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?

Tuesday, August 18, 2009

Twenty Percent of Spanish Mortgages Now Considered To Be High Risk

Hello, and sorry I have been away for so long. Basically I have been busy with holidays, and economic problems out in the Baltics and across Eastern Europe. I have however been posting regularly in Facebook, and basically those of you who haven't taken advantage of my offer to join my friends don't know what you have been missing.

I break radio silence this morning to cover a story which appeared today in the Spanish newspaper Expansion. According to that article, one in five Spanish mortgages is now considered as being high risk and liable to become "non performing".

The mortgages at greatest risk are naturally those contracted after 2005 where the loan to valuation was over 80% of the total. In 2006 and 2007, according to data from the bank of Spain, LtVs were over 80% in 17.7% of the mortgages granted.

Prior to 2006, the main source of data comes from a study by Genworth Financial, who show that loans with +80% LtV rose from 12.2% in 1996 to 26.4% in 2005 (see chart below which comes from Expansion). These loans were especially popular between 2003 and 2006, but then started to decline as the decision of the ECB to raise interest rates made the likelihood of a price correction rise sharply.

The other key indicator for risk of mortgage default is, of course, the proportion of income devoted to servicing the loan. This has risen, according to Bank of Spain data for the second quarter of 2009 to an average of 38.6% of disposable income.

This figure is down sharply from the 46% reached between 2006 and 2008 largely as a result of the drop in interest rates. This is the plus side of over 90% of Spanish mortgages being variable interest. The boost to families with mortgages has been significant, and this is evident in the consumer confidence surveys.

But there is a downside here. Spanish households are now extraordinarily vulnerable to any rise in interest rates.

Secondly, people feel better because of the improved cash flow situation, but are probably not looking at the capital account side of their personal balance sheet. People with large mortgages and very high LtVs may well be better off by a few hundred euros a month, but the capital value of their investment may be sinking like a stone. In other words they are bleeding out money through the rear window. One day they will wake up to this, and find they are paying interest on a loan which is worth far more than the property they hold. Then, if there is no change in the bankruptcy law it is off to Australia, Canada or Brazil for many highly educated but heaviliy indebted young people, since as the Spanish law stands there is simply no way out from underneath this for them, ever. That is what those awkward little words "full recovery" mean.

Thirdly, Spain is now in deflation. This means that incomes will go down (over several year probably, if there is not one dramatic year of fall), and property values (which will remember correct against the general price index, that is they will also be further sucked down by the general level of prices) will also continue to fall. So the LtV will rise even as the proportion of income which needs to be paid to service a debt of which so many people were once so proud, but which they now find the be a millstone round their necks, will go up and up an up.

Meanwhile Bad loans as a proportion of total credit at Spanish lenders fell the first time in two years in June as savings banks reported a decline in defaults. The ratio fell to 4.6 percent from 4.66 percent in May and compared with a rate of 1.7 percent a year ago, the Bank of Spain said today on its Web site. Bad loans at Spain's banks slipped to 85.6 billion euros in June from 86.7 billion euros in May and 31.2 billion euros a year earlier.

But to put this in perspective, the ratio of bad loans to the total has still tripled to 4.6% over the past 12 months. And the situation is worse than it seems, since according to a study by UBS Spanish commercial banks have clawed back about €10 billion in debt-for-property swaps. And this number does not include Spain’s savings banks who do not disclose the relevant figure. If the position is similar to their commercial peers and we reclassify all these property purchases as bad loans, then the non-performing loan ratio would be 5.7% (before making any further adjustments for the loan restructuring which has been going on thanks to the availability of generous government and ECB funding).

In addition the central bank recently circulated new guidance relaxing the provisioning rules on risky mortgages. Until now, banks had to make provision for the full value of high-risk loans - those above 80% of the property’s value—after two years of arrears. That was obviously far too demanding, since property values rarely fall to zero. However the timing of the change was far from inpeccable, and the new rules, which mean banks only have to allow for the difference between the value of the loan and 70% of the property’s market value, give the impression of massaging rend results.

Iñigo Vega, an analyst at Iberian Equities, estimates that the new rules would relieve banks of the need to make provisions of about €22 billion in coming months (assuming non-performing loans only reach 8% by the end of 2010). To put that into context, Spain’s savings banks, which are heavily exposed to developers, are expected to make profits of only €16 billion before provisions this year.

As the Economist said, deferring losses to mañana doesn't change the extent of the difficulties facing Spain’s financial system.

