Expansion of private lenders’ participation in housing finance for low income groups under the Brazilian Sistema Financeiro de Habitação:
Analysis and Recommendations
June 15, 2010
Urban, Water and Disaster Risk Management Unit
Sustainable Development Department
Latin America and the Caribbean Region
The World Bank Group
Abbreviations
a.a. / Annual rateABECIP / Associação Brasileira das Entidades de Crédito Imobiliário e Poupança
ALM / Asset Liability Management
BACEN / Banco Central do Brasil
BNH / Banco Nacional de Habitação (National Housing Bank)
BRL / Brazilian Real
Caixa AO / CEF Agente Operador (Caixa’s arm serving as Operating Agent of FGTS funds)
Caixa AF / CEF Agente Financeiro (Caixa’s arm serving as Financial Agent of FGTS funds)
CBIC / Câmara Brasileira da Indústria da Construção
CDI / Certificado de Depósito Interbancário
CEF / Caixa Econômica Federal
CH / Companhias Hipotecariás (Mortgage Company)
CIBRASEC / Companhia Brasileira de Securitização
CRI / Certificados de Recebiveis Imobiliários
CUB / Custo Unitário Básico (Basic Unit Construction Cost)
FAR / Fundo de Arrendamento Residencial
FGC / Fundo Garantidor de Creditos
FGTS / Fundo de Garantia por Tempo de Serviçco (National Severance Fund or Provident Fund)
FI-FGTS / Fundo de Investimento-FGTS
FIF / Fundo de Investimento Financeiro
FNHIS / Fundo Nacional de Habitação de Interesse Social
GDP / Gross Domestic Product
IGPM / Indice Geral de Preços do Mercado
INCC / Índice Nacional de Custos da Construção (National Construction Cost Index)
MCMV / Minha Casa Minha Vida
MW / Minimum wage
NHP / National Housing Plan
LTV / Loan to value
OGU / Orçamento Geral da União (Federal Budget)
PAR / Programa de Arrendamento Residencial
PEC / Proposta de Emenda Constitucional (Proposal of Constitutional Amendment)
PSH / Programa Social de Habitação
SBPE / Sistema Brasileiro de Poupança e Empréstimo (the Brazilian Savings and Loan System)
SECOVI / Sindicato das Empresas de Compra e Venda de Imóveis (the Realtors Syndicate)
SELIC / Sistema Especial de Liquidação e Custódia (Central Bank’s overnight rate)
SFH / Sistema Financeiro de Habitação (Housing Finance System)
SFI / Sistema Financeiro Imobiliário (Real Estate Finance System)
TR / Taxa Referential (reference index)
1. Summary of Key Recommendations
1. Broader access to FGTS funds could have important benefits for the development of the housing finance sector. Lenders are expanding more aggressively in the housing finance market, including a gradual down-market penetration towards the low income housing segment. Competition has already intensified in the middle income segment, which explains why several lenders are now more readily interested to move further down-market. SBPE funds will not be sufficient for such a large expected market expansion, nor will it be the lenders’ preferred source of funds for long-term housing loans due to the inherent asset liability mismatch challenge. The FGTS could step into this role.
2. Participation by the private lenders in housing finance for low-income groups could help the Government meet housing development goals, such as the one million houses to be built as part of Minha Casa, Minha Vida. It would also offer diversification of lending channels to this market segment, which is now currently served only by Caixa Agente Financeiro.
3. The principal obstacles to an expanded lenders’ participation in FGTS lending are both operational and financial. Specifically, the main operational challenges include complex procedures for loan approvals and disbursements, and the delays in processing the funds. Several suggestions for streamlining the processes are proposed, including: (i) establishing target lending volumes for disbursement of FGTS funds; (ii) simplifying the rules; (iii) abolishing the second review of the loan files by Caixa Agente Operador and introducing a system of delegated underwriting; (iv) resolving asset/liability management issues; (v) resolving the issue of the Caução Hipotecária; and (vi) reviewing the organizational structure of the FGTS trustee function.
