Spain Real Time Data Charts

Edward Hugh is only able to update this blog from time to time, but he does run a lively Twitter account with plenty of Spain related comment. He also maintains a collection of constantly updated Spain charts with short updates on a Storify dedicated page Spain's Economic Recovery - Glass Half Full or Glass Half Empty?

Thursday, July 31, 2008

There Is No Sub-Prime in Spain, But Has Spain Itself Now Become One Huge Sub-Prime?

``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.


Charles Butler said...

Help me out, Edward. What book is this Prats guy talking? Ahorro Corporacion is among the biggest marketers of cedulas and is owned virtually outright by the cajas themselves.

The issue, in any regard, does not begin to sort itself out until sellers like the last guy in the Bloomberg article start lowering their expectations a touch. (WTF does he want, anyway? He's been offered a 2006 price.) Until then, everyone - including the cedula market - is just guessing where the bid surfaces. Couple that with a certain negative bias and we have a prescription for overshoot.

A propos of nothing, I had not-mortgage-related reason to use TINSA for a variety of appraisals in 2003. They were then, with one exception, consistently low in their assessment of both urban and rural real estate. One of the problems, I believe, was that they did not have a good fix on the black money component of transactions, having underestimated the amount that was surfacing following the introduction of the euro.



Edward Hugh said...


"What book is this Prats guy talking? Ahorro Corporacion is among the biggest marketers of cedulas and is owned virtually outright by the cajas themselves."

Yep. It's hard to see what interest this guy would have in being a whistle blower. I think he may well have fallen into an interview trap, since Bloomberg probably wanted to be able to attach a name and a surname to something which is open knowledge out on the street, at least here in Barcelona.

"The issue, in any regard, does not begin to sort itself out until sellers like the last guy in the Bloomberg article start lowering their expectations a touch."

Well, according to Santiago Baena, president of the API real estate agents association (Colegios Oficiales de Agentes de la Propiedad Inmobiliaria) - as widely quoted in the Spanish press - Spanish property prices have fallen by 30% since Spain’s economic downturn began last year, and obviously there is more to come. We are talking here about newly built property.

But the official data from the Ministerio de Vivienda still show only a very slight drop in prices. The reason for this would seem to be that the ministry data are based on valuations - provided by TINSA members - and then the properties are sold at "discounts".

Thus the valuation of the property which goes into the mortgage pool is significantly inflated, which means effectively that the quality of the assets which back the cedulas are not as high as appear at first glance.

As an example, house prices in Spain’s cities have only fallen by 3.8% in the last 12 months, according to figures from Tinsa earlier this month.

Price index people Kyero have this warning on their information about Spain:

"Actual prices are likely to be unreliable due to the fact that some of the sales price passes from buyer to seller 'under the table'. This amount is never notarised and therefore cannot feature in the MVIV figures."

It would seem that we could now invert this, and say that prices are likely to be unreliable since the actually selling price would appear to be considerably less than the "valuation".

After this is all over the Spanish parliament will obviously need to clean this part of the industry up, and considerably.

Having lived in Spain for 18 years now, I would say that it is absolutely impossible, in my opinion, that lending policies were more lax in the United States than they have been here. It was "how much do you want"...ah yes, 110% LtV... no problem (ie piggy backs have been extensive, at least with young people and in large cities).

"You need five salaries attaching to the mortgage... OK, no problem, I have a friend who can do this one for you" (for the immigrants).

Meantime Fitch, S&P, Moody's and company are all frantically working through every batch of bonds, desperately trying to save their reputations from taking another very big hit.

I think this is the bottom line here. If realistic valuations are put into the books, a number of banks will obviously see their credit rating go down, and this will only compound what is already an extremely difficult situation for them.

etc, etc