Inter-American Development Bank

Housing Finance in Latin America and the Caribbean: What is holding it back?

Research Proposal:

The Brazilian Housing Finance System: An analysis of the financial sector structure and mortgage credit development

Research Team:Prof. Doctor Nabil Bonduki (USP)

Prof. Doctor Silvia Maria Schor (USP)Claudia Magalhães Eloy (USP)

Fernanda CostaHenrique Paiva

December, 2009

1. Introduction:

Over the last years, housing production and financing in Brazil have been experiencing steep expansion, seen

by many as a real estate boom, thanks to stable economics, declining interest rates and a number of legal

reforms.

A set of coherent macroeconomic policies – fiscal policy with deficit and public debt controls; monetary policy,

based on inflation targets; and, floating exchange rates – brought about stability allowing the country to finally

leave behind its historical pattern of high inflation and real interest rates. The maintenance of these policies

during the entire last decade – first time for Brazil1 – as well as its foreseen continuity, indicate that interest

rates shall keep decreasing and gradually promote the shift of investments in treasury bonds to other types of

investments, including ones of longer maturity such as those of real estate, stimulating the increase of

mortgage credit. Steady growth, without ruptures – GDP rose at an average of 3.8% between 2003 and 2007,

reaching 5.1% on 2008 – has been essential to jobs and income dynamics, fostering the increase on savings

as well as the demand for housing, thus contributing to the growth of the construction industry and housing

finance. The comfortable level of international reserves, the reduction of external debt and, at last, the reach

of investment grade, in the first semester of 2008, have allowed the country to go through the international

turmoil without much turbulence. The significant expansion of credit in these last years is related to this new

economic soundness.

Among the legal reforms undertaken one of the most important that regards the seize of collateral in the event

of default, is the adoption of Alienação Fiduciária (Trust Deeds). This has allowed a significant drop in NPL

from 9.7% in 2004 to 3% in 2008. Looking just at contracts under Alienação Fiduciária, NPL is down to 1.2%,

according to Abecip2, 2009.

The origin of mortgage credit in Brazil goes back to 1964, when the federal government structured the

Housing Finance System (SFH), a specialized system, created amidst the financing system and capital

market reforms, together with the institution of indexation. Before 1964, there were the “Institutos de

Previdência” (IAPIs e IAPs), that utilized pension funds and produced about 260 thousand units to some

professional categories over around 3 decades3, and there was the “Fundação da Casa Popular” (Affordable

Housing Foundation), in this case a public institution, that financed approximately 17 thousand units between

1946 and 1964 on plots of land donated by state or municipal governments (Bonduki, 1999). The SFH

encompassed the creation of the National Housing Bank (BNH) and 2 sources of funds – savings accounts

under a subsystem called SBPE (Brazilian Savings and Loans System – Sistema Brasileiro de Poupança e

Empréstimo) and FGTS (Fundo de Garantia por Tempo de Serviço, Law nº. 5.107/1966) a severance fund

that collects compulsory savings for workers (excluding public servants and some other categories). Instituted

in a period of semi-stagnation of the construction industry and strongly motivated by the need to create Jobs,

the SFH established as its objective the promotion of housing to low income families4.

1 Before, Brazil had only maintained the same macro-economic policy for a period of 8 years (1960/70).2 Associação Brasileira de Entidades de Crédito Imobiliário e Poupança.3 Trindade, 1971 cited by Aragão, 2007, p.:100.

The capture of funds was such that by 1970, BNH was the country’s second biggest bank5. The economic

environment of the 80’s, however, with high inflation rates and unemployment reduced the funds of the

system, causing a mismatch between installment indexes (related to salaries rise) and the evolution of the

outstanding loan debt according to mortgage contract terms.

In 1986, SFH underwent a restructuring process (Decreto-Lei nº 2.291/1986) that extinguished BNH,

transferring FGTS management and the execution of housing programs to CAIXA – a state owned bank – and

the fiscal and controlling functions to the Central Bank and CMN (National Monetary Council). Later incentive

measures were put up to stimulate prepayment of loans against discounts (MP 133/1990). During the

following nearly 2 decades, housing policy was dismantled. Despite the significant production of SFH up to the

early 1980’s, the system served mainly medium and upper income families6, while reductions and discounts

offered (subsidies) were mostly regressive, becoming larger as financing amounts increased (Ferreira, 2003;

Köhler, 2003)7.

