Sister Inmaculada Torano, a 47-year- old Spanish nun, stepped in to negotiate when Bankia (IBEX) SA tried to repossess the home of a student at the school where she works over missed mortgage payments.
“The bank may have a right under the law to evict, but there’s a difference between what’s legal and moral,” said Torano, who teaches at a school run by the Sisters of Charity of the Sacred Heart of Jesus in the working class Madrid suburb of Villaverde. The intervention helped persuade Bankia, led by former International Monetary Fund head Rodrigo Rato, to delay eviction until the student finishes the school year in June, she said.
With Spain’s economy set to contract in 2012 for the third year out of five and unemployment at 23 percent, banks are increasingly easing terms for customers who are missing payments on mortgages underwritten during the country’s decade-long housing boom. Pressure to renegotiate debt and delays in repossessions are raising doubts that default rates on Spain’s 613 billion euros ($817 billion) of mortgages have stabilized.
“It probably is going to be worse than people expect, even though the banks say it’s not a problem,” said Daragh Quinn, an analyst at Nomura International Plc in Madrid, on the outlook for mortgage arrears. “The more they kick the can down the road, the less visibility we have on what is really happening with asset quality.”
Investors view the 182 billion euros of bonds tied to Spanish residential-mortgage backed securities as being among the least creditworthy in Europe, trailing securities from the U.K., Netherlands and Italy. The outlook for the collateral is expected to worsen as mortgage arrears rise with increasing unemployment and house prices continue to fall, Moody’s Investors Service said in a report last month.
The extra yield investors demand to hold Spanish RMBS above benchmarks has risen 170 basis points to 530 basis points in the past year, according to JPMorgan Chase & Co. data. That’s even after spreads contracted 1.1 percentage points in 2012 amid growing confidence that Europe’s leaders will contain the Greek sovereign debt crisis. A basis point is 0.01 percentage point.
Bankia, based in Valencia, has dropped 16 percent this year, the fourth-worst performer in Spain’s IBEX 35 Index, which is down 0.2 percent.
Spain’s government has taken steps to tackle the problem of souring real estate piled up on the balance sheets of banks by forcing them to recognize more losses. Lenders, which have about 175 billion euros of what the Bank of Spain terms “troubled” property assets, will have to take about 50 billion euros in provisioning costs or capital charges under plans announced by Economy Minister Luis de Guindos on Feb. 2.
The quality of mortgage loans, whose volume more than tripled over the past decade, may come under more stress as Spain enters a recession that the International Monetary Fund says could cause the economy to shrink 1.7 percent this year, said Juan Villen, head of the mortgage advisory service at Idealista.com, Spain’s biggest property website.
Data from the Spanish Mortgage Association show the default rate for home loans was 2.63 percent in September, less than the 3 percent reached in 2009. “Unemployment (SPUNEMPR) is going to continue to rise and this will mean that there will be more mortgage arrears,” said Villen in an interview in Madrid.
Other analysts are skeptical of data showing the improvement in mortgage arrears. “This is impossible, in our opinion, given the current economic environment and the evolution of unemployment,” said Santiago Lopez, an analyst at Exane BNP Paribas in a Feb. 15 report. “Similar to what we have already seen in the developer book, banks seem to be restructuring retail clients’ loans quite aggressively.”
Ronale de la Cruz, 48, an unemployed construction worker from the Dominican Republic, is head of the family that Sister Inmaculada helped by negotiating more time for them to stay in their home. De la Cruz, who has lived in Spain for 10 years, started falling behind on payments in 2009 after his employer first cut his working hours and then laid him off in 2010.
Caja Madrid, one of the savings banks that later merged to form Bankia, gave him a 100 percent mortgage in 2004 to buy an 80 square-meter (861 square feet) apartment in Villaverde for 218,000 euros, said de la Cruz, a father-of-four, in an interview. After he’d missed two mortgage payments, the bank agreed to extend his mortgage term by two years, he said. By mid-2010, he’d defaulted on the loan after finally losing his job.
‘Dignity Taken Away’
“Having your home taken away is the equivalent of having your human dignity taken away,” said de la Cruz, adding that having a place to live was as “necessary as owning a pair of shoes.” Banks were behind the “building boom and they need to take some of the responsibility now in the bust.”
A spokesman for Bankia, who asked not to be identified by name in line with company policy, declined to comment.
The drama of evictions is playing out in public as those affected organize protests when mortgage debtors get removed from their homes.
Plataforma de los Afectados por la Hipoteca, or PAH, a group whose protest outside de la Cruz’s home near his children’s school prompted Sister Inmaculada to discuss his plight with Bankia, said there have been about 330,000 foreclosures since 2007. Joan Coscubiela, a Barcelona deputy who has challenged the government over the issue in parliament, said that’s resulted in 150,000 evictions in the same period.
Economy Minister de Guindos announced steps to tackle what he termed the “human drama” of evictions by announcing Feb. 22 plans for a code of good conduct for banks aimed at helping low- income families stay in their homes and clear their debts. His proposals include allowing poorer Spaniards to stay in their home for at least two years once an eviction has been ordered and also making it possible to clear mortgage debts by handing over their homes to the lending bank, which wouldn’t be able to pursue them for more assets.
Banks including Bankia, CaixaBank SA and Banco Bilbao Vizcaya Argentaria SA (BBVA) said they’re easing mortgage terms for people hit by the financial crisis who can’t pay their loans. Bankia, Spain’s third-biggest lender, said Feb. 23 it renegotiated credit conditions for 100,000 clients and that half that amount involved mortgages. Juan Maria Nin, chief executive officer of CaixaBank SA, said Feb. 8 that the fourth-biggest bank had renegotiated 170,000 mortgages to avoid evictions.
“All the banks are extolling how many families they have helped,” said Villen. “It’s clear everyone is kicking the can down the road to avoid on the one hand these properties are on their balance sheet and they have to make more provision and on the other to help families stay in their homes, which I consider very positive.”
Some analysts think banks can keep mortgage arrears under control even as the economy worsens.
“Banks are trying to restructure mortgages, but that’s a normal banking practice,” said Antonio Ramirez, an analyst at Keefe, Bruyette & Woods in London. He said that the default rate on the loans may rise to a “quite manageable” 3 percent by year-end. Immigrants and young jobseekers whose numbers make a big impact on the unemployment data were not the main targets of mortgage sales by banks, he said.
The renegotiations, though, may contribute to investor concern that the bad-loan problem in Spain is still growing, even as the government takes steps to make banks recognize real- estate losses, said Nomura’s Quinn. While mortgage defaults represent a problem that will worsen for lenders, it’s not on a comparable scale with lending to property developers because the homes backing the loans have value, he said.
Patched Up Problem
“It’s dramatic on a human scale, but the losses may not be that big compared to what we’ve seen with real estate developers,” said Quinn. “A lot depends on the quality of the underlying asset and we know banks can sell some of the properties when they drop the price.”
The property boom that ended in 2008 left Spanish banks with 303.5 billion euros in loans related to real estate in the third quarter of 2011, according to the Bank of Spain. That’s after they were forced to take on properties and land in return for canceling debt held by bankrupt developers.
What to the banks is a business problem is often a catastrophe for people like de la Cruz, Sister Inmaculada said.
“We’ve just patched up a problem for Ronale without really solving it,” she said. “A home to live in and food to eat should be a basic right, so it’s so sad to see people in this situation.”