Spain Foreclosures Spread to Once Wealthy: Mortgages
Home foreclosures in Spain, which disproportionately affected lower-income immigrants after the real estate bubble burst, are spreading to formerly well-to-do families and businessmen as they run out of ways to pay mortgages in a deepening recession.
Spanish business people, upper middle class families and their loan guarantors, typically parents of first-time buyers, now account for 60 percent of foreclosures in Madrid, according to AFES, an association that advises homeowners facing repossession. Three years ago, 80 percent of foreclosures were on the homes of immigrants, usually the first to lose jobs and fall behind on loan payments in a souring economy. They now comprise 40 percent of the total, according to AFES.
“Repossessions are encroaching further into the city centers, like an overflowing river,” said Emilio Miravet, head of real estate finance at the Spanish property unit of advisory and investment firm Catella AB. “At the beginning of the crisis, it was homes in the periphery areas belonging to the less affluent that were being foreclosed upon.”
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Loan guarantors, often parents who used their houses as collateral to help their children become homeowners when real estate was booming, now represent a fifth of foreclosures, AFES data show. Bloated prices had forced thousands of first-time homebuyers to seek parental help to get a foot on the property ladder, according to Jose Luis Ruiz Bartolome, author of “Adios Ladrillo Adios,” which means “Goodbye, Real Estate, Goodbye,” a 2010 book on the rise and fall of Spain’s property market.
Spain’s worsening foreclosure crisis comes as ministers from all 27 nations in the European Union meet today. Spanish Prime Minister Mariano Rajoy will have talks with French President Francois Hollande tomorrow in Paris after European finance ministers met in Luxembourg yesterday to discuss Spain’s overhaul effort and closer banking cooperation as they seek to avert further turmoil and prepare for a summit next week aimed at easing the region’s debt crisis.
Rajoy is struggling to cut a budget deficit and stem crippling borrowing costs while the country copes with its second recession since 2009 following a more than decade long property boom.
“Bank managers, who had aggressive targets to meet, did all they could to lend to those who wanted to carry on buying into the bubble,” Ruiz Bartolome said. “Asking for guarantors became another useful tool to spread their risk and allow them to continue lending right up until the bubble exploded.”
Carlos Banos, president of Madrid-based AFES, said parental guarantors “are the saddest of all cases” the association sees. “The kids lose their homes, go live with mom and dad and then mom and dad lose the home that they worked all their lives to pay for because it backed their children’s debts.”
At the peak of the housing boom in 2007, purchasing a home in Spain cost 7.7 times a family’s annual gross income on average, compared with 5 times in the U.S., according to research by Banco Bilbao Vizcaya Argentaria SA (BBVA), the country’s second-biggest lender.
Guarantors were rarely aware of the consequences of backing mortgages. On top of losing their homes, some have had part of their pensions taken away to repay debts, according to Banos.
Spanish home prices have fallen more than 30 percent since the peak, according to Tinsa, Spain’s largest homes appraiser. That’s left about a fifth of borrowers in negative equity, a figure that could reach 25 percent by year’s end, according to Standard & Poor’s. Unemployment, already the highest in the European Union, rose to 24.6 percent in the second quarter, the highest since at least 1976, the year after the death of dictator Francisco Franco.
“The economic crisis is wiping out businesses and the finances of families that were comfortably off” and “foreclosures are now massively threatening businessmen and families in high income areas,” Banos said. “Unemployment is the root of all of this and the worst affected areas are Madrid, Barcelona, Valencia and Andalucia.”
Banos said 22,000 small businesses have disappeared in Madrid alone since 2007. Demand for the group’s help from clients such as lawyers, dentists and tavern owners has surged more than sevenfold in the past three years.
Entrepreneurs who refinanced home loans to support businesses at the beginning of the crisis in 2008 have gone bust or failed to keep up with payments and now make up 15 percent of Madrid home foreclosures. Once-affluent families, who until recently had been able to buy time by selling assets other than their homes, represent another 25 percent, according to the AFES study carried out last month.
“The study can be easily extrapolated to the rest of the country,” said Banos, who estimates as many as 400,000 foreclosures have occurred in Spain since the beginning of the housing market’s collapse.