However, these 2 first funds – SBPE and FGTS – instituted at the origin of SFH remained almost intact, still

composing the basis of the System and since then have been growing in terms of amounts deposited as well

as housing financing contracted.

At the end of 2008, FGTS had summed up to BRL8 227 billion while savings accounts deposits under SBPE

totaled BRL 218 billion and have reached around BRL 240 billion in October, 2009. Savings deposits have

risen especially after this year’s more rapidly decline on interest rates – now Selic (basic interest rate) is

8.75% – turning these accounts into a more interesting investment relative to those related to Selic, especially

considering that interest accrued on the deposits are tax exempt9.

On the financing side, between 2003 and 2008, SBPE went from BRL 2.7 billion in 2003 to BRL 30 billion for

300 thousand financing operations, totaling about BRL 69 billion in real estate financing in 6 years. Yet, it is

interesting to notice that despite the impressive growth in amounts financed, financing relative to the volumes

deposited in savings accounts has actually been quite volatile, with a peak on the 2nd semester of 2006 and

again on 2007. Against greater financing from SBPE there is the argument about the risk of mismatch

between short term deposits and long term loans. There are also arguments favoring regulatory lessening of

SBPE, since there are mandatory lending rules related to the size of deposits per agent – minimum volumes

of housing loan and other real estate applications, maximum interest rates charged, plus indexation.

4 “... destined to facilitate and promote the construction and acquisition of housing, especialy by low income families...” (Art.8º Law 4.380).5 At first, 85.7% of BNH’s was composed of FGTS, but after the regulation of savings accounts, the deposits had such a growth that by 1980 surpassed FGTS, accounting for 53% of System’s total. 6 Azevedo, 1988 and 1996; Maricato, 1987; Magalhães, 1993; Rezende, 1993; Souza, 1993; Bonduki, 1996; Carneiro and Valpassos, 2003; Aragão, 2007.7 In Ferreira’s (2003) study she concluded that subsidies given were higher for higher financing values.8 Brazilian Real.9 It is interesting to point out that even when “poupança” was not such a good investment in comparison to treasury bonds and other fixed rate investments (CDB for instance), savings accounts still managed to capture a significant amount of families savings. That may be attributed to cultural factors, the tax exemptions and government guarantee up to BRL 60 thousand per account holder.

Housing finance figures at FGTS have also grown reaching BRL 9.8 billion in 2008 against 6.9 billion in 2007.

FGTS has also been providing money for subsidy (Res#460/2004), due to net earnings obtained from the

difference between interest gained on investment applications on treasury bonds (Selic) and lower interest

paid to account holders (fixed by law at 3% + TR annually). Both in 2007 and 2008, BRL 1.5 billion were

applied in direct subsidies used by borrowers for down-payment as well as caps to lower interest rates

attached to housing financing from FGTS. This has allowed the Fund to finance lower income families (around

3 minimum wages).

In 1997 a new subsystem was added – the SFI (Sistema Financeiro Imobiliário) – to promote capital market

based loans through securities (CRIs Certificados de Recebíveis Imobiliários) 10, aiming at expanding the

systems’ funds and reducing its dependency on the savings and loans system. Nonetheless, SFI totaled only

BRL 1.4 billion in 2007 and 4.9 billion in 2008 and just a small fraction of these totals correspond to housing

financing – 20% of total securitized in 2007. Moreover, SFI remains low profile and upper-scale focused,

though it is becoming more competitive in final cost with SBPE. The structure of government borrowing

through short term bonds indexed at high and floating rates offers, at the same time, liquidity, good return and

low risk to investors, competing with long term papers such as CRIs.

