“Very serious threat … to Spain’s entire mortgage market”: Moody’s
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
A bitter, long-simmering conflict finally appears to be reaching its finale in Spain. On one side of the divide are the country’s biggest banks and some of the world’s largest investment funds; on the other are hundreds of thousands of families who lost their homes after the collapse of one of Europe’s biggest ever housing bubbles, together with the many thousands more who face the same fate today or tomorrow.
In Spain, more than in most places, debt stays with you until death do you part; it is never forgiven nor forgotten, and mortgages are “full recourse.” Even when a bank, often with the heavy-handed assistance of the forces of law and order, has repossessed someone’s home, that person could still be left on the hook for thousands, if not hundreds of thousands, of euros of debt.
Most Spanish foreclosure victims end up personally liable for not only much of the outstanding loan, but also thousands of euros in penalty interest charges and tens of thousands of euros in court fees. They can end up owing more than the original mortgage, but with no house to speak of, or live in.
So contentious is the issue of foreclosures in Spain that it sparked a nationwide resistance movement. When a local resident is threatened with eviction, word quickly spreads and groups of neighbors and social activists begin forming and offering their support. By the time police officers arrive there is an almost impenetrable wall of protesters between them and the front door of the property to be foreclosed.
The Rajoy government’s response to this popular movement was to include within its Orwellian-dubbed Citizen Security Law (A.k.a the Gag Law) a clause that made it illegal for people to try to prevent, through passive, non-violent resistance, the forced eviction of a local resident. If found guilty, suspects could face crippling fines of up to €30,000.
Now, the European Commission, for once seemingly on the side of the common man, has launched a formal legal procedure against Spain for failing to protect consumers against the abusive clauses that proliferate in Spanish mortgage contracts. It also demands that Spanish law finally gets in line with European directives on mortgage contracts and payment orders, which date back to the year 1993.
During the immediate aftermath of the multi-billion-euro bailout of Spanish banks, in 2012, the Commission published a number of scathing reports on Spain’s dysfunctional foreclosure laws. The problem, as the same reports pointed out, was that changing the laws would risk doing untold damage to the already deeply compromised balance sheets of the banks. The Commission decided to err on the side of caution.
Now, four years and over 600,000 evictions later, the balance sheets of Spain’s banks are apparently fortified enough to withstand an overhaul of Spain’s foreclosure laws. At least that’s what the Commission seems to believe. Judging by the disappointing quarterly results announced this week by most of Spain’s biggest banks, senior management may beg to differ.
On Thursday, Spain’s second biggest bank and one-time systemically important financial institution, BBVA, announced first-quarter profits of €709 million, down 54% from the same period last year. In response to the news, its shares nose-dived over 6.5% on Thursday and 4.7% on Friday. The bank blamed its poor performance on a heady cocktail of factors, including currency market volatility, in particular in key emerging markets like Mexico, Brazil and Turkey, increased operating costs, lower revenues from its brokerage activities, and a permanently stagnant real estate sector in Spain.
Now, to cap it off, the European Commission is calling for a complete overhaul of Spain’s foreclosure laws, which would almost certainly make it more difficult for the banks to speedily foreclose on delinquent owners, in turn hampering their ability to securitize and offload real estate assets on to international funds, such as Goldman Sachs and BlackRock. These express foreclosures have been an essential source of liquidity in recent years.
If the European Commission remains unimpressed with Spain’s caretaker government’s minimal efforts to address abusive practices in the sector, it could refer the case to the European Court of Justice. If the court then rules in favor of Spain’s mortgage victims, the government could end up facing punitive fines.
The fact that on Friday the Rajoy government announced that it seeks to block crucial aspects of the Catalan regional government’s broadly popular anti-eviction law, which is aimed at reducing evictions in the north-eastern region, as well as expanding the stock of properties available for social housing, is hardly reassuring. Nor is the revelation from the news website Voz Populi that the government was bowing to direct pressure from large Spanish banks and some of the world’s biggest investment funds. They include BBVA, which has spent months trying to sell a €1.5 billion mortgage portfolio.
As the U.S. rating agency Moody’s warned in February, the Catalan anti-eviction law includes a clause that states that if a bank sells a mortgage to a third party, such as, say, an investment firm on the other side of the planet, just as BBVA hopes to do, the debtor can be released from the credit arrangement. It’s primarily for this reason that the new law poses, in Moody’s words, a “very serious threat,” not only to real estate investment in Catalonia, “but to Spain’s entire mortgage market.”
It’s also probably the reason why BBVA has put the skids on its international sales campaign — temporarily!
In the meantime, the stage is set for the ultimate showdown between Spain’s foreclosure victims and Spain’s major banks. It bears all the hallmarks of a classic David versus Goliath contest, with one important twist: on David’s side is one of Europe’s most powerful institutions. The perverse irony is that if Spain’s government successfully blocks Catalonia’s anti-eviction law, on the flimsy pretext that it discriminates against other Spaniards, and the Commission ends up fining Spain for its failure to tackle the financial sector’s abusive practices, it will be Spanish taxpayers who will, once again, pick up the tab. By Don Quijones, Raging Bull-Shit
Since the housing bubble popped in Spain, unleashing one of the deepest recessions in memory, the nation’s public debt has more than doubled, to nearly 100% of GDP. Last year, despite the fact that Spain grew faster than almost any other European economy, the government racked up a deficit of 5.2% of GDP, the third-highest in the Eurozone after Greece and Portugal. And now, as the EU scoots closer to the verge: Read… With Impeccable Timing, ‘Economic Miracle’ in Spain Unravels