``Subprime lending, meaning poorly documented, very long- term, increasing-interest mortgage loans where repayment by the debtor depends sometimes critically on the ability to refinance, simply does not exist in Spain,''
Deputy Finance Minister David Vegara, Oct. 24 2007.
Bloomberg once more goes on the attack over Spanish mortgage backed securities situation this morning. They make the following, in my opinion, reasonably valid points:
1/. The Spanish issue is now a matter of international concern since mortgage backed securities issued in Spain are extensively held by global fund managers - like Pacific Investment Management Company LLC and Pioneer Investments (the two mentioned by Bloomberg). Josep Prats, a fund manager at Ahorro Corporacion in Madrid, is quoted as saying that property appraisal firms, working in the interests of the banks who controlled them, regularly inflated home values, and that such inflated assets are backing for as much as 320 billion euros of mortgage-backed paper sold to savers worldwide. This point seems a fair and reasonable one to me.
``Valuations aren't realistic,'' says Prats, who heads a team managing about 11 billion euros. ``Valuation companies issue reports for whatever amount the bank managers are prepared to lend.''
2/ Caja de Ahorros de Gipuzkoa y San Sebastian SA, a savings bank in northern Spain known as La Kutxa, has sold 2.5 billion euros of mortgage-backed bonds since the end of 2005. Pimco, based in Newport Beach, California, and Pioneer Investments bought Kutxa bonds for funds sold to investors around the world.
Pimco's Euro Bond Fund, sold to savers in Hong Kong, is the biggest investor in Kutxa's 2007 issue with a 20.6 million-euro holding, according to a March 31 regulatory filing. Pioneer Investments' CIM Euro Fixed Income Fund, which is sold to Italian savers, holds 11 million euros of the bonds. Pimco, majority-owned by Munich-based Allianz SE, runs the world's largest bond fund and has $829.5 billion under management on behalf of corporate pension plans, public retirement funds and foundations. Pioneer Investments is the fund-management arm of Italy's largest bank, Milan-based UniCredit SpA, which oversees 190.5 billion euros for 40 million customers in 23 countries. Kutxa's 2007 bond has lost 8 percent since it was issued in February last year. That contributed to the Pioneer fund underperforming the JPMorgan EMU Bond Index by 2.7 percentage points over the past 12 months.
One concern is that the real worth of many Spanish homes is far below official values, meaning the so-called loan-to-value ratio.... understates the risk, according to Prats of Ahorro Corporacion.
2/ In 2006 and 2007 many banks allowed three or four people to sign for mortgages when the buyers didn't qualify on their own, and Bloomberg cite a spokesman for Banco Bilbao Vizcaya Argentaria SA, Spain's second-biggest bank. I think this is already an "open secret" on the streets of Barcerlona.
Banks also granted variable-rate loans to families at the financial limit when interest rates were close to the lowest in a generation. Kutxa itself even offered a 50-year mortgage in 2007.
Concerns about the way valuation companies operate aren't new. In 2006, the Bank of Spain cautioned four home valuers against making baseless appraisals, or using a methodology for their calculations that didn't meet legal requirements. The bank didn't identify the companies involved.
"The tricks of a seasoned valuer include constant visits, models - any method is valid........In the end it's about imagination and knowledge. It's not a question, as it is in some other countries, of passing information from a public office to the statisticians.''
Luis Leirado, managing director of the biggest home valuer, Tasaciones Inmobiliarias SA, known as Tinsa.
3/ In recent years, existing safety measures failed to rein in the appraisers. Under Spanish law, valuers are obliged to provide a so-called mortgage valuation -- at a discount to the market price - when there is a significant risk a property will cost less within the next three years. In 2005, less than 1 percent of estimates applied such a discount, according to a report by the Bank of Spain. The central bank was already warning that housing was overvalued by as much as 30 percent then.
Many home-valuation companies are owned by banks. Kutxa gives most of its business to Servatas, in which it holds a 35 percent stake. Tinsa is owned by 36 savings banks and the Spanish Savings Banks' Confederation.
"During the credit boom, valuers understood that clients would welcome inflated estimates"
Ramon Lobo, former BBVA branch auditor.
Between 2005 and 2007 it was ``very common'' for valuations to exceed the transaction price by 25 percent, Lobo says. That allowed banks to treat loans for 100 percent of a property as if they were closer to the 80 percent limit for regular mortgages when they sold them to investors. In December 2007, the government passed a mortgage law limiting the amount of business appraisers can take from clients with ownership stakes.
4/. Spanish AAA-rated mortgage debt is now judged to be the riskiest on the continent. Investors demand as much as 240 basis points more than Euribor, the benchmark for interbank lending in the euro zone, up from 85 basis points at the end of last year, according to Dresdner Kleinwort prices. That means it costs borrowers an extra 15.5 million euros in annual payments for every billion euros of bonds.
Caja Madrid, Spain's second-largest savings bank, had 262 million euros of mortgage-backed bonds downgraded by Fitch Ratings in June after the default rate on the underlying home loans doubled in a year.
Company Profit Reports
Antena 3 Television SA, Spain's second-largest commercial TV station, cut its interim dividend by a fifth after first-half profit fell 31 percent as advertising sales dried up. Net income dropped to 80 million euros ($125 million) from 115.7 million euros a year earlier, the company said today in a regulatory filing. Sales slumped to 476.9 million euros from 538.8 million euros.
Telefonica SA, Europe's second- largest telephone company, said second-quarter profit dropped 20 percent after a gain from the sale of Airwave O2 Ltd. boosted earnings a year earlier. Net income fell to 2.06 billion euros ($3.21 billion) from 2.57 billion euros a year earlier, Telefonica said today in a regulatory filing. Sales rose to 14.25 billion euros from 14.08 billion euros. The company reiterated its 2008forecasts for all regions.