issued by financial institutions and intended to capture savings as a regular CD. These are not instruments used in large amounts, because they collide with the CP market, which has a simpler structure of operation. LI is used to raise funds for qualified investors who, according to the instructions of the Brazilian capital market, have a significant portfolio of investments in the market for which investment products are designed, being the minimum unit value 300,000 BRL (USD 166.667)1 . LIs can be used for fundraising by banks that do not have a widespread network of agencies, because they can pay free interest,
1 Exchange rate:1.00 BRL (Brazilian Real) 1.80 USD (U.S. dollars)
allowing reaching qualified investors, with greater savings potential. However, given the knowledge that the market already have of the CP and that the housing finance business is operated primarily by major Brazilian
banks, which holds a high penetration branch network, the LIs are used moderately and do not represent a significant vector of funding for the system.
The Application of Sistema Financeiro da Habitao-SFH Resources The housing financing banks in Brazil finance the construction and acquisition of houses using a particular source of funding of the CP associated with the revenue stream of returning acquisition funds that are already in repayment. The return flow of housing finance represents a stable contribution to the funding of the system, but deferred in the end. Any procedure with the securitization of mortgages would advance this contribution, which would use resources from outside the SBPE, gaining volume in the medium term. Through securitization of mortgages, one can access domestic savings in pension funds, for example, as is the strategy of market systems to
spread throughout more developed economies. Working, however, with the mortgages internalized in the portfolio of banks, the housing finance system in Brazil operates with zero leverage. Funding for purchase of the residence follows the construction and does not need to be done within the same agent. The rules of the system allow some banks to specialize in financing the construction and others to deal with mortgages only. What is perceived as the main intention in this industry is to finance mortgages, not the construction, being noted that private banks do finance production without desire, but only as a mechanism for generating mortgages.
The regulatory mechanisms of the SFH-system commands to collect, from the values raised: to the Central Bank a compulsory 20 percent. Central Bank pays to the banks the same interest rate that is paid to the savings accounts, meaning that, for the banks, that part has is a zero profit operation; 65 percent has to be directed to housing finance. From this part, the application of 52 percent is normalized by SFH for low and middle income housing (interests, loan to value and length) being the remaining 13 percent free (unregulated as interests, loan to value and length) to be used either in production or acquisition, for medium or high income; that leaves the remaining 15 percent of funding free to apply the operating banks, but targeted at companies in the real estate, credit derivatives or investment derivatives in the sector, or even in government securities. It is noteworthy that, due to high interest rates practiced in Brazil, in the remuneration of public bonds (rate), the arbitration between the yields paid
to CP against income from bonds would tend to cause a passive implementation of this part of the raised funds. Figure1 shows the flow of funds for construction finance on the real estate finance of the Brazilian private banks. In Figure 1 it is noted the movements in financing the construction, highlighting the temporal asymmetry between the two flows of resources. The CP depositary is free to redeem each month and the construction finance, where the funds are allocated, has a higher length of liquidity cycle, considering that the construction finance is paid with the issuing and placing of mortgages. As for the imbalance that might occur there is no mechanism to hedge the bank and should be supported with other resources from the bank cash flow, which can cause asymmetry of yield, generating operating losses. In the case of funding with the issuing of LI, even though this is an insignificant stratum of the market that banks tend to ignore, the asymmetry could be lower, given the possibility of issuing LI in conjunction with construction financing.
FIGURE1: FLOW OF FUNDS FOR CONSTRUCTION FINANCE ON THE REAL ESTATE FINANCE OF THE BRAZILIAN PRIVATE BANKS
Savings on the CP depositary retention of funds = at least 1 month mandatory to receive interests
asymmetric
65% +15% on construction finance retention of funds = -12 to 18 month average to build and receive the return via mandatory placement
A Multiple Bank showed in this Figure 1 regards the banks structure in Brazil. The Central Bank gives particular operations authorization for the different banks operations as commercial banking, investment banking, real estate finance, leasing, international trade, etc. A multiple bank is a bank that has multiple activities, in this Figure including real estate. In Figure 2, it is shown the full construction financing circuit, with the creation of mortgages, highlighting the pronounced temporal asymmetry that can be hedged via securitization instruments or mortgages transfers to the system administered by CEF.