And just to confirm that Spain really is different, surreal almost, this article (in Catalan) explains that the majority of the long term unemployed who have gone to the employment offices to claim the 420 euro monthly payment they thought they had been promised have discovered ...... that they are not in fact entitled. Apparently, according to the small print, you need to have run out of benefit and been declared unemployed AFTER 1 August 2009. This is Monty Python stuff, isn't it?

Incidentally, I have a much longer and more thorough post now in the works, sometime tomorrow for publication probably.


Spanish Mortgages said...

The problem is that there is a 12 month lag (at least) on all these figures. Many are paying far more than prevailing rates due to the Spanish 1 year fixed rate system.

Those mortgage holders who manage to survive last years high rates are desperately hanging on for their annual "mortgage rate review" which should substantially decrease their monthly payments.

But, this simply gives them 12 months at a more affordable rate whilst the Euribor creeps back up - I really think the turning point is here for the Euribor and from August 2009 the only way is up - lets hope it sits in this trough for a while because if it climbs as quickly as it fell, in 12 months time all these mortgage borrowers will be back where they started.

Edward Hugh said...


Yes, you are right. I completely agree with you. I am perhaps more convinced than you are that the ECB will hold rates down for some considerable time, due to the fact I do not consider economic recovery even outside Spain to be anywhere near imminent, and fear that Germany itself may also be trapped in deflation. So we may be in for a "Japan type" experience.

But Spain's households are terribly exposed now to any increase in interest rates, and doubly so with salaries and house prices falling while the capital value of the mortgages stays put.

Put simply, Spanish households can't afford to have an economic recovery. That is the mess we are in.

Anonymous said...

No words, Edward, Monthy Python es nuestra vida cotidiana, pero no todo el monte es orégano en Anglolandia, tampoco (el gran lapsus que le encuentro a este gran blog y a A Fistful Of Euros: Kazahjistan es Europa, pero UK está fuera del mapa, cuando la mayoría de las fuentes son british):

El impresentable artículo de Expansión no es interpretable juiciosamente, y buena cuenta da de ello tu disentidor colega en IbexSalad.

Los argumentos más serios los he leído en Verges.

¿Algo nuevo?

No words, Edward, Monthy Python is our daily life, but not everything is oregano in Anglolandia (not in the big slip I put this great blog and A Fistful Of Euros: Kazahjistan is Europe, but UK is outside the map when most of the sources are British):

Expansion unpresentable the article is not interpreted judiciously, and gives a good account of it in your disentidor colleague IbexSalad.

The most serious arguments I have read about are in Verges.

What's new?


Edward Hugh said...

Hello José Luis,

No, obviously the UK economy is in a mess. This is one disagreement I have with Krugman. I doubt very much the UK will be the first major European economy to emerge from the crisis. I have always felt that that honour would go to France.

But the seriousness of the UK problems only adds to the issues which face a struggling Europe. France is more or less coping, Italy is in terminal long term decline, and Germany Spain and the UK are on the critical list. The UK's problems are very special, owing to its status as a global financial centre. It is sort of Iceland gone bigtime.

Spain's problem is lack of competitiveness and a huge foreign debt secured against a property "park" which is worth half what it was at the end of 2007. This makes banks, government, everybody insolvent. This is why I think Spain is effectively the weekest link in the global chain, and it is Spain that I think will be the origin of the next "Lehman Brothers type" event.

Costa Tropical Villas said...

Here on the Costa Tropical we are just finishing the peak holiday season and the bars, beaches and roads have all appeared to be as busy as usual although I have heard that occupancy rates were not 100% this year. Whenever I am out there always seems to be plenty of people spending money and I have heard more than once people ask "Crisis, what crisis?".

I anticipate that once new unemployment figures come out they will rise again (despite dropping back over the summer) and this will shake confidence although it should not.

The biggest problem as I see it is that Spain cannot do much to improve its situation - Not so long ago Spain was struggling to provide much more than a third world environment in which to live for almost the entire population. (Possibly controversial but a gardner I know of about 55 years old had 4 brothers who he has told me all starved to death when young! and there are countless other examples that I have experienced or know of). It has been transformed mainly by investment to meet the demand of money pouring in from abroad (and the EU). The tap has not been totally turned off but the torrent has been reduced to a trickle. If Spain had a climate like Belgium it would be interesting to see how it would have developed but it chose to maximise the revnue resulting from its climate and has got itself into problems. For various reasons this situation may never manage to restore itself to its previous levels and Spain will need to reinvent itself possibly turning to medical tourism and other areas.