More recently, the establishment of the Affordable Housing National Fund (FNHIS, Fundo Nacional de

Habitação de Interesse Social, Federal Law 11.124/2005) brought about the idea that public funds from

federal budget must also be put in place on a regular and perennial basis. In March, 2009, the Federal

Government launched a housing program named Minha Casa Minha Vida (PMCMV), as part of an anti-

cyclical package intended to boost the economy and prevent the country from facing a serious job reduction.

Although mainly motivated by the international crisis, the public investments put together for this Program that

sets the objective of 1 million new housing units produced in about 3 years, may open the way for larger and

more sustainable public housing budgets as well as larger subsidies dedicated to housing finance11.

The funding system is completed by alternative sources, like developer funding (private resources, IPOs, etc.)

real estate investment funds or funding through housing cooperatives and consórcios, but mainly by self-

finance.

At the institutional level a series of recent events – the establishment, in 2003, of the Council of Cities 12 and of

the Ministry of Cities, taking up the role of previous Urban Development Secretary; the institution of the

National Housing Policy (PNH) in 2004 followed by the definition of the National Housing System, subdivided

in market and low income segments; the already mentioned Affordable Housing National Fund in 2005 and

the development of the National Housing Plan (Planhab) from 2007 to 2008 – shows that, for the first time

after 1964-1986, housing has returned to the public policy agenda. The goals set by the PNH are very

ambitious and include universal access to decent housing and setting the housing issue as a national priority.

10 Certificados de Recebíveis Imobiliários (CRIs) are issued by Securitization Companies.11 A Constitution Amendment proposal currently under analysis establishes a mandate of 2% of the federal budget and 1% of state and municipal budgets to go into housing.12 Originated from the National Council of Urban Policy in 2001, it is responsible for proposing the regional distribution of the Ministry of Cities’ budget.

As the U.S. subprime mortgage crisis turned into an international financial crisis, in the last quarter of 2008 the

turmoil hit Brazil, affecting more strongly the real estate sector, reducing credit and sales and curbing down

new housing developments in the first semester of 2009. From Jan to July, 2009, a total production of 62,600,

a 32% drop compared to 91,500 units in the same period of 2008, left developers short of cash and made

development industry stocks abruptly lose value. As mentioned previously, as a counter measurement, the

Federal Government launched an economic set of programs that included a housing stimulus scheme

(PMCMV) encompassing a public investment sum of BRL 34 billion and a goal to produce 1 million units from

2009 to 201113.

Although the amount of resources involved is quite impressive and the Program offers important stimulus to

the real estate sector, the resources directly invested in housing finance are restricted to BRL 2.5 billion to

subsidize financing from FGTS funds and the expansion of FGTS housing budget from BRL 13.5 billion in

2008 to BRL 19 billion in 2009, adding to the original budget established by the FGTS Council. Most of the

investments (BRL 15 billion) shall go directly into the production of units targeted to families with incomes

below 3 minimum wages, but no real (strict sense) financing is involved in this case – families pay 10% of

their incomes for 10 years, regardless of the cost/price of the unit and at no risk for the financing agent

(CAIXA) intermediating the process. Program investments include BRL 2 billion to set up the new Guarantee

Fund for mortgage credit to families between 3.1 and 10 minimum wages and to provide insurance coverage

at significantly reduced costs (MIP – death and permanent incapacity and DFI, physical damage to property);

BRL 5 billion to finance infrastructure in affordable housing projects; BRL 1 billion to finance the construction

industry productive chain; as well as a tax reduction (RET of 1%) incentive for production and new rules to

foster competition in the insurance sector.

Despite the shrank on financing right after Sept/2008, between June/08 and May/09 SBPE totaled BRL 30.8

billion in mortgage credit, a growth of 38% in relation to the previous period, from June/07 to May/08. Spreads

at SBPE have been reduced while terms and LTV ratios have expanded. The price of stocks of the real estate

companies that were significantly affected at first have also moved up – after falling 43% between Sept/08 and

Jan/09, the Imob index that represents stocks of major developers in the country, went up 123% from January

to Aug/2009, way over the hight of 49% of Ibovespa in the same period. Companies focused on low income

segments had even higher recuperations – ordinary stocks of Tenda rose 222%, MRV’s 170% and Helbor’s,

118%14.

