The Brazilian Association of Real Estate Loans & Savings Companies (Abecip) last week presented a proposal to the country’s central bank for a Brazilian version of covered bonds in a bid to create a long term funding instrument that can support a fast growing real estate financing market, according to Moody’s.

Savings deposits have been the primary source of mortgage financing in Brazil, with the country’s banks mandated to invest at least 65% of these into real estate lending, but this funding source is dwindling and “could soon constrain further expansion of mortgage financing”, said Moody’s.

“While the real estate sector has been expanding robustly amid Brazil’s economic stability, an improved legal framework, and historically low interest rates, savings deposits have not recorded similar growth,” it said.

The rating agency said that the introduction of Brazilian covered bonds, to be called Letras Financeira Imobiliarias (LFI), is a credit positive for the country’s banks because it provides for an alternative long term funding instrument that will allow Brazilian banks to serve growing housing demand.

It noted that the country’s banks have no incentive to securitise their mortgage portfolios because they are required to invest in real estate, therefore making that funding source unattractive.

Mortgage loans have been growing at an annual average rate of 45% since 2007 – in contrast to an 18% increase in savings deposits, with Brazil’s largest banks standing to benefit the most from the introduction of covered bonds, said Moody’s.

These are: Banco Santander (Brasil), Banco Bradesco, Itaú Unibanco, and Banco do Brasil. The rating agency said that these banks expect growth in mortgage lending, although mortgage financing still accounts for a modest portion of their total loan books.

Caixa Economica Federal, with a 60% market share, is the largest player in this market, said Moody’s.

If LFIs fail to attract market interest, a short term solution to serving Brazil’s growing housing demand would be an increase in the 65% investment mandate with a corresponding reduction in reserve requirements, said Moody’s (30% of banks’ savings balances have to deposited at the country’s central bank as a reserve requirement).

LFIs are structured as debt securities that will be guaranteed by the issuing banks and a pool of assets. The rating agency said that the proposed format calls for tax exemption on investments in longer maturity papers, primary those with five to 10 year tenors, aimed at creating additional incentives for investors.