4. By contrast, the issue of remuneration would be more difficult to address in the short-term, although some targeted improvements related to the risk fee (taxa de risco) and the capped upfront remuneration (limitador) may be feasible. Revisiting the spread calculation is also a key recommendation. According to the Secretariat of the Conselho Curador, the 2.16% spread was calculated based on the average spread of the 6 minimum wage income bracket from Caixa Agente Financeiro’s historical portfolio performance and relied on cross-subsidization from higher to lower income brackets. The calculation was to serve a four-year timeframe and be subject to subsequent revision. While it was beyond the scope of this note to evaluate the adequacy the spread, the idea of envisaging an approach to incentivize private lenders to enter the FGTS market is important, especially if a detailed review of the spread calculation demonstrates that it effectively constitutes a barrier to entry and a barrier to operations in the long-run. Should incentives be required, it would be important that these (a) are adequately calibrated and withdrawn over time when economies of scale are achieved, and (b) do not come at the expense of excluding borrowers or increasing their costs.
5. Two approaches to facilitate lenders’ access to FGTS funds are presented. The first approach is to adopt a strategy of small incremental improvements, which mainly seeks to resolve smaller issues, mostly of an operational nature, without questioning the existing modus operandi of the system. The second approach would hinge on the transformation of the current FGTS structure by giving a stronger mandate to Caixa Agente Operador’s role as second tier lender, a role that is hoped would make it a stronger catalyst to the development of the housing finance market.
2. Introduction [1]
6. The Minha Casa, Minha Vida Program (MCMV), launched by the Federal Government in March 2009, provides a large package of subsidies to stimulate the construction of one million new affordable houses within a three year period. This is aimed at reducing by 14 percent the existing housing deficit in Brazil (estimated in 2007 at 6.3 million units) and contributing to employment generation in the context of the economic crisis. In addition to providing immediate stimulus to the economy, the program is targeted at the low-income segment of the population (beneficiaries are households earning up to 10 minimum wages, with 800,000 units intended for those with incomes up to 6MW).[2] Program funds amount to BRL34 billion, mostly in subsidies from the Orçamento Geral da União (OGU—the Federal Government’s budget) with support from the Fundo de Garantia de Tempo de Serviço (FGTS).
7. The main entity responsible for program administration is the Government-owned Caixa Ecônomica Federal (CEF), with its two arms: Agente Operador (the operating arm of FGTS funds) and Agente Financeiro (the lending arm). Despite its market share and substantial experience in low-income housing lending, the responsibility of single-handedly achieving the target of one million new housing units within this tight time frame would be a tall order for CEF.
8. Expanding private lenders’ participation in housing finance is therefore an imperative if Brazil is to address its significant housing shortfall and address housing needs over the short- and medium-term in accordance with the National Housing Plan (NHP), as well as to ensure the achievement of MCMV targets.
9. The Ministry of Finance (Fazenda) as well as the Ministry of Cities (MCidades) aim for a stronger involvement of private lenders within the SFH. The FGTS Conselho Curador (Council) also expressed a strong desire to increase the number of lenders in the FGTS distribution channel. The CEF Agente Operador (hereinafter referred to as Caixa AO) has expressed openness to discuss changes to the current administrative regime as a means of easing the administrative burden for lenders seeking to access FGTS funds.
10. The openness of the Government and the Conselho Curador to discuss changes is an important signal to private lenders which are interested in expanding their mortgage lending operations down-market. In this context, such interested lenders are seeking improved access to FGTS funds. The larger private lenders in Brazil have already tested the current regime of FGTS, but have encountered numerous difficulties. These difficulties are also faced by Caixa Agente Financeiro (hereinafter referred to as Caixa AF) and Banco do Brasil.
11. The report is organized as follows. The first section provides a concise analysis of the SBPE and FGTS systems. It also argues in favor of expanding the use of FGTS funds in light of the funding mismatch that characterizes SBPE. The second section assesses the merits of increased access to FGTS for the development of the housing finance sector for low-income groups and analyzes the extent of interest of private lenders to access such funds. The third section provides an extensive evaluation of the obstacles to increased access by (private and public) lenders to FGTS funds. Suggestions are provided on how to reverse the current participation and loan allocation mechanism within FGTS. Proposed changes to improve the administration of the FGTS regime are divided in two categories: (i) operational issues and (ii) remuneration issues. A central element in this context is strengthening the transformation of Caixa AO into a second-tier lender. Annexes to the report present the mechanics of the FGTS system, a summarized overview of the current housing finance situation in Brazil, and developers’ views on recommended changes to the FGTS.
3. FGTS vs. SBPE: are the current funding systems appropriate to enhance access to housing finance for low and middle income groups?
12. The SFH consists of two subsystems: (i) FGTS and (ii) SBPE. In 2008, SBPE lending volumes exceeded FTGS volumes by a multiple of three. For 2009, the gap is expected to narrow. One reason is the stronger demand for FGTS lending as a result of the MCMV program, which envisages a higher deployment of FGTS funds.