It is clear that some of the basic conditions to develop our mortgage market have been put in place and that

housing finance is consequently growing. Yet, one should not take it for granted and assume that given time,

Brazil will finally reach the level of mortgage credit as a ratio of GDP found in Chile, with approximately 15%

or even higher ones such the South African’s 22% and Malaysian’s 28%15. Thus it is still very much necessary

to investigate other factors that may be restraining growth in order to design adequate interventions. These

factors certainly include low income levels and income inequality, poor credit and real estate information

13 In reality, there is no timeframe definition, but it is estimated that MCMV should last for abour 3 years14 According to Economática, published in Valor Econômico, 22.06.2009.15 Warnock e Warbock (2008), calculating the average percentage from 2001 to 2005.

sharing, still high (though declining) real interest rates a and shallow secondary market. They may also

comprise lack of risk buffers and insurance instruments and a well developed insurance market.

Yet, another factor that appears to be quite relevant in the Brazilian case regards the financial sector. Of a

total of 336 banks that existed here in 1964, only 164 remained in 2003, while Germany has about 2 thousand

and the US, before the crises, around 10 thousand (Troster, 2004). In Brazil, at the end of 1994, the five

bigger banks responded for about 57% of overall credit, reaching 77% in Dec/2008, due to a series of merging

and acquisitions in the financial sector. Around only 30 agents – some belonging to the same business

conglomerate – work with SBPE savings and loans, while CAIXA, a state owned bank is expected to account

for 67% of SBPE loans (in BRL) contracted during 2009 (in 2004, CAIXA was responsible for 41% of SBPE

financing). CAIXA is also basically the only agent working with FGTS housing loans and since the loans

effectively contracted are historically below the budget – an average of 27% of the yearly budget from 2002 to

2009 did not turn into housing loans – there is a possibility that CAIXA’s operational capacity may be limiting

the expansion of loans despite funds availability.

According to Escrivá (2007), Brazil shows one of the highest public banks market share on credit among

emerging economies. Questions that derive from these observations are: Is the predominance of CAIXA in

SBPE and its almost monopoly on FGTS useful in alleviating the pressure for profitability, inducing loans to

borrowers whose return is not privately positive but only socially? Does it imply in poorer management and

higher operation costs? Do public banks (CAIXA and now Banco do Brasil) serve markets where private

banks are unwilling to serve? Does their presence induce to more or less competition in the banking industry?

Although there is research on the theme of concentration and public banks (see, for instance, Coelho, Mello

and Rezende, 2007, and Ugo, Yeyati and Micco, 2004), many of these questions remain open for debate.

Aside from concentration and private/public ownership, other aspects of the financial sector, such as

knowledge and experience in mortgage credit and related risk evaluation, importance of mortgage credit in

business portfolios, efficiency in loan processing/servicing, adequacy to serve low income families – research

conducted by the IFC (2007) showed that 66% of Brazilians still did not have banking accounts – and

innovation capacity may turn out to be quite significant for the development of the mortgage market in Brazil.

2. Motivation for the proposed country study:

The Housing Finance System, established in 1964, has been showing a revitalization path over the last years,

in terms of the volumes of its funds and loans contracted. Since its creation, new funds have been added,

within an institutional move that has (re)set the housing issue at the public policy agenda in Brazil.

The motivation for this proposed study lies, in general, at the very small mortgage credit to GDP ratio – 5.7% 16

– considering the size of the Brazilian economy, the housing deficit estimated in 2007 of 6.3 million units

(Fundação João Pinheiro, 2008) mostly among low income families17 and the comparison with other Latin

American countries – Warnock & Warnock (2008) study on 62 countries observed that the average ratio for

developing countries is 10% and 55% for developed ones. These considerations may indicate, at first, that

there is a high growth potential for housing finance in Brazil. But it also signals for the need to better

understand the actual possibilities and restraints of the Brazilian mortgage market.

