Photographer: Angel Navarrete/Bloomberg

Protesters Mock Bankers as ECB Fuels Spain Mortgage Fight

Dressed as a banker from a bygone age, with a black top hat, a cigar and a briefcase full of fake money, Eduardo Martinez Cobo traveled to Madrid to protest what he considers unfair clauses in his mortgage contract.

Martinez and other demonstrators delivered a petition signed by 125,000 Spaniards to the Bank of Spain on March 31. Many are homeowners who, like Martinez, don’t benefit from record-low borrowing costs because banks added “floors” to their mortgage contracts. A floor sets a minimum rate for a loan that won’t fall even when market rates are lower.

“The monthly savings could pay for two trips to the shops, which would make a very big difference,” Martinez said during the protest. “We’re paying all this extra money to the bank when we could be spending it on something else and helping to save the economy.”

As the European Central Bank’s stimulus program drives down interest rates on most of Spain’s 560 billion euros ($603.7 billion) of outstanding home loans, lenders are facing public pressure and a lawsuit seeking to abolish mortgage floors. About a third of Spanish home loans had a minimum or maximum interest rate attached to them, according to a Bank of Spain report in 2009.

Lenders Sued

The Spanish banking and insurance services consumers’ association, known as Adicae, is suing lenders on behalf of 15,000 of the estimated 2 million people in Spain who are affected by mortgage-rate floors. In a lawsuit, Adicae alleges that the floors are “abusive,” that clients were not adequately informed of their inclusion into mortgage contracts and that they should be abolished.

The suit also seeks to make lenders that included floors in contracts reset the rates at lower market levels and reimburse customers for the excess mortgage payments they made. If Martinez’s 3.25 percent floor is removed, his rate would drop to about 1.46 percent.

Spokesmen for CaixaBank SA, Spain’s third-largest lender, and Liberbank SA declined to comment for the story. The two banks are among about 101 current or former lenders named in the lawsuit.

Floor clauses are generally legal if the client is correctly informed, a spokeswoman for the Spanish Bank Association said by phone.

A ruling on the lawsuit probably will be issued during the summer, said Adicae spokesman Fernando Herrero. If the lawsuit is successful, banks would lose between 2,000 euros and 5,000 euros per mortgage, Herrero said.

Legal Floors

“If the floors were banned, it would be very bad news for those banks that have a lot of these mortgages in their loan books because it would affect their net interest income,” said Nuria Alvarez, a banking analyst at Renta 4. “They would have to renegotiate their mortgages to the current lower interest rates and that would affect the profitability of their mortgage portfolio.”

Abolishing the clauses would have a negative impact on the net interest income of as much as 5 percent for Banco Popular Espanol SA, according to a March 11 note by CaixaBank. Popular has 7.2 billion euros of loans with floors that have an average yield of 3.05 percent, according to CaixaBank estimates.

Banco Popular Chairman Angel Ron said last week during the lender’s annual shareholders meeting that its mortgage floor clauses are legal, according to the bank. Ron added that the bank no longer applies the floors for new mortgages and, if they are banned, it would respect the ruling.

Renovation Work

Martinez, 53, a former worker at Seville’s public-lighting service, said lender Caja San Fernando didn’t explain the inclusion of the minimum and maximum rate clauses in his mortgage. He got a 72,000-euro loan from the lender in 2006 to renovate his home.

In 2012, CaixaBank took over Banca Civica, a group of ex-savings banks including one that had previously absorbed Caja San Fernando. Martinez’s loan was set at 12-month Euribor, the euro-area interbank rate used to price most floating-rate Spanish mortgages, plus 1.25 percentage points.

The Euribor rate published by the Bank of Spain plunged to a record low of 0.212 percent as of March from a high of 5.39 percent in 2008. On Tuesday, Spain sold three-month Treasury bills to yield minus 0.029 percent in a sign of how the ECB’s easy monetary policy is driving down funding costs.

Martinez, who earns about 1,050 euros a month, estimates he would be paying 236 euros in monthly mortgage payments if he didn’t have the floor, compared with the 314 euros he pays now.

Favoring Banks

“On paper, it looked like a good deal for both parties,” said Jose Luis Ruiz Bartolome, co-author of Vuelve Ladrillo Vuelve (The Return of Bricks and Mortar), a 2015 book about the decline and incipient recovery of Spain’s real estate and mortgage markets. “In reality, it wasn’t because interest-rate floors were typically set at 3 or 4 percent and ceilings were set at around 10, 12 or even 15 percent. So the mortgage holder had little room to benefit from rate cuts, but everything to lose from increases. That favored banks disproportionately,” he said.

The Spanish Supreme Court in 2013 ruled that the mortgage floor clauses of three lenders, including Banco Bilbao Vizcaya Argentaria, Spain’s second-biggest bank, didn’t meet transparency requirements and should be removed from contracts.

Among the shortcomings in their procedures, the lenders didn’t provide clients with simulations of different interest rate scenarios, the court ruled. In BBVA’s case, details of the clauses were masked by other information that diluted the clients’ attention, the court said.

Negotiating Changes

Another court decision in February clarified that borrowers could only be compensated for the extra payments they made as a result of the floors from May 9, 2013, the date of the original ruling.

Borrowers have sometimes been able to negotiate the removal of the floors. Ivan Muniz, 33, a steelworks quality-control inspector from Gijon in northern Spain, said he’s saving 450 euros a month in mortgage payments after his lender agreed to remove a 4.25 percent floor on his mortgage. Muniz is now paying interest of about 0.6 percent on his loan.

“If we could spend the extra money, everyone would be better off,” said Martinez while protesting outside of the Bank of Spain. “Instead it’s all going into the pockets of the banks.”

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