Last Thursday (30), the newspaper Valor Economico revealed that Jair Bolsonaro‘s economic team is studying changes to expand the use of real estate properties as collateral for loans (home equity lending). The changes would bring the sector’s rules in the country closer to those in force in the US, where the same asset or real estate property can be used as collateral for more than one loan agreement and by different financial institutions. But they are also somewhat complex to be implemented at once. The fintechs that emerged to revolutionize the segment in the country believe that the easiest way of implementing the changes would be gradually.
According to Valor, the proposal of the Ministry of Economy is to create a central of real estate guarantees, in the figure of an agency, which would manage the information of each asset and determine how much of the asset could be given as collateral for each contract negotiated. For this to work, the asset would have to be registered as a collateral directly by the the agency, and not by the bank or financial institution as it happens today.
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The first difficulty of the proposal is the fact that each and every property in the country needs to be registered in person at a specific registry office, defined by circumscription (region) of each city, as well as any guarantee linked to the property. This process is one of the main obstacles for credit with property as collateral to take off in the country, and it is also one of the main obstacles to the government’s proposal.
The second obstacle for the government’s proposal is in the instrument of fiduciary alienation, which revolutionized the Brazilian real estate market from the 2000s, but which also blocks the use of the same property as collateral for contracts from different institutions. A legislative change of this size could be stalled in Congress.
Maria Teresa Fornea, CEO of Bcredi, a fintech specialized in home equity, explains that the main technical difference between mortgage and chattel mortgage is in the process of repossession of the property by the bank in the event of default.
“The mortgage is a judicial instrument. In the event of default, the bank had to go to court to claim the guarantee (the property). As the justice system in Brazil is very slow, the process used to take a long time. The fiduciary alienation, created in 1997, in its turn, is an extrajudicial instrument, which follows a rite that involves the creditor and the real estate register. And that reduced the entire foreclosure process in a gigantic way”, explained Maria Teresa.
Before the instrument, the real estate market represented 2% and 3% of Brazil’s GDP. After the instrument, this proportion jumped to more than 10% of GDP, but it could be even greater if the entire equity potential (of the country’s real estate stock) was used.
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In a press conference in August last year, the president of the Brazilian Central Bank, Roberto Campos Neto, said that home equity could growth from the current 3% to 20% of the Brazilian GDP in 20 years, if bureaucracies just as the decentralized registration of the property and its guarantees and judicial disputes were eliminated. In Mexico and Chile, other Latin American countries, home equity represents about 10% and 14% of GDP, respectively.
In the USA, according to Maria Teresa, where this type of collateral is called lien, all properties have, on average, 50% of their value linked to credit, which generates a market of $13 trillion to $14 trillion for the segment. In Brazil, however, 70% of properties (about 50 million) do not have any credit linked.
Small changes, great deals
To be feasible, the government’s proposal would have to evolve little by little, following the example of a change made in 2017 that allowed the consumer to have more than one loan contract from the same financial institution linked to the same property.
At the end of last year, the Brazilian fintech Creditas, which offers cheap credit as equity for automobiles, real estate properties and salary, launched a credit line in this direction. Bcredi is also studying how to take advantage of the new legislation.
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For Maria Teresa, the centralization of property records and property guarantees in the same document, for example, would already make life much easier for the Brazilians, as well as for fintechs.
“Today, in Brazil, if the consumer has a tax or labor debt this does not always appear in the property’s registration. It is necessary to do a complete search for the name of the borrower to make sure that these debts exist or not, and that makes the credit granting process time consuming “, she said.
If real estate records were, in fact, federally centralized, independent of geographic location, and in an automated way, the process would be faster, and home equity would be facilitated.