It should be noted, however, that mortgages securitization instruments in Brazil are used scarcely due to almost non-existent secondary market liquidity. The contracts of construction finance are assigned at interest rates that vary between 11% and 15% year, plus the inflation adjustment. The funds are liberated monthly, according to the completion of the construction phases, should be paid in full (principal and interests) at the end of the construction, what is made by the placement of the mortgages generated trough the acquisition finance. The guaranties required for the construction finance are the land and construction as collateral.
FIGURE 2: FLOW OF FUNDS FOR MORTGAGE GENERATION ON THE REAL ESTATE FINANCE OF THE BRAZILIAN PRIVATE BANKS
20% to Bacen same yield as CP savings Savings on the CP depositary retention of funds = at least 1 month mandatory to receive interests
highly asymmetric
house acquisition finance retention of funds= monthly payments on 20/30 years cycle
construction finance
HOUSE BUYERS
repayment of construction finance with the mortgages Source: Joo da Rocha Lima Jr. (2010) 5
Figure 3 shows the overall funding structure of the SFH in Brazil, at the production and acquisition, noting that the system can only maintain a certain degree of balance when one takes into account the reallocation of resources collected by FGTS to tackle falls in savings balances, whose resources are tied up in buildings or mortgages.
Savings on the CP depositary retention of funds = at least1 month mandatory to receive intersets
Operational mangement Construction finance and house acquisition finance house acquisition finance
Construction finance
strategic decisions
house buyers
Savings on the employees accounts retention of funds = presumably very long, up to 30 years
Funding for Production The funding for production is not ruled by means of its own instruments, i.e. mortgage companies and securitization companies. Together with the commercial banks in their lending to companies, comprises all the financial agents, which will use the funding market, using the instruments utilized in the regular funding of business (e.g. debentures) and banks (certificates of deposit, for example), and the financing to build granted at market interest rate. It should be noted that in SFH, in view of the fund raising cost (income of CP), 52 percent of applications are mandatory for financing housing for lowincome families. Mortgage companies, authorized by the Central Bank to operate only in real estate lending by the SFI, can raise funds from qualified investors through Letras Hipotecrias (LH), which are mortgage securitization instruments.
Housing Acquisition Mechanism Funding for acquisition of housing might be done directly by the entrepreneur, without mortgage, but with the concept of fiduciary disaffection. The flow of receivables (installments) derived from this contract is sold to the securitization companies, asset against which these companies may issue Certificates of Real Estate Receivables (CRI), which in turn work like any instrument of mortgage securitization in the international market (CMO, for example). It is intended that the CRI have a market with institutional investors, but, in view of an almost nonexistent secondary market, such investments must remain within the portfolio of investors by the time of funding (20 to 30 years), which restricts its placement.
For enterprises for higher income classes, whose funding may be made at shorter intervals (5 to 7 years), the CRI has a greater chance of use, but this represents a small market segment. In another sense, this legislation which authorizes a certain amount of CRI that has been issued, is bound to flow from rentals (usually 5 to 7 years) in commercial investment in the model build-to-suit. There are CRIs issued to securitize future flow of locations in shopping centers, but these instruments are very specific and niche markets. Since they are being used in very specific strata markets (high income, build to suit and shopping centers), the investment vehicles that would serve to leverage the CRI did not acquire the necessary strength, so that the large residential market continues to operate without leverage, anchored especially in the SFH.
