Spain Home Expropriation Plans Seen Violating EU Bailout

Spanish politicians trying to cushion the blows of austerity plan to seize foreclosed homes to house the needy, discouraging foreign investment and threatening to violate terms of the European bailout of the country’s banks.

The regional governments of Andalusia, with the most vacant properties in the country, and the tourist destination of the Canary Islands, are planning to expropriate foreclosed properties for as long as three years to house displaced families. The European Commission has asked Prime Minister Mariano Rajoy’s government for details on the regions’ actions, to ensure they don’t clash with the country’s commitments.

“It’s third world, populist and akin to policies more commonly seen in Bolivia and North Korea,” said Mikel Echavarren, chief executive officer of Irea, a Madrid-based restructuring firm that has advised on 22 billion euros ($28.6 billion) of refinancing. “Investors fear it will set a precedent and other regions will follow suit, making Spanish real estate investment an extremely high-risk activity.”

Rajoy’s People Party has pushed ahead with the harshest austerity measures in the country’s democratic history to tame surging borrowing costs that last year pushed Spain to the verge of a bailout. While seizing homes may soften the impact, it threatens to complicate the government’s task of meeting the terms of a 41 billion euro rescue package for the banking sector, including selling 50.8 billion euros of soured property assets transferred to the nation’s bad bank with a return for its investors.

‘Key Element’

“We are talking about a key element, a very important element which concerns the financial assistance that banks have been given by the European Union,” Deputy Prime Minister Soraya Saenz de Santamaria said on Friday at a press conference in Madrid. That agreement “obliges us to fulfill certain obligations, pacts and memorandums. We all have to work together on the issue of foreclosures to adopt balanced decisions.”

Simon O’Connor, spokesman for European Union Economic and Monetary Affairs Commissioner Olli Rehn, said today in Brussels that the commission is well aware of the “severe social consequences of the crisis in Spain” and is in contact with the Spanish authorities to request additional information about policies adopted at the regional level.

Property investment in Spain already is a risky proposition after a decade-long property bubble burst in 2008, tipping the nation into recession and pushing unemployment to a record 27 percent. Around 400,000 foreclosures have been ordered in Spain since the start of the crisis, sparking a wave of demonstrations that have seen protesters picket politicians’ homes to shame them over evictions.

‘Terrible Idea’

Spain’s Economy Minister Luis de Guindos said the regions’ actions will choke off mortgage lending and the chairman of Spain’s largest bank described it as a “terrible” idea.

Andalusia, the most populous of Spain’s 17 autonomous regions, passed the decree last month, allowing it to seize residences that have been foreclosed on by banks and developers to house families who’ve lost their homes and meet certain low-income requirements. In exchange, lenders will receive 2 percent of the properties’ value per year in compensation and can recover legal possession after three years, according to the April 9 decree.

The government also can impose fines of as much as 9,000 euros on dwellings that have been unoccupied for six months in an attempt to force them to be made available for rent. Andalusia has 637,221 empty units, according to the National Statistics Institute.

‘Blindness, Desperation’

Given the state of Andalusia’s economy -- joblessness among under 25-year-olds stands at 66 percent -- it’s not surprising the measures were introduced, said Carles Vergara, a Barcelona-based professor of Financial Management at the IESE Business School.

“The measure has not been thought through properly and seems more the result of blindness or desperation,” he said in a telephone interview.

“We are experiencing a state of economic, social and housing emergency,” Amanda Meyer, general secretary of housing for the regional government of Andalusia, a coalition of the socialist PSOE and United Left parties elected last year, said in an e-mailed statement. “We are responding to social demand and a problem that massively affects the victims of a crisis that won’t let up.”

Protecting Families

Guindos, the economy minister, said on April 17 that the only result of expropriating homes is that banks will no longer grant mortgages on properties in Andalusia, located in the south of Spain and comprised of eight provinces including Granada and Malaga. He said that the central government already passed a law last year freezing bank repossessions for a two-year period in the case of low-income families, a measure that “solves problems without creating additional ones.”

The law, approved in November, protects families who can’t pay their mortgages for a two-year period if they earn less than 1,597 euros per month, have at least three children, have one child under three, a disabled dependent to look after, are a single parent family with two children or a victim of domestic violence; or being unemployed and not receiving benefits.

On Jan. 30, the Economy Ministry changed rules so that mortgage recovery proceedings cannot start until three payments have been missed, from one previously, and limited mortgage arrears interest rate to three times the legal interest rate.

Emilio Botin, chairman of Banco Santander SA, Spain’s largest bank, added last week at a meeting in Malaga that the Andalusian decree is “terrible” and won’t help the Spanish economy “in the slightest,” news agency Europa Press reported. He added that Santander hasn’t foreclosed on any homes since November and that the bank has delayed repayment on 2 billion euros of credit for almost 20,000 families to help them.

Canary Islands

The Canary Islands region, Spain’s most popular destination for foreign tourists after Catalonia and the Balearic Islands, is studying adopting similar measures, despite objections from national politicians and bankers, said Paulino Rivero, the Canary Islands president.

Avoiding foreclosures is a top priority, transcending all other considerations, said Martin Marrero, spokesman for the regional government of the Canary Islands, a mix of the Peoples’ Party, socialist PSOE and nationalist parties elected in 2011.

