Lamin Numke, a 34-year-old man from the Republic of Mali, is one of the millions of immigrants who settled in Spain during the real-estate boom, attracted by plentiful jobs and cheap mortgages, only to default on his loan.
Today, borrowers like Numke are the most likely to fall behind on mortgage payments and lose their property, according to a Moody’s Investors Service study of 890,000 mortgages from 2006 through 2008. The average default rate for foreign residents is “strikingly high compared with mortgage loans to Spanish residents,” Moody’s wrote in the report last month.
Faced with mounting losses, Spanish banks have reduced new lending, which the National Statistics Institute in Madrid said fell 35.8 percent from a year earlier in November, the 19th straight decline. The bad loans to immigrants are also complicating a push for Spanish banks to recognize greater losses on real estate they accumulated during the crash and driving buyers from the 182 billion euro ($240 billion) Spanish residential mortgage-backed securities market.
“Deals with a significant portion of foreign residents, whether immigrants or vacationers, are double no deals for me,” said Alexander Fagenzer of Union Investment GmbH in Frankfurt, which oversees 120 billion euros. “Incentives for those borrowers to keep paying are significantly lower than for Spanish residents,” and that’s “key in a country facing high levels of unemployment and declining housing prices.”
Financial institutions have foreclosed on 328,720 homes since 2007, according to Plataforma de los Afectados por la Hipoteca, a group known as PAH that campaigns against evictions. Repossessed houses in Spain are valued at 43 percent less on average than the appraisals on the mortgages, Fitch Ratings said in a Dec. 15 report.
Lenders, whose bad loans as a proportion of total lending jumped to a 17-year high of 7.42 percent in October, have also acquired properties from developers to cancel debt and may have as many as 900,000 finished, unfinished and foreclosed homes on their books, according to Borja Mateo, author of “The Truth About the Spanish Real Estate Market.”
Spanish bonds fell today, increasing the extra yield investors demand to hold the securities instead of 10-year German bunds by three basis points to 336 basis points, after Moody’s Investors Service downgraded Spain’s debt rating to A3 from A1.
Spain’s economy will contract by 1.7 percent this year, according to forecasts by the International Monetary Fund. The economy grew at an average rate of 3.9 percent a year in the decade through 2006, and the immigrant population swelled eight-fold to 4.1 million as foreigners flocked to Spain, attracted by plentiful jobs in construction and services.
That propelled demand for new mortgage loans which peaked in 2005, according to the National Statistics Institute. Immigrants held five percent of outstanding mortgages at the peak of the home lending boom, according to a report by the Institute of Fiscal Studies, a government-backed research organization.
That year, Numke, who arrived in Spain a decade ago, paid 231,000 euros for his three-bedroom apartment in downtown Madrid with a 100-percent mortgage granted by Caja Madrid, a Spanish savings bank that was merged with six other troubled lenders in 2010 to form Bankia SA. Spanish banks had relaxed borrowing requirements even for people who, like Numke, had short-term work contracts with nothing to back the loans.
Like thousands of workers in the construction industry, Numke lost his job in 2008 after the real-estate bubble burst. Construction accounted for about 18 percent of gross domestic product at the height of the boom, according to a McKinsey & Co. report. That’s fallen to about 11 percent, data compiled by the Statistics Institute show.
Spain’s unemployment rate rose to 22.9 percent in December, Eurostat said. The country is home to a third of the euro region’s jobless and half of young Spaniards are estimated to be out of work, according to the EU’s statistics office. The number of unemployed non-Spanish residents surged to 1.23 million in the fourth quarter of 2011 from 306,300 five years earlier, according to Spain’s Statistics Institute.
Numke stopped paying his mortgage when his savings dried up and repayments doubled, adding to the burgeoning number of foreign residents driving up defaults for Spanish lenders already facing a five-fold increase in residential mortgage arrears since 2007.
“Bankia refused to take the keys and cancel our loan,” Numke said in an interview at the property on Jan. 17, the day before he, his wife, two-year-old son and 4-month-old daughter were evicted. “The bank is only harming itself by taking on another foreclosed home and still chasing us for a debt that we’ll probably never be able to repay.”
The second-most risky debts are loans originated by mortgage brokers rather than bank branches, according to Moody’s. Historically, bank branches issued most mortgages in Spain. When lending peaked brokers played an increasingly important role.
“Loans originated by mortgage brokers have higher default rates in large part because of the socioeconomic profile of borrowers contacting a mortgage broker,” Moody’s analyst Tena Centeno wrote in the Jan. 12 report. “Broker remuneration is fee-driven and linked more to volume than the credit quality of the applicant.”
Marisa Mazabanda, a 35-year-old Peruvian, was earning 1,200 euros a month as a cleaner when she was granted a 100-percent 198,000-euro loan by a mortgage broker in 2005 that was 14 times her gross annual salary. Milenium, the broker she used, added other mortgage applicants to her loan request as guarantors to get it approved. Milenium has since been dissolved.
‘Prices Never Fall’
“I was a bit frightened of taking on such a huge amount of debt, but the mortgage broker just kept telling me home prices never fall and if I lost my job I could sell my home at a profit,” Mazabanda said. “I thought: if this is legal and they are offering me the money, what can go wrong?”
House prices, which more than doubled in the decade through 2007, turned negative in the first quarter of 2008 and have since fallen by about 17 percent, the Ministry of Public Works estimates. Home sales are down 65 percent from the peak in 2006, according to the agency.
Mazabanda lost her job and found another that paid 600 euros a month, while her monthly payments rose to 1,200 euros. She stopped paying her mortgage and lost her home in 2007 because she couldn’t sell it for as much as the loan.
“It’s well known that banks provided subprime loans during the boom, even though they won’t admit it and there’s no official data to prove it,” said Fernando Rodriguez de Acuna Martinez, consultant at Madrid-Acuna & Asociados, a Madrid-based real estate research and advisory company.
Acuna says lenders regularly granted mortgages with repayments that exceeded guidelines of 33 percent of families’ incomes, inflated valuations above actual selling prices in order to distort loan-to-value ratios and accepted multiple guarantors for individual mortgages, according to Acuna.
“We have seen cases of as many as nine parties being used as guarantors for one property,” Moody’s Tena Centeno said in a telephone interview.
The result is bad news for the banks that granted the mortgages in the first place and for holders of RMBS tied to the loans, Acuna says.
High Yield Bonds
The extra yield investors demand to hold top-rated Spanish home-loan bonds more than lending benchmarks is 550 basis points, or 5.5 percentage points, according to JPMorgan Chase & Co. data. While the spread has narrowed from 640 basis points this year, it’s expanded from 400 basis points since the start of 2011. The spread compares with relative yields of 475 for debt tied to Italian borrowers, 152 basis points for those in the U.K. and 150 basis points for debt tied to Dutch homeowners.
It’s “a difficult year ahead for Spanish RMBS,” said Tina Stumpf, a Frankfurt-based securitization analyst at DZ Bank AG, citing increasing unemployment rates and possibly declining home prices.
“Foreclosed properties are hard to sell because anyone in a position to buy simply doesn’t want them due to their quality and location,” Acuna said. “Given the fact that most immigrants just go back home, the probability of recovering the money from these mortgage holders is zero.”