Rajoy’s nine-month-old government on Sept. 27 announced its fifth package of budget cuts and tax increases, bringing planned savings to about 150 billion euros ($195 billion), or 15 percent of annual gross domestic product, by the end of 2014.
Those austerity measures have failed to contain the deficit, which may still approach last year’s 9.4 percent of gross domestic product, said Ignacio Conde-Ruiz, an economist at the independent Applied Economic Research Foundation in Madrid.
“The mix of tax increases, disappearing wage growth and rising energy and food prices continues to chip away at families’ disposable income, and represents a growing risk to mortgage affordability,” Raj Badiani, an economist at IHS Global Insight in London, said in a phone interview.
“Meanwhile, recent austerity measures including two labor market reforms to make it cheaper to lay off traditionally secure workers are expected to accelerate the rate of defaults on retail mortgages,” he said.
Under Spanish law, a bank can pursue a borrower for the difference if a foreclosed property is sold for less than the outstanding mortgage. Lenders can also garner present and future assets and earnings of borrowers and their guarantors, including pay checks and pensions.
“These people completely lose their purpose in life,” Banos said. “Everything they had or will ever have in the future will go to the bank.”
Falling interest rates, which have led to the European mortgage index dropping to its lowest level since it began in 1999, are helping to delay foreclosures Spain will face when a recovery starts in the rest of Europe, according to Juan Villen, head of the mortgage advisory service at Idealista.com, Spain’s biggest property website.
The Euro interbank offered rate “at record lows has allowed families where one member has lost their job to hang on to their homes because their mortgage payments have fallen,” he said in an interview in Madrid.
“When the rest of Europe recovers before Spain, interest rates will rise,” Villen said. “It’s a ticking time bomb.”
In 1994, the unemployment rate in Spain was 24.5 percent and the mortgage-default rate peaked at 5.5 percent. Today, with a similar jobless rate, about 3.2 percent of outstanding home loans are in default, according to the Bank of Spain.
“Many investors ask me why mortgage delinquency hasn’t grown here,” said Fernando Acuna Ruiz, managing partner of Madrid-based Taurus Iberica Asset Management, which oversees 60,000 foreclosed properties on behalf of 25 banks.
Acuna estimates that because more than 90 percent of mortgages in Spain are variable, low interest rates have shaved an average of 400 euros a month from mortgage payments since 2009 and that’s helped keep delinquencies low.
When a bank decides to start foreclosure proceedings on a homeowner who’s more than 90 days in arrears, it can take 18 months or more to dislodge them and seek to sell the home, according to Acuna. He estimates repossessed assets on lenders’ books will swell to more than 500,000 units sometime in the next two years.
Spanish banks have said mortgage defaults aren’t a problem for them even as some analysts say the official default rates for mortgages may be obscuring future losses. In April, Banco Santander SA (SAN) Chief Executive Officer Alfredo Saenz said that anyone raising this as an issue for mortgage lenders was “saying something stupid.”
At the Bankia group, the Spanish lender that was nationalized in June, mortgage defaults as a proportion of 84 billion euros of lending for home purchases was 4.7 percent in June, up from 4.1 percent in December, according to a company report. Bankia, Spain’s third-largest bank, set aside 6.8 billion euros in the first half to provision for bad loans and real estate. A further 6.9 billion euros of charges are expected this year.
The number of foreclosed properties for sale on Idealista’s website has climbed 16-fold in the past three years, the firm says. The site advertises more than 48,700 foreclosed homes valued at 6.3 billion euros on behalf of 40 banks and savings banks, compared with 3,000 homes in June 2009.
Fitch Ratings has said repossessed properties in Spain are worth 48 percent less on average than the value assigned when their mortgages were originated.
It’s not in the lender’s interest to take more foreclosed homes onto their books as they can’t sell them in an illiquid market and must set aside capital to provision for declines in value, Banos said. Still, he said the banks’ need to foreclose is understandable. “If a law was approved to let people hand over the keys and walk away, a million mortgages would stop being paid because you could walk away and buy that house 40 percent cheaper the day after,” Banos said.