A specific motivation comes from the observation of the financial sector, especially with the market moving to

low income housing. In this new scenario, FGTS may assume, in the short term, a more prominent role as a

financing source, due to its lower funding cost, requiring more access to the available funds while that is

exactly where financial agent concentration is more evident. How ready – capable, diversified and efficient –

our financial sector is to deepen the mortgage market and how suitable it is to face this move towards low

income families are important research questions in the country today, although not yet investigated

thoroughly.

The growth of credit is fundamental to the housing issue, especially after two decades of very low

investments. During that period, population liiving in slums more than duplicated in relation to overall urban

population (Grostein, 1998; Davis, 2006). As mentioned, many of the basic conditions to expand housing

finance are finally present, but the factors that may be deterring it must be identified and well comprehended.

This research paper intends to analyze the Brazilian case, going through the aspects and changes that have

fostered the expansion of the mortgage market as well as those that have limited its development, and to

focus on the investigation of the financial sector. While most of the existing studies about Brazil concentrate

on the availability of funds and subsidies, macroeconomics and regulations, the emphasis proposed here

represents a much less explored line of study, although fundamental to the full understanding of what is

holding housing finance back in Brazil.

16 Abecip (2009).17 89% of the estimated deficit is concentrated among families with incomes up to 3 mininum wages and others 6.5% between 3 and 5 minimum wages.

3. Preliminary assessment of data availability:

Data on SBPE financing is available at the Central Bank – deposits and withdrawals by agent and region;

number, ranking, and market share of agents; number of loan contracts and volumes in BRL classified by

type of borrower (developer, families, cooperatives), type of property (commercial or residential), use

(construction, acquisition, renewal), amounts financed (totals, under SFH regulation or at market rates), other

real estate applications, NPL, compliance with the regulatory loan mandates.

SBPE – Accumulated loans relative to deposits

Dec

/04

Mar

/05

Jun/

05Se

p/05

Dec

/05

Mar

/06

Jun/

06Se

p/06

Dec

/06

Mar

/07

Jun/

07Se

p/07

Dec

/07

Mar

/08

Jun/

08Se

p/08

Dec

/08

Mar

/09

Jun/

09

54.0

56.0

58.0

60.0

62.0

64.0

66.0SFH

% d

o sa

ldo

base

Data on FGTS is available at CAIXA, Ministry of

Cities and Ministry of Labor and include balance

sheets, Council’s Resolutions, Administrative

Reports and Financial Data/Statements – deposits

and withdrawals by region; number of loan

contracts and volumes in BRL classified by use

(construction, acquisition, renewal), program and

family income; other investments; budgets and

effective applications; default; net assets; subsidies

(totals and by type).

FGTS Balance Sheet 2008Data on SFI is found at CVM but strictly for number

and volume of emissions, as shown bellow.

Data about the financial sector – number and size

of agents, number and location of branches, market

Ativo ................................................................2008 2007 Circulante

Caixa e equivalentes de caixa (Nota 4)............

Depósitos bancários....................................... 4.550.289 6.965.822

Aplicações interfinanceiras de liquidez.......... 1.926.251 3.485.960

....................................................................... 6.476.540 10.451.782

Títulos e valores mobiliários (Nota 5)........... 28.983.877 28.445.246

Créditos vinculados – FCVS (Nota 6)............. 5.772.926 6.799.052

Operações de crédito (Nota 7)

Financiamentos – setor público..................... 11.729.932 10.438.434

Financiamentos – setor privado..................... 1.118.312 2.832.921

....................................................................... 12.848.244 13.271.355

Outros créditos

Créditos securitizados (Nota 8 (b))................ 1.591.760 6.000.158

Rendas a receber........................................... 53.881 43.202

Devedores diversos....................................... 1.136

Tesouro Nacional – pagtos a ressarcir (Nota 8) 433.977

....................................................................... 2.079.618 6.044.496

Não Circulante

Realizável a longo prazo

Títulos e valores mobiliários (Nota 5).............67.431.502 47.367.177

Operações de crédito (Nota 7)

Financiamentos – setor público..................... 76.739.106 64.671.730

Financiamentos – setor privado..................... 2.349.244 743.657

....................................................................... 79.088.350 65.415.387