13. Typically, SBPE loans are larger. The average SBPE loan amount in 2008 was BRL120,000 compared to BRL39,958 for a FGTS loan. Table 1 compares SBPE and FGTS in view of the benefits offered to customers as well as the practicality and suitability for lenders to meet higher expected demand for housing within the low and middle income segments.
Table 1. Comparison of FGTS and SBPE
FGTS / SBPEConsumer view
Target group / Until 6 MW (“Desconto”)
From 6 to 10 MW (incl. “Pro-Cotista”) / From 7 - 15 MW
Benefits for consumer / · Down-payment function in two ways: (i) savings accrued in the provident fund; (ii) FGTS provides an upfront down-payment subsidy (for households with income up to 5MWs)
· FGTS loan interest rate is lower than SBPE loan interest rate (TR + 5% - TR + 8.16%) / · Savings instrument (depending on market interest rates)
· Interest earned on SBPE deposits are tax exempt
· Access to a mortgage loan.[3] Rates vary from TR + 9% to TR + 12 % and are typically higher than those of FGTS
Lender view
Risk management / · The down-payment function lowers credit risk
· Liquidity management is less problematic because financial agents obtain long-term funds from FGTS
· Access to FGTS is a huge administrative burden for financial agents
· Spread may not be enough to cover all cost for the financial agent / · Risk management remains under the lender’s control
· Lower reserve requirements [4]
· Substantial mismatch (short term deposits are used to finance long-term loans)
· Higher spread (4 – 5 percentage points)
· Higher funding cost than FGTS funds
Suitability to increase market share in housing finance / · Lenders without access to SBPE funds are interested in FGTS
· CEF is often perceived as the only provider of FGTS funding by consumers
· MCMV Program has a stronger link to FGTS funding / · Borrower can combine the down-payment obtained through FGTS with a SBPE loan
· Increasing market share depends on inflow of SBPE deposits
14. Private lenders have mainly relied on SBPE as the source of funds for housing finance operations. The design of the SBPE has led to a permanent mismatch with market conditions. The most prevailing risks for lenders are:
· Liquidity risk and interest rate risk. The interest rate caps on the savings (TR +6%) and the loans (TR + 12%) complicate liquidity management. For example if market interest rates go up, inflow of SBPE deposits may decrease because investors seek other investments. The breakdown of the passbook balances serve as an indication that SBPE deposits are an interest-rate sensitive instruments. About 40% of the SBPE deposits are held by 1% of the SBPE passbook holders. Due to the considerable concentration of SBPE deposits among a concentrated number of investors, the SBPE is vulnerable to volatile inflows of savings, even if culturally it has been the preferred and perceived as the most secure investment channel. Ultimately, investors compare the return on SBPE with other returns in the market and could thus withdraw their savings as soon as interest rates of other savings products are higher.[5]
· If market interest rates go down, then a higher inflow of SBPE deposits is expected. Lenders may want to reduce SBPE lending (within the parameters of the mandated use or diretionamento) because they may access cheaper funding outside the SBPE system. In addition, since SBPE deposits are callable on a monthly basis by the saver, lenders have to finance long-term debt with short-term funding instruments. Typically, the tenor of the SBPE housing loans is 20 years. Since SBPE is not linked to a market-based index, lenders are not able to blend SBPE deposits with other funding sources. Thus, the current regulatory regime for SBPE does not allow the lenders to reduce the existing asset/liability mismatch resulting from the short-term deposits and the long-term loans.
· Spread compression. With declining interest rates, margins may decrease to a level where the housing finance business is no longer sustainable because lenders cannot reduce the funding cost, which is fixed at TR + 6% (effectively TR+6.17% and not including the lender’s funding cost associated with the capture of SBPE deposits).
15. Thus, lenders thus face a dilemma. If market interest rates go up, inflow of SBPE deposits may fade away because investors will buy other investment products. If interest rates go down, lenders are exposed to spread compression. The short-term nature of the SBPE deposits and the resultant asset/liability mismatch when lending long-term may exacerbate the situation for lenders and explain the difficulty of anticipating an expansion of SBPE lending for housing finance. This is especially the case in light of the changes to the SBPE system that are expected to follow the drop in the SELIC rate to 8.75%, including the taxation of hitherto tax-exempt individual SBPE accounts with over BRL50,000 (currently under discussion) and the inevitable need to rethink their remuneration.