Liliana Proano Males won’t be decorating her house in Madrid this Christmas because she’s about to lose it.
Males and her husband, who was fired from his job during the depths of the financial crisis in 2009, can no longer afford their mortgage. With Spain’s persistently high unemployment rate now at 26 percent, the couple is among the 350,000 homeowners who may be foreclosed upon by lenders in the next two years as the housing crisis worsens, according to AFES, a Madrid-based association that advises on restructuring debt. Since 2008, about 150,000 families have been hit with a foreclosure.
“We refinanced three years ago, but now the noose is around our necks,” Males, 42, said. “Not only do we still owe more than the original loan. We’re losing our home as well.”
As mortgage defaults rise, lenders will have to set aside money to cover losses, hurting profits, according to Juan Villen, head of mortgages at Spanish property web site Idealista.com. Spanish banks absorbed 87 billion euros ($120 billion) of impairment charges last year after Economy Minister Luis de Guindos forced them to record more defaults on loans to developers. The government took 41 billion euros in European assistance to shore up its failing lenders.
“Mortgage defaults do tend to keep rising late in the cycle because they are the last debt that people will stop paying and the problem is already quite bad,” said Benjie Creelan-Sandford, a bank analyst at Macquarie Bank Ltd. in London.
More than 5 percent of Spanish residential mortgages were in default in the third quarter, up from 3.5 percent a year earlier, according to data released today by the Bank of Spain. The level was 0.7 percent in 2007, the year before the real estate market imploded. AFES estimates a rise to 6 percent next year. Defaults as a proportion of all loans by Spanish lenders climbed to a record 13 percent in October from 12.7 percent the previous month, the central bank said today.
Defaults are rising partly because of changes required by the Bank of Spain that force lenders to book more soured mortgages.
“When the real estate bubble burst in 2008, banks used refinancing en masse to cover up non-performing residential mortgage loans,” AFES President Carlos Banos said. “Refinancing only served to draw out the situation and exacerbate the problem.”
Banks refinanced mortgages and granted grace periods in return for adding financial penalties and notary expenses to the principal of loans. Lenders assumed that Spain’s economic crisis would last only a couple of years and that borrowers would be able to make their payments, Banos said.
In April, the Bank of Spain ordered lenders to review their portfolios of refinanced loans, including mortgages, to make sure they’re classified in a uniform way. Lenders had 208 billion euros of loans on their books that they’d restructured or refinanced as of the end of 2012, according to the regulator.
The review led the regulator to the preliminary conclusion that classifying all refinanced loans correctly would cause a 21 billion-euro increase in defaults. Lenders would need to generate a further 5 billion euros of provisions to cover the losses.
The default rate for Banco Santander SA’s Spanish mortgages jumped to 7 percent in September from 3.1 percent in June as it reclassified loans that it had refinanced.
“As a bank this will be the main focus area, whether you are properly recording your non-performing loans, especially the refinanced ones,” said Alexander Pelteshki, an analyst at ING Financial Markets in Amsterdam. “There is an urgency to come clean.”
Foreclosures on retail mortgages are preventing banks from reducing their real estate holdings more quickly that built up on their balance sheets after the property crash, said Macquarie’s Creelan-Sandford. Banco Bilbao Vizcaya Argentaria SA’s assets from foreclosures on residential mortgages rose to 1.8 billion euros in September from 1.5 billion euros in December 2012.
Spain’s recovery has not been strong enough to prevent defaults from rising. The economy grew 0.1 percent in the third quarter from the previous three months -- its first expansion since March 2011, according to the National Statistics Institute.
More than 4 million people have lost their jobs since the start of the credit crunch. The International Monetary Fund predicts the jobless rate won’t fall below 25 percent until 2018.
As Spain’s borrowing costs in 2012 surged to the highest level since the euro was introduced in 1999, the government introduced deficit reduction measures such as wage freezes and income tax hikes that ate up disposable income. Spanish households’ average income fell for a fourth year to 23,123 euros in 2012 compared with 25,556 euros at the start of the crisis in 2008, the National Statistics Institute said on Nov. 20. That left 22 percent of the population below the poverty threshold.
Spanish house prices have dropped an average of 40 percent since the peak in 2007, according to Fotocasa.es and the IESE Business School.
“Until Spain starts creating jobs and credit starts flowing again, house prices aren’t going to recover,” Beatriz Toribio, head of research at Fotocasa, said. “We expect further price declines, albeit smaller than in previous years, in 2014.”
Males, a cleaner, and her husband Patricio bought their home in 2006 with a loan of 229,000 euros that covered the entire cost of the property. When Patricio lost his job as a welder in 2009, the couple’s combined monthly income of 3,000 euros dropped by almost half.
The couple could no longer afford the 1,300-euro monthly mortgage payment. Their bank, Banco Mare Nostrum, which was nationalized this year, allowed them to pay only half that amount during a three-year grace period.
When that period ended 18 months ago, BMN informed the couple that they needed to pay 1,400 a month on the loan. It had ballooned to 245,000 euros after notary fees, interest and refinancing costs were added.
“The bank strung out the situation to avoid a loss three years ago but has just made things worse,” Males said. “They will have a larger loss to write off now when they foreclose.”
BMN initiated foreclosure proceedings in June after the couple failed to find a buyer for the property, which is now worth less than the loan on it. The couple will lose their home in 2014.
“I don’t know where we’ll go when they evict us,” Liliana Proano Males said. “We will look for somewhere to rent. But truth be told I have no ideas, will or enthusiasm left.”