Diferido (Nota 9)

Diferimento -créditos complementares......... 46.930.883 47.391.295

Amortização acumulada do diferido..............(32.178.629) (27.187.322)

....................................................................... 14.752.254 20.203.973

Total do ativo...................................................... 217.433.311 197.998.468

Passivo e patrimônio líquido ......................2008 2007

Circulante e não circulante

Depósitos vinculados do FGTS (Nota 10)

Contas ativas............................................... 152.422.034 137.359.986

Contas ativas -LC nº 110/01........................5.265.030 5.568.052

Contas inativas........................................ 1.612.067 1.591.611

Saldos credores..............................................5.155

Variação monetária e juros a incorporar............ 502.580 313.485

Valores a desdobrar....................................( 111.339) (124.124)

......................................................................159.695.527 144.709.010

Reserva de contas inativas (Nota 11).......... 15.687.074 15.673.617

Obrigações diversas

Saldos credores condicionais...........................53.816

Valores a pagar -outros serviços de terceiros... 15.521 28

Créditos vinculados a pagar (Nota 12 (a))......... 72.293 67.074

Provisão para taxa de administração e tarifas

bancárias.....................................................170.778 179.022

Valores a repassar – CAIXA -outros................. 20.245

Provisões para contingências (Nota 12 (b))....... 750.997 831.530

Valores a repassar União -risco de crédito

(Nota 12 (c)).................................................157.741 132.856

Provisão de créditos complementares -

LC nº 110/01 (Nota 12 (d))...............................12.929.207 13.472.408

................................................................14.150.353 14.703.163

Patrimônio líquido

Fundo conta geral (Nota 15)..........................27.900.357 22.912.678Total do passivo e patrimônio líquido................ 217.433.311 197.998.468

share, bank level balance sheet, savings deposits, mortgage credit operations – are available at the Central

Bank (ESTBAN database), FEBRABAN, ABECIP, ASBACE.

Financing agents are also a source of information, although much more scattered. Information on loan

conditions and operations, for instance will be gathered directly with agents:

Housing Finance - SFH/SBPE

Housing Valueup to BRL 120K 9% 8.9% 11.5% 9% 9% 11.5%up to BRL 150k 8.9% 8.9% 8.9% 10%BRL 120 - 500k 11.38% 10.9% 11.5% 9.62% 9.62% 11.5%BRL 150 - 500k 9.5% 10% 10% 11%over 500k 10.5% 11% 11% 12% 11.9% 12% 11.95% 12% 11.95% 12%

Pref

ixed

up to BRL 120kup to BRL 150k 11.9% 12.75%BRL 120 - 500kBRL 150 - 500k 12.36% 12.75% 12.83% 12.75% 12.7% 12.7%above BRL 500k 13% 13% 13.2% 13.2%

Oth

er c

ondi

tions LTV max 70% 90% 80% 90% 80% 80% 80% 80% 80% 80%

Term max (months) 360 360 360 360 360 360 360 240 360 360% of Income 30% 30% 30% 25% 30% 35% 27% 30% 27% 35%Adm Fee (montlhy) R$ 25 R$ 22 R$ 22 R$ 25 R$ 25 R$ 25 R$ 25 R$ 25 R$ 25 R$ 25Prop evaluation fee R$ 800 R$ 300 R$ 339 R$ 890 R$ 890 R$ 1,000 R$ 890 R$ 890Analysis fee R$ 800 R$ 400 R$ 750 R$ 500 R$ 1,000

Source: banks - August, 2009.

Type of Rate

Post

-Fix

ed

(+TR

)

Notes: At CAIXA, interest rates may go down to 8.2% if the borrower contracts a package of other banking services/products. Also, LTV may go up to 90% but term becomes restricted to a maximum period of 240 months.

