Brazil recession to fuel higher mortgage defaults, Moody's says

[SAO PAULO] Brazilian banks will write fewer mortgages this year as delinquency rates climb amid the country's worst recession in more than a century, according to Moody's Investors Service.

State-owned lender Caixa Economica Federal, which issues almost three-fourths of housing loans in Brazil, also faces higher financing costs, imperiling its ability to write new mortgages, Moody's said in a report. Lower household income and higher costs for credit will weigh on demand for houses at least through mid-2017, the report said.

"The severity of the ongoing recession will lead to increased payment delays and defaults over the next two years," Moody's analysts including Ceres Lisboa and Cristiane Spercel wrote.

Brazil is suffering from a shrinking economy, rising unemployment and inflation that has exceeded the central bank's target for years, damping demand for new houses and making it more difficult for workers to borrow. While the government has used state-owned lenders to bolster credit in an effort to fuel growth, increased concern about the country's fiscal accounts is making that strategy increasingly difficult to sustain.

Caixa has tapped into the national worker's social security fund, and sought other, more expensive sources of financing to support mortgage issuance after exhausting the amount it could loan based on the deposits it holds, according to Moody's. As a result, the bank's profitability is shrinking.

Caixa's credit grew at an annual average pace of almost 36 per cent from 2011 to 2014, before easing to about 12 per cent last year, according to the bank's most recent earnings statements.

Even after the slowdown, Caixa's lending growth last year was twice as fast as Banco do Brasil SA's 5.9 per cent expansion.

"Caixa will continue to face the greatest pressure among banks in the system to seek alternative funding sources in support of its loan origination, because the size of its mortgage book already exceeds its savings deposits," the Moody's analysts wrote.

BLOOMBERG