Why mortgages might be Spain’s next headache

December 17, 2010

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

MADRID — Are mortgages the next headache for Spanish banks? Regulators think the country’s 630 billion euro home loan market can survive the slump relatively unscathed, just as in the last real estate crisis of 1992-1993. Spanish banks’ biggest problem is bad loans made to real estate developers. But it would be optimistic to assume that mortgages will emerge unscathed.

In a recent presentation, the Bank of Spain pointed out that conditions in 1993 were tougher  than they are now.
Unemployment hit 24 percent and interest rates soared to 13.9 percent, compared to 2.6 percent today. Even then, only 4 percent of mortgages went sour. And banks were able to sell repossessed properties after the bust without incurring losses.

There are grounds for optimism. Despite falling property prices, Spanish home loans are on average worth just 62 percent of the value of the property. These loans are recourse, making it harder for borrowers to walk away. Spanish families will often help overextended homeowners keep up their mortgage payments. This is reflected in banks’ data: the proportion of mortgages classed as non-performing has fallen to just 2.6 percent.

But today’s real estate bust is worse than in 1993. Spain started building 760,000 new homes in 2006 — almost four times as many as in 1992, even though the population has grown by just 13.5 percent. Most analysts predict Spanish house prices will fall 25 percent from the peak, twice the 12.8 percent drop to date. According to RR Acuna, a consultancy, Spain has 1.5 million unsold homes — about 6 percent of the total stock. These will act as a drag on prices, making it hard for banks to sell foreclosed homes at a profit. Moreover, households are more indebted than in 1993.

How bad could it get? If delinquencies on mortgages reached, say, twice the 1993 peak, banks would have 50 billion euros of troubled loans. Even then, this would be less of a headache than lenders’ 180 billion euros of potentially troubled exposure to construction and commercial real estate. Eventual losses would also be much smaller. Nevertheless, it’s hard to argue that mortgages will not be a problem.

Comments

Unemployment at 24 percent, interest rates shooting up to 13.9%, 180 billions of exposures of the banking sector etc. Are these not the negative indicators; particularly the mortgage financing in construction and commercialsectors done by the banks in Spain.
Unless you know the quantum of toxic assets, their exposure toward financing the Irish property developers- direct of through local Irish banks-, how can you say that the trouble is not lurking them on the face?
Perhaps it is well known by now that in Ireland the property values have gone down from 50 – 60%. Moody’s have, day before yesterday, downgraded the Irish credit rating.Under the circumstances,will the financial sector not feel a pinch in Spain?
Just yesterday, the Bank of England has released a troubling report about the British Banks’ involvement in the property/real estate sector in Ireland.Please refer to the latest BBC report on the subject to update the information.
Today, Germany is the only country, followed by France and U.K.;dictating the terms of behavior of all the 16 member group of the EURO ZONE.The other countries have been forced to adopt severe austerity measures, which in fact are harsh for the taxpayers.

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