Berkeley Program in Law and Economics

The retention of title as a collateral for financing real estate property acquisitions was introduced in Brazilian legislation by Federal Law 9514 from 1997. The underpinning idea was that simplifying the recovery of the possession of the property by the financial institution against the party in default would boost the real estate industry. However, there are some indications that retention of title was not used by financial institutions in their contracts as it could. As a result, the development of the real estate industry has not arrived (at least in the proportion once predicted). The idea of this paper is to suggest, based on law and economics approach, a theoretical hypothesis for the underdevelopment of the retention of title in real estate transactions in Brazil. The main argument is that there is a gap between law in action and law on the books since Judicial Power tends to revise bargains of the parties in real state financing contracts. Thus, the market does not have incentives to use this new form of collateral. Therefore, the more important feature of the retention of title that would be the quick recovery of the possession of the property is undermined by courts. The theoretical suggestion shall be complemented with empirical work to evidence the hypothesis presented here.