Passivo e patrimônio líquido ......................2008 2007

Circulante e não circulante

Depósitos vinculados do FGTS (Nota 10)

Contas ativas............................................... 152.422.034 137.359.986

Contas ativas -LC nº 110/01........................5.265.030 5.568.052

Contas inativas........................................ 1.612.067 1.591.611

Saldos credores..............................................5.155

Variação monetária e juros a incorporar............ 502.580 313.485

Valores a desdobrar....................................( 111.339) (124.124)

......................................................................159.695.527 144.709.010

Reserva de contas inativas (Nota 11).......... 15.687.074 15.673.617

Obrigações diversas

Saldos credores condicionais...........................53.816

Valores a pagar -outros serviços de terceiros... 15.521 28

Créditos vinculados a pagar (Nota 12 (a))......... 72.293 67.074

Provisão para taxa de administração e tarifas

bancárias.....................................................170.778 179.022

Valores a repassar – CAIXA -outros................. 20.245

Provisões para contingências (Nota 12 (b))....... 750.997 831.530

Valores a repassar União -risco de crédito

(Nota 12 (c)).................................................157.741 132.856

Provisão de créditos complementares -

LC nº 110/01 (Nota 12 (d))...............................12.929.207 13.472.408

................................................................14.150.353 14.703.163

Patrimônio líquido

Fundo conta geral (Nota 15)..........................27.900.357 22.912.678Total do passivo e patrimônio líquido................ 217.433.311 197.998.468

4. Strategy for collecting relevant data, including regulatory data:

The strategy comprehends the collection of secondary data at selected data banks as well as primary data

from selected institutions and agents.

The data banks already selected are:

i. CAIXA – balance sheets, administrative reports and financial demonstrations of FGTS;

ii. Central Bank – data sets about SBPE and information on the financial sector;

iii. National Monetary Council (CMN) – information on the financial sector;

iv. Comissão de Valores Mobiliários (CVM) – SFI operations;

v. Ministry of Cities – FNHIS, FGTS, Planhab, PMCMV and housing programs;

vi. Ministry of Labor – FGTS housing loan budgets;

vii. IBGE, Fundação João Pinheiro e CEDEPLAR – deficit and future housing demand in

income quintiles;

viii. Private and Public Banks, Febraban, Abecip – loan conditions and information about the

financial sector.

Primary data will be obtained through semi-structured interviews with selected representatives of – Febraban,

Abecip, Banks, Mortgage Companies, Securitization Companies, Cooperatives, Housing Companies

(Cohabs), Developers, Central Bank, CVM, Council of Cities and Housing, Housing Associations and

“Housing Movements”.

Regulatory data will be gathered from Federal Legislation (database available at

www.presidencia.gov.br/legislação), Resolutions passed by FGTS Council, Resolutions from Central Bank

and CMN, and “Instruções Normativas” from CVM, as well as proposed constitution amendments.

5. Description of methodology:

This paper will be organized as follows – a descriptive part that will provide a comprehensive and updated

picture of the housing market and the housing finance system, highlighting the main factors, figures, and

characteristics, as well as perceived trends and challenges faced; and, an analytical part that will focus on the

structure of the financial system that operates the loans under SFH.

The analysis will rely on the definition of indicators – criteria and variables – to capture some aspects of the

financial sector that may have significant effects on housing finance expansion in Brazil. Components of such

indicators are mortgage debt outstanding to total assets in the agents’ portfolios, operational capacity and

costs/spreads, time for processing a loan, regional distribution of branches and of loans, innovation and

especial measures targeted to low income, controlling for size and type of lending institution/agent, loan

amount and property value.

By utilizing quantitative methods associated with the analysis of indicators constructed this research intends to

identify correlations between certain aspects of the financial structure and the development of housing

finance, especially considering the low income groups which comprise the majority of the housing

deficit/demand. The basic sets of data that will be used regard the SFH – outcomes of the System; the

banking sector structure and also the housing deficit distributed regionally and by income levels.

The revision of the financial structure of other Latin American countries with higher mortgage credit

outstanding to GDP, probably Chile and Mexico, at the extent of available data and existing studies, will also

be included as a means of gathering inputs to better understand the relations between the financial sector

structure and housing finance and possibly extracting useful lessons.

