Mortgage lending has strong potential for growth in Latin America, especially in Brazil and Peru.
BY LATIN AMERICA ADVISOR
Peru's total mortgage lending grew 47 percent for the 12-month period through March, the Association of Peruvian Banks said April 23. Peru's expansion of available credit comes amid strengthening demand for housing across the country's socioeconomic groups. How does what's happening in Peru compare to other countries in the region? What is the outlook for mortgage lending across Latin America?
Jeanne Del Casino, vice president and regional credit officer for Latin American banks at Moody's Investors Service in New York: Mortgage lending has significant growth potential throughout Latin America given the steady expansion of GDP per capita incomes and still generally low levels of banking penetration, particularly with respect to housing finance. Nowhere is that potential greater than in Brazil, where mortgages represent a mere 3 percent of GDP versus about 20 percent for Chile, probably the region's most mature mortgage market, though still low by international standards. Such levels reflect the virtual absence for many years of a supportive yield curve or credit appetite to enable the funding of long term loans in the market. We believe that current low inflation and interest rates and the increasing appeal of longer tenors both locally and internationally should serve as catalysts for more robust development of the mortgage industry going forward. In addition, the secured nature of residential mortgage assets makes them particularly attractive to banks because of their lower capital consumption vis-à-vis commercial or unsecured consumer loans; as such, they should help support ever tighter capital requirements on the banks' road to Basel II and Basel III. With consumer demand helping to stimulate economic recovery, investments in housing and home finance are likely to play an increasingly important role in the development of the region's economies, provided that credible legal and regulatory frameworks are in place in the various countries. Positive GDP growth of between 4 percent and 7 percent is projected for the major countries in 2010, and therefore overall credit growth is expected to land well into the double digits, with consumer and mortgage lending fueling the trend.
Paul Sève, partner at Andrews Kurth LLP in Dallas and Ricardo Escobar, partner at Pizarro, Botto & Escobar Abogados in Lima: Peru is one of several Latin American countries seeing results of long-term policies designed to stimulate the mortgage market and increase affordable housing. Peruvian governmental institutions like the Fondo MiVivienda and programs like Techo Propio were launched to provide support for affordable low-income housing through subsidized interest rates and other credit support aimed at lowering the costs of housing finance. Legislation to permit new financial products like covered bonds (bonos hipotecarios cubiertos) was introduced by the executive branch in February to broaden the products available for financing the housing market. Liquidity in the Peruvian banking sector, coupled with the credit quality of loan portfolios and governmental actions to lower interest rates largely insulated Peru from the effects of the recent global financial crisis. Continued demand for affordable housing and a housing boom contributed to this month's decision by the Peruvian central bank to raise interest rates as a preventive measure to avoid overheating of the economy. At the same time, multilateral financial institutions such as the International Finance Corporation and the Inter-American Development Bank provide credit support for the growth of the primary mortgage market in Peru (as well as other countries such as Mexico and Brazil) by onlending to local banks and helping to improve loan origination documentation and techniques. These institutions have also supported the growth of secondary mortgage markets through warehouse lines and partial credit guarantees as credit enhancement support to establish residential mortgage-backed securitization transactions, permitting originating banks to pool such loans and securitize them through issuances in both local and foreign markets. Nevertheless, limitations remain in Latin American countries on a mortgagee's ability to enforce security. In the absence of meaningful reform, lengthy judicial processes, the absence of self-help measures and, in some countries, the inability to foreclose through private auction processes will continue to pose barriers to financing that ultimately affect the cost of mortgage credit.
Juan P. De Mollein, managing director of Latin America/emerging markets structured finance at Standard & Poor's in New York: Despite the global financial crisis, the Peruvian mortgage market continues its expansion supported by strong macroeconomic fundamentals, solid loan performance and strong government support through a variety of programs. Additionally, property values have continued to appreciate throughout this period. While Brazil is experiencing a similar cycle, its housing development is mainly concentrated in the largest urban centers given that lending growth has expanded in only a few regions. Overall, improving economic conditions are contributing to a recovery of the housing sector across the region. We expect stable conditions to persist in the residential mortgage-backed sector in Panama, Peru, Brazil and Argentina. Nevertheless, we also expect delinquencies and default levels to continue to rise in Mexico through the third quarter of 2010, with potential for year-end stabilization if positive macroeconomic trends endure. Despite strong signs of recovery, the increase in mortgage delinquencies and defaults in Mexico are a result of relatively high unemployment and inflation levels, high leverage levels for households and the continued decline in foreign remittances, which, in some cases, represent a high percentage of household income.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.