Brazilian banks are likely to issue fewer mortgage loans in 2016and see rising default rates amid the country's deep recession, Moody's said.

"Brazil's real estate market will remain weak as the nation'srecession hits consumer confidence while at the same time banks becomemuch more selective in terms of the loans they make," the rating agency saidApril 27 as it released a new real estate market outlook report. "As the ongoingrecession leads to rising unemployment, Moody's expects payment delays and defaultson mortgage debt to increase in coming years, despite delinquencies having remainedstable at around 2% over the last five years."

Moody's also believes banks will have to consider alternativefunding sources to support loan origination, due to savings deposits declining amidthe recession. Caixa Econômica Federalin particular faces the most pressing need to turn to other funding sources, sincethe value of its mortgage book far exceeds the value of its savings deposits, Moody'snoted.

Against this backdrop, Moody's added that the covered bonds marketmay become an important source for mortgage funding. "Letras Garantidas, whichare issued by financial institutions and are backed by pools of real estate loans,will eventually offer a low-cost, long-term funding alternative for home lenders,"Moody's vice president and senior analyst Daniela Jayesuria said in a statement.