(FCVS) whose risk was supported by the Federal Government. It was always understood that the primary sources of funding (CP and FGTS) should first be protected from the losses caused by inflation and then remunerated (3 percent per year in the FGTS and 0.5 percent per month on CP). Therefore, funding for the acquisition of residences should undergo adjustment of the balance through the same rates applied to sources of funding, to impose the required symmetry of the SFH system. It was evident that in times of inflation crisis, the wages of borrowers of housing loans did not keep with the curves of monthly inflation, which boosted the default. Federal government then decided to counter the symmetry, by adjusting the debit balances of contracts through the same inflation rates that adjusted the sources of funding (CP and FGTS), monthly, but not the installments and the payments of buyers that was adjusted through indexes that reflected the adjustments of salaries, every six months. A fund, the FCVS, was created, and its resources should cover the debit balances outstanding funding agreements, recorded at the end of the payment due to the lack of symmetry of inflation adjustment. Buyers had to contribute to the formation of FCVS, following a set fee applied on the value of the monthly payment. This insurance plan was ill defined and calibrated, resulting in a debt of the Federal Government, which has been settled gradually, but that was in default for a few years and which amount exceeded USD 100,000 million. The SFH had even been through a period of inaction, caused by this default of the FCVS, with the banks that held the mortgages with outstanding balances and any benefits already paid. Banks had an uneven balance between its obligations to the CP and the perceived benefits of the financing contracts, whose stability was only recomposed with the release of claims against accounting FCVS,
The Experience of the Fundo de Compensao de Variaes SalariaisFCVS on the Sistema Financeiro da Habitao-SFH SFH had always suffered from the issue of inflation adjustment, especially in the 19641994 cycle, in which it seemed to crumble completely when an insurance system for inflationary adjustments was created, through the Salary Variations Compensation Fund
but that does not reflect cash flow, if there were any strong pressure of looting in CP, or the obligations to the FGTS. This cycle ended in the transition to the twenty-first century, with the assumption by the Federal Government of a program for settlement of claims against FCVS and enhancing the SFH, the CP and the FGTS.
The Recasting of the Sistema Financeiro da Habitao-SFH, with the Introduction of Taxa Referencial-TR In 1991 which was a period of high inflation in Brazil, where economic plans succeeded often by looking at the change of currency, it had already withdrawn the correction for inflation of two action lines of the SFH (funding and debt financing). It introduced the concept of the TR (a basic rate defined specially for the system fund-raising and lending are TR referenced), which brings closer to the financial market system, in monthly regimen.
This concept is sustainable for the uptake in CP, but maintains the same instability previously found with respect to the balance between the setting of wages and the provision of funding for the purchase of houses. Through the TR, the most new currency of the SFH was created, based on resource revenues in time deposits (bank certificates of deposit CBD and bank receipt of deposit RDB) offered by commercial banks, and no longer in inflation rates. The TR is calculated daily by the Brazilian Central Bank, is valid for a month and is based on the average of a basket of returns offered by CDB and RDB market, applied a reducer (deflator), which seeks to deduct the inflationary component and the differential taxation of tax income from a financial investment in those instruments and the application in CP.
As this virtual currency (TR index) is selected in short-term applications, the long-term debt and investments of SFH end up functioning as a chain of short-term applications and debt, which in the macroeconomic sense means an asymmetry, because it perpetuates the short term, that should move following higher interest rates than those attributed to longterm and conservative applications, as are the CP for savers and as is the mortgage for banks. The non-significance of TR with respect to inflation is evident in Figure 4, showing that the TR in the long run, as a marker of savings and conservative cycle of funding for housing, has been losing its reference against inflation since 2001. In this Figure 4, GPI gross prices index is the IGP M (general prices index), CPI consumer prices index is the IPCA (consumer prices index) and the CCI construction costs index is the INCC( national construction costs index).
Table 2: shows the TR variation and the CPI (IPCA) variation in the last years.
% Per year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 9.6% 9.8% 7.8% 5.7% 2.1% 2.3% 2.8% 4.6% 1.8% 2.8% 2.0% 1.4% 1.6 % Per year 22% 9.6% 5.2% 1.7% 8.9% 6.0% 7.7% 12.5% 9.3% 7.6% 5.7% 3.1% 4.5%
10
Figure 4 shows the discrepancy between the inflation indexes and the virtual inflation that supposes to be reflected in the TR definitions made by the Government.
300
200
200
150
150
100
Sources: IPCA (IBGE-Brazil); IGP-M and INCC (FGV-Brazil) TR and Exchange Rate (Bacen)
Figure 4 shows the evolution of main inflation indices used in Brazil linked with the business of real estate, in comparison with the variation of the TR: IGP-M = General Price Index FGV Fundao Getlio Vargas. It is the index mainly used to reflect the loss of purchasing power of the Real within the environment of the Brazilian economy. The IGP-M is measured monthly and associates movements of wholesale prices (60 percent) variation in the cost of household budgets (30 percent) and construction costs (10 percent).