The latest wheeze to lift the gloom of Brazil's MBS market - exempting securitized, real estate-based receivables from the CPMF financial operations tax - seems doomed to failure.

The tax hits a transaction three times over: when the company captures resources by issuing titles, when it buys a portfolio of receivables, and when it amortizes the principal of the debt and pays interest. "This kills the operation," said Andre Arco Verde, funding manager of the Companhia Brasileira de Securitizacao (Cibrasec). "In a capture operation of R10 million, for example, the value of the tax bite is R97,800, which rises the total cost to R131,000, including expenditures with the Securities and Exchange Commission and other agencies."

Although the proposed exemption from the CPMF tax would make real estate receivables more attractive on the secondary market it is unlikely to be accepted by the federal government. "We received negative feedback from the government on this proposal," said Verde. "They explained that if they were to lower or abolish CPMF for real estate receivables other sectors of the economy would demand the same."

The CPMF tax exemption is only one of the measures that are being weighed to try to reactivate the real estate sector.

A study group made up of members of Caixa Economica, the country's largest mortgage originator, and representatives of Brazil's central bank is also formulating other initiatives that will be presented to President Cardoso in the next few weeks.

One of these initiatives includes requiring that pension funds invest 85% of their funds in real estate receivables (up from the current requirement of 65%). Another proposal is to simplify the registration process for mortgages. "Mortgage registration is currently a convoluted and expensive process," explained Verde. "If the government makes the system more straightforward it will inject some much needed agility into the market."

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