Mortgaged to the hilt

Mención a Joaquín Trigo, Director General del IEE, el 27 de abril en The Economist


After the house-price crash come the repossessions-and the angry response

SPANIARDS used to complain that housing cost too much. Now they fret that, with unemployment at 26% and incomes tumbling, they can no longer afford it at any price. The Spanish ate among Europe’s keenest owner-occupiers, with 83% living in their own homes. A culture of immobility means that, once a home is bought, it is expected to be for life. For Mariano Rajoy’s government, the problem of repossessions is thus a big headache.

The pre-crash bubble saw Spaniards borrow merrily, owing almost twice as much in mortgages as Italians by 20l0. The total debt is falling gradually, but is still around €6oo hfllion ($780 billinn). Some 8% of mortgage-holders ate now jobless. Last year 8o families a day had mortgages foreclosed, with their properties usually valued far below the purchase price. Many owe money on homes they no longer own or live in. Passions are running high. A vociferous protest movement blocks the doorways of houses due to be repossessed. It obtained x4m signatures on a petition demanding a retroactive law to allow American-style mortgages, where the keys (and ownership) can be dumped  the banks.

This spooked banks already struggling with toxic assets from bust developers. With hall a million mortgaged properties in negative equity, many mortgage-holders would be better-off handing their homes over. «If half of the potential beneficiaries took advantage of the measure, the nonperforming loan rate could triple,» says María Romero of Analistas Financieras Internacionales in a paper.

The government has now passed a watered-down law to stop banks foreclosing until mortgagees ate three months in arrears. Poorer families have two years. It also capped interest rates, which can reach 25%, and includes only a very modest version of the key-return idea. Banks breathed a sigh of relief, however. Spain’s finance sector is undergoing a huge restructuring with €41 billion of European bail-out money. Nobody wants a return to last year, when Bankia alone declared losses of over €19 billion, with more than 600,000 new homes still unsold, a flood of new properties onto the market would hurt both banks and house prices. Ripples would extend, as Spain has Europe’s second-largest mortgage-securitisation market.

For banks, the situation is not yet drastic. Mortgage delinquency is running at 3.5%, below the overall non-performing loan rate of lo.4%. It is not worse because many mortgages have guarantors (often family members), interest rates ate low and the average loan to value is just over 60%, says Fitch, a ratings agency. Yet last year banks resold foreclosed properties at only 40% of the original value. Defaults will rise as long as the economy is stalled. Last year, even before the new law, more than a third of foreclosures were key drops. Foreign owners may flee the country: Spain’s foreign population fell by 216,000 last year. Ecuador has already passed a law to stop Spanish banks pursuing returnees.

The government cannot afford further bail-outs. Its 2012 budget deficit was l0.6% of GDP. Rescuing banks accounted for over a third of that. And Spain must cut the underlying deficit to 4.5%, even as the economy contracts. Fresh budget measures ate expected, and there ate hopes that Brussels will relax the target.

Now regional governments are punishing banks for their empty housing stock. Andalusia and the Canary lslands will either expropriate or fine them for empty properties. Catalonia wants to tax them. Joaquín Trigo, of the lnstitute for Economic Studies think-tank , suggests a different solution: regional governments could rent from the banks and sublet to the needy.