They’re apparently powerful enough to get their way.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
“We probably have the best mortgage system in the world,” explained Francisco González, Executive Chairman of Spain’s second largest bank, BBVA, seemingly with a straight face last week at the annual World Economic Forum in Davos.
Given the devastating effects Spain’s “mortgage system” has had on the country’s economy and society over the last decade and a half, González’s sweeping statement is hard to fathom. It played a central role in stoking one of the most mind-boggling real estate bubbles of modern times, which was followed, in time-honored fashion, by a devastating crash that would have probably destroyed Spain’s financial system if it hadn’t been for the government’s taxpayer-funded bailout. To date, over 600,000 mortgage holders have been evicted from their homes in its aftermath.
In 2013, the European Court of Justice ruled that Spain’s mortgage law was wholly incompatible with a European directive on abusive practices in consumer contracts — that dates back to 1993! As El País reported at the time, one of the “anomalies” of the law in Spain was that if a homeowner failed to meet just one monthly mortgage payment, the bank could (and often did) initiate accelerated proceedings to evict the borrower and take possession of the property:
Even if the borrower alleges the contract he has signed is abusive and a court agrees with him, if the eviction has already been carried out the homeowner has the right to compensation but not the right to recover the property. The bank can also ask for full repayment of the loan even after obtaining possession of the property in question.
Perhaps this is what González had in mind when he spoke so glowingly of Spain’s mortgage system. It truly is a great system — from the banks’ perspective!
Little has changed since the ECJ’s 2013 ruling. In the face of such inaction, the European Commission last year demanded a complete overhaul of the country’s foreclosure laws, which would 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. Again, progress has been painfully slow, except for in the North-Eastern region of Catalonia.
Now, the “world’s best mortgage system” is facing its biggest scandal, which could lay waste to one or more of the country’s shakier banks. Just before Christmas the European Court of Justice (ECJ) ruled that Spain’s major banks would have to refund all the billions of euros they had surreptitiously overcharged borrowers as a result of the so-called “mortgage floor-clauses” that were unleashed across the whole home mortgage sector in 2009 [A Nightmare Before Christmas for Spanish Banks].
These floor clauses set a minimum interest rate, typically of between 3% and 4.5% but in some cases as high as 5.5%, for variable-rate mortgages, even if the Euribor dropped below zero, as happened last year. While this is not strictly illegal, most banks failed to properly inform their customers that the mortgage contract included such a clause.
Now, 40 out of 42 banks have to pay back all the money they’ve overcharged almost one and a half million mortgage customers. The problem is that doing so could hammer the final nail in the coffin of one or more of the more cash-strapped entities. As Spain’s Supreme Court feared in its 2013 ruling against three banks (including, ironically, BBVA), forcing Spain’s financial institutions to reimburse all the funds they had surreptitiously overcharged customers since 2009, when the scam began, could seriously destabilize Spain’s financial sector.
To avoid such an outcome, Spain’s government has bent over backwards to soften the blow for the banks. It has drawn up a whole package of extra-judicial measures that allow — but fall far short of obligating — banks to compensate the customers they have systematically fleeced without having to settle in court, thus avoiding potentially billions in legal fees.
The new measures, passed into law today by royal decree, have done little to inspire confidence among consumers. “They are pure smoke and mirrors, since they do not force the banks to do anything,” lambasted the consumer association Facua-Consumidores en Acción.
With one exception: the banks must now calculate the total amount the floor clauses have cost each customer, although they are not obliged to reimburse the funds, as the ECJ ruling demands. The banks are nonetheless up in arms, since they know that if they inform each customer how much money they’ve overcharged them but refuse to pay them the full amount, those same customers will have the perfect ammunition to recoup the funds they’re owed in court.
Given that the vast majority of the floor-clause lawsuits so far launched against the banks have been decided in favor of the homeowners, this could represent a big problem for the banks, which are determined to do whatever they can to avoid — or at least significantly forestall — the big payback.
And Francisco González’s BBVA is leading the way. Together with the two other banks named in the 2013 Supreme Court case, Caja Mar and Abanca, BBVA is refusing to reimburse clients en masse until Spain’s Supreme Court clarifies the implications of the ECJ’s ruling. It is a preposterous pretext given that the ECJ is the highest court of the land (and is accepted as such by Spanish authorities), and its ruling is unappealable.
Spain’s most Italian bank, Banco Popular, is also playing for time as it frantically tries to clean up its heavily compromised balance sheets. Its defense is that Spain’s Supreme Court has not yet ruled that it, too, must reimburse its flexible-mortgage customers. The fact that the highest court in the European Union has demanded that it pay back all its customers in full does not seem to matter. Nor does the fact that banks like Popular and BBVA have already provisioned for at least part of the pay out they’re now refusing to honor in their 2016 accounts.
One thing is clear, though: even when the game isn’t completely rigged; even on that rare occasion when the law of the land actually favors the common man, the banks refuse to abide. And they are powerful enough to both openly defy the law and still get their way. By Don Quijones, Raging Bull-Shit.
These banks pressured borrowers with “poisoned offers” to settle, backed by the government. Read… From One Scam to Another: How Banks in Spain Intend to “Compensate” 1.4 Million Fleeced Homeowners