Foreclosures have surged as mortgage delinquency rates rose to 3.84 percent from 2.36 percent in December 2008.

According to Meyer, 90,000 evictions have taken place in Andalusia alone since the start of the crisis as families’ disposable incomes have dropped more than 20 percent.

“The government understands it has an obligation to the thousands of people who are suffering foreclosure procedures and that it must do everything in its power to impede the drama involved with losing a home,” Marrero said in an e-mailed statement.

Rising Delinquencies

The risk that mortgage loan default rates could double in the next three years is “a good guess, having looked at the experience of other periphery countries,” said Alberto Gallo, head of European macro credit research at Royal Bank of Scotland Group Plc in London.

Even as unemployment peaks in the first quarter of next year at 28.5 percent, loan delinquencies will continue to rise as the depth of the recession means joblessness is increasingly affecting 30 to 50 year olds, higher-educated nationals on permanent contracts, who are far more likely to own homes, according to Fitch Ratings.

“The jump in the percentage of households with no employed adults to 16 percent last year from 14 percent in 2011 also makes delinquencies more likely,” Fitch Director Douglas Renwick wrote in a May 3 report.

‘Precarious’ Economy

Home prices in Spain have already plunged 39 percent from their April 2007 peak, according to real estate website and the IESE business school. They will fall a further 20 percent over the next four years as “precarious” economic conditions deter buyers and as “swaths” of unsold housing stock drag on prices, Sophie Tahiri, a Paris-based economist for Standard & Poor’s wrote in a report last month.

For Echavarren, expropriating foreclosed homes will accelerate price declines and discourage foreign investors from buying properties the country desperately needs to sell. Funds and real estate investment trusts won’t spend a cent buying homes or purchasing property to rent in the regions for the next three years, he said.

“The legal security of international investors in Spain is taking one step closer to that of third-world countries,” Echavarren said. “The value of a property is comprised of full ownership rights to it and the freedom to do with it as you please,” Echavarren said, “Embargoing that right, albeit temporarily, significantly lowers the property’s market value, liquidity and damages the chances of selling it in the short or medium term.”

Punishing Success

Individual homeowners, who already have to compete to sell their homes against lenders that can offer steeper discounts to asking prices and provide vendor financing to shift the properties on their balance sheets, will also suffer as banks cut prices even further to get rid of homes in case they are expropriated, said Vergara, the IESE Business School professor.

“In effect you are favoring families that have lost everything at the expense of families who have faithfully honored their mortgage repayments.”

Sareb, Spain’s bad bank, set up last year to absorb soured real estate assets from the nation’s ailing lenders, has around 90,000 homes on its books and has pledged to sell around half of them in the next five years while turning a profit for shareholders.

That task will be made more arduous as investors don’t distinguish between Andalusia and the Canary Islands, where assets will be worth even less if expropriations and fines come into force, and the rest of Spain, Echavarren said.

Sareb’s Obligation

Sareb’s obligation is to manage its portfolio efficiently and any measure or obstacle which affects that capacity may endanger the fulfillment of agreements made with Spanish and European authorities and with its shareholders and investors, said a spokeswoman for the entity who declined to be named citing policy. Legal teams are studying the measures and will take action deemed necessary, she said, adding it’s still too early to establish the impact they will have on its accounts.

Rents, already under pressure after the number of homes to rent surged more than 400 percent since a drought in mortgage lending paralyzed sales, may also fall as private landlords struggle to compete with regional governments to rent properties.

Rents Falling

Rents fell in March for an eighth consecutive month, with the average price standing at 7.20 euros per square meter, down 4.7 percent from the year ago period, according to Fotocasa and the IESE. In May 2008, Spain’s largest property website, advertised, 35,907 homes for rent. Today it has 193,149 listings.

Spain needs investment in its real estate inventory and a return to a stable rate of construction, said Vergara, who estimates that Spain went from selling 700,000 homes per year at the peak to virtually nothing now.

“Construction will only resume once the viable stock of homes has been absorbed and that won’t be bought up by investors who feel there is lack legal security as measures such as these are introduced halfway through the game,” he added.

In the third quarter, home sales were 71 percent below the peak in the second quarter of 2006, according to data from the Ministry of Public Works. Spanish banks granted 274,700 new mortgages in 2012, a drop of 80 percent from 2006, data from the National Statistics Institute shows. Investment in commercial property declined 45 percent to 1.81 billion euros in 2012, according to a January report by Deloitte & Touche LLP.

Citizens’ Rights

Andalucia states in the decree it has an “exorbitant” amount of empty properties and justifies the measures on the grounds that Spain’s constitution guarantees all citizens the right to a dignified home. It said 50,000 families in the region need rental accommodation, yet there’s insufficient supply at adequate prices, so empty homes must “urgently” be put to use.

“The same could be said of the right to employment and to eat, but you don’t see anyone expropriating factories and supermarkets, Echavarren said.

Jose Antonio Grinan, president of the regional government of Andalusia, said he doubts that Brussels wants to challenge the decree. “If that is what Europe wants, then Europe isn’t worth the trouble,” he said on Friday on Spain’s La Sexta television.