For months, Spain's residential mortgage sector has performed an impressive feat: Despite tumbling home prices and sky-high unemployment, just a small portion of mortgage borrowers have fallen behind on their payments.
Now, some analysts and economists are wondering if Spain is in for a wave of defaults in coming months amid further job cuts meant to address the country's broader economic problems.
While banks' biggest problem now is loans to real-estate developers, "there are signs that the residential segment could become more stressed if unemployment remains high," said Luis Garicano, a professor at the London School of Economics. "And if interest rates go up, families could be really stretched."
The resilience of Spain's residential-mortgage sector has been a key plank in Spanish officials' defense of the country's financial system, which has faced increasing doubts about its health in recent weeks.
The €67.5 billion ($89.2 billion) international bailout of Ireland has investors worried that woes in Spain's banking sector could require Spain to seek aid, too.
Spain on Thursday sold €2.401 billion in 10-year and 15-year bonds, comfortably within its target range but an expensive exercise as yields and credit-insurance costs rose. The bond sale came a day after Moody's Investors Service Inc. warned it might downgrade the country's credit rating due to its mounting debt and funding needs.
Last week, Spanish Finance Minister Elena Salgado told a group of European finance ministers that despite Spanish banks' exposure to the country's troubled construction sector—where about 11% of the loans are judged to be troubled—their residential loan operations are mundane.
The "retail residential business in Spain is plain vanilla," read one slide shown at the presentation, noting very little lending in riskier segments such as buy-to-rent, as well as high loan-to-value ratios. "Stress tests show that hypothetical losses…are considerably lower in this portfolio than others."
Indeed, the percentage of "doubtful" mortgage mortgageloans—meaning loans more than 90 days past due or which are for some other reason unlikely to be paid in full—were just 2.6% of Spanish residential mortgage lending as of the second quarter, despite falling house prices and 20% unemployment. The ratio is down from 3.1% a year earlier, its peak since the start of the crisis.
There are valid reasons for Spain's loan-loss rate to be low. Most loans are on first homes, rather than vacation or investment properties, and if a debtor defaults, he or she carries that mortgage debt for at least 15 years—a powerful incentive to keep up payments, even if the home price has fallen below the value of the mortgage.
In addition, the average loan-to-value ratio on Spanish residential mortgages is low at around 60%, compared with the ratios of 100% or more on many of the troubled mortgages in the U.S. housing crisis.
Another explanation for the stubbornly low amount of delinquencies is that Spain's actual unemployment is believed by some analysts to be much lower than the official 20% figure, thanks to a thriving black-market economy in sectors such as agriculture and services. And if people do lose their jobs, family members help each other out, and benefits are generous.
But there are indications that picture will change.
In addition to government job cuts that loom, any interest-rate rise to combat inflation will put pressure on households, which economists say already devote a large chunk of their income to mortgage payments. About 95% of Spain's mortgages are adjustable, and pegged to the very low Euribor, Europe's base interest rate.
Another problem is that the residential mortgage stats may be misleading. LAlso, loans that have been modified or forgiven for a short period don't usually show up in the "doubtful" ratios. Banks and lawyers say lenders are increasingly willing to strike deals with struggling borrowers instead of foreclosing or accumulating more problem loans.It is unclear how many of Spain's home loans have been modified. According to Spain's National Institute of Statistics, residential mortgages have been modified at an average rate of 25,000 a month over the past year, although banks aren't obligated to register all types of mortgage modifications. These maneuvers let the banks avoid marking loans as delinquent, which eats away at profitability and can also increase their funding costs in the bond markets. Analysts and economists say these moves make sense in the short term, but questions remain whether the vulnerable borrowers will be able to pay in the future and banks are kicking losses down the road.
"I tell people to negotiate with the bank," said Maria Luisa de Castro, a property-lawyer in Spain's southern city of Algeciras who has worked with clients struggling to make payments. "The banks don't want more [foreclosed] properties; they prefer extending your mortgage and making low-interest deals," she said.
Other banks go to greater lengths to avoid customer defaults. Barcelona-based Catalunya Caixa is one that will, in some cases, purchase a home from struggling buyers and rent it back to them, giving the option to rebuy in several years. A spokeswoman said it is "good for both entities" because it keeps people in their homes and also allows the bank to avoid taking a bad-debt charge.
Source: Wall Street Journal