As a result, this research may help to point out fragility and inadequacy issues of the financing sector that,

holding other things equal – availability of funds, macroeconomic stability, legal framework, etc. – may be

deterring a more vigorous growth of housing finance in Brazil, and may be under serving certain groups and

regions. The analysis will not, however, take into consideration other important variables such as the

presence of developers, availability of production inputs and resources, but results shall indicate directions for

government intervention that will promote changes in the financial sector favoring housing finance

accessibility and thus expansion.

6. A brief survey of previous studies conducted on the country:

The following list is certainly not an exhaustive one, but shows some of the studies about Brazil that may offer

inputs for the proposed research:

i. ABECIP (2007) – a series of articles on mortgage market in Brazil;ii. BELAISCH’s (2003) analysis on the competitive structure of the Brazilian financial sector; iii. CARNEIRO and VALPASSOS (2003) about housing finance and economic volatility in Brazil; iv. CEDEPLAR-UFMG (2007) demographics study about future housing demand from 2008-2023;v. CINTRA (2007) about the institutional and balance sheet evolution of FGTS;vi. COELHO, MELLO and REZENDE (2007) measuring the effect of entry of public banks on the level of

competition on local banking markets in Brazil;vii. COSTA and ARAÚJO (2001) about the evolution of the mortgage market and housing policy;viii. COUTINHO and NASCIMENTO (2006) on housing finance and investments on housing production;ix. ESCRIVÁ (2007) about financial regulation and credit stability on Latin American countries;x. FERREIRA (2007) about legal reforms and their relations with the expansion of the mortgage market; xi. FUNDAÇÃO JOÃO PINHEIRO (2008) about the housing deficit;xii. GIAMBIAGI and NASCIMENTO (2008) on the effects of macro-economic stabilization on credit and

the risks still faced – inflation volatility and expansion of current public expanditures/debt and deficit –; indexation and credit; and, relations between monetary and fiscal policies, specifically for Brazil;

xiii. HOEK-SMIT (2006) analysis and recommendation for a housing subsidy policy for Brazil;xiv. INEPAD (2009) about the real estate credit development over the last years;xv. INSTITUTO CIDADANIA (2000), Projeto Moradia;xvi. INTERNATIONAL FINANCIAL CORPORATION (IFC, 2007) about the access of the population to

banks; xvii. KÖHLER (2003 and 2005) discussing the housing finance system in Brazil and its implicit subsidies;xviii. MICHEL ALEXANDRE (2003) about the regional distribution of bank branches in Brazil;xix. NAKANE (2007) about financial sector business portfolio changes after economic stability, sector’s

competitive structure with the entrance of foreign banks in the Brazilian market and information technology; as well as regulatory reforms since the 90’s;

xx. OLIVEIRA (2002) on controversial issues of the Brazilian Housing Finance System;xxi. PEREIRA about inconsistencies of fiscal and monetary policies and their implications;xxii. REZENDE (2003) about amortization systems and the disputes around the Price system in Brazil;xxiii. TORRES FILHO et all (2009) on the perspectives of SFI/securitization, analyzing the capital market

and more specifically, Brazilian pension funds and their potential role as a source of funds for long term credit for infrastructure and housing sectors;

xxiv. TROSTER (2004) on the financial sector concentration and international comparison; xxv. VIA PÚBLICA, LAB-HAB/FUPAM and LOGOS (2007/2008) National Housing Plan (Planhab) for the

Brazilian Ministry of Cities18;xxvi. WARNOCK & WARNOCK (2008) about correlations between macroeconomic stability, legal

framework and credit information sharing and the development of mortgage markets in 62 countries including Brazil;

xxvii. YEYATI and MICCO (2003) on concentration and foreign penetration on the banking sector in Latin American Countries including Brazil and their impact on competition and risk.

It is also appropriate to mention studies conducted in Brazil about Chile by FUNDAÇÃO GETÚLIO VARGAS

(2007) and ABECIP (2007), and about Mexico by FUNDAÇÃO GETÚLIO VARGAS (2007) and VEDROSSI

(2007).

18 Members of this research team participated in the studies and development of Planhab.