The fact that several of the banks repossessing homes are receiving state funds has fuelled Spaniards’ anger
On December 2nd, Tarragona city hall in northeastern Spain revealed it was planning to cut off ties with any bank that evicted local people who could not pay their mortgage.
In doing so, it was following a handful of other towns and cities across Spain which have responded in a dramatic way to a deepening evictions crisis.
With deposits of only about €4 million, Tarragona’s threat will not necessarily have caused a great deal of alarm in the financial sector. But the move was only the latest example of mounting political pressure that is making Spain’s lenders the targets of opprobrium as well as the subjects of painful structural reform.
The city’s authorities announced their initiative just days after the European Commission had approved Spain’s plan to restructure its four nationalised banks, giving them access to €37 billion in EU funds.
“The banks receive help . . . and instead of giving out credit, thousands of people are being evicted from their homes,” said Francisco Zapater, a local politician in Tarragona. “There are two million empty homes in Spain and those of us in institutions mustn’t ignore this social reality.”
Most of the threats by town and city halls to stop banking with lenders that follow through on evictions are led by left-leaning parties. This was the case in the northwestern city of Vigo, where the Socialist Party and left-leaning Galician nationalists pushed through an initiative which also prevents local police from helping to enforce repossessions.
Authorities in the cities of Zaragoza, Toledo and Irún have made similar moves.
An estimated 350,000 evictions have taken place in Spain since the economic crisis started to bite in 2008. The collapse of a decade-long property bubble has seen house prices tumble and, as unemployment has soared to 25 per cent, the payment of mortgages – many of them taken on during the boom – has become impossible for more and more Spaniards.
In the meantime, a grass-roots movement seeking to stop evictions and change Spain’s notoriously tough mortgage law has gathered momentum, staging sit-ins at which protesters block the doors of properties due to be repossessed. In many cases this works, with court authorities being unable to deliver the foreclosure notice, thus delaying the process.
And while the number of evictions has continued to rise, the banking sector itself has become mired in crisis as its exposure to the burst property bubble has become increasingly apparent. The fact that several of the banks implementing repossessions are receiving state funds has fuelled Spaniards’ anger at their financial sector.
A wave of suicides in recent weeks by people about to be evicted has put the housing issue firmly at the heart of an already frenzied political agenda. In response, last month, the conservative government of Mariano Rajoy scrambled to present a series of measures that help some of Spain’s more vulnerable homeowners, including the creation of a pool of social housing for those already evicted.
But many were not convinced. For Santiago Domínguez, of the Galician Nationalist Party, which helped approve the ultimatum to banks in Vigo, Spain is “facing a new dictatorship, that of the banks under the captaincy of Merkel and her chief general, Rajoy”. The current wave of evictions, he added, amount to “a veritable existential drama”.
Yet many would argue that it is Spain’s banks which are now facing an existential crisis. Although some believe the total €39.5 billion package for the banks that euro zone finance ministers approved on Monday could end up being too little for the country’s needs, it comes with tight strings attached.
Lenders face the daunting task of shedding toxic property assets, slimming down substantially and refocusing their operations. Details of the plans for Spain’s private banks that need assistance are due to be unveiled on December 20th and the government insists they only require an injection of €1.5 billion.
In the meantime, Spain’s state-held entities are required to transfer €45 billion of their property assets to the Spanish version of Ireland’s Nama at an average discount of 63 per cent.
“There is a huge need for the banks to clean up the mess on their balance sheets – that is the biggest challenge right now,” says Manuel de la Rocha Vázquez, an economist at the Fundación Alternativas. “They need to turn into much more balanced businesses.”
The fact that the largest of these lenders, BFA-Bankia, will cut 6,000 jobs over the next four years, gives an idea of how tough the EU conditions are.
BFA-Bankia, and fellow nationalised lenders Novagalicia and Catalunya Banc, will have to change their focus, lending to individuals and smaller businesses within geographical range of their own heartlands. This new emphasis will end their lending to property developers and rein in their wholesale activities.
Spain is expected to implement similar guidelines for all its cajas, or regional savings banks, next year.
Reform
Despite the Rajoy government’s raft of measures to help those struggling to pay their mortgages, the administration is facing pressure to go further and reform the mortgage law in favour of homeowners. A report by a panel of judges, which largely blamed the “frivolity and bad practice” of banks for the evictions problem, helped turn up the heat on the government.
In an effort to stem the tide of ill-will and talk of mortgage reform, Spain’s AEB banking association last month issued an open letter defending its actions as both ethical and legal. The letter claimed the extent of the evictions crisis was being exaggerated, given that many foreclosures are of second homes and businesses.
“The indiscriminate criticism of the financial sector, accusing it of abusive and irregular practices and a lack of social sensitivity, only contributes to generating undue social alarm,” it read.
Perhaps more tellingly, the AEB warned that reforming the housing law could not only restrict Spaniards’ access to housing, but also spook international investors who have substantial holdings in the covered bond market. It cited the examples of Mexico and Brazil where, it said, steps to protect people struggling to pay mortgages had hurt those countries’ economies.
Reports that Brussels has firmly expressed similar concerns as it seeks to keep a tight rein on Spain’s financial sector would help explain the government’s resistance so far to a sweeping mortgage law.
Mortgage law In Spain and other countries
Spain’s mortgage laws are harsher than most others in the EU. Foreclosure procedures can start three months after a homeowner’s failure to make monthly payments.
Even after repossession, homeowners often remain saddled with debt because of interest, legal fees and the property’s alleged loss of market value.
Spanish campaigners often cite the example of the U S, where all debts are cleared after the evictee hands over the keys to the property.
Despite sharing many of Spain’s financial problems, Ireland avoided a major evictions crisis by making legislative changes and introducing a code of good practice.
Those who cannot pay their mortgage are able to negotiate with their bank in an attempt to reach an agreement.
It is also common for Irish banks to clear a client’s debt on receiving the key to a property following repossession.
The crisis In numbers
Since Spain’s economic crisis began in 2008, an estimated 350,000 evictions have taken place due to failure to pay mortgages. Anti-eviction activists say around 500 repossessions were taking place each day across Spain in the first quarter of 2012.
Recent data show that the country’s bad loan rate hit a new high in September, at 10.7 per cent. Paula Papp, a consultant at AFI in Madrid expects that to rise to 15 per cent in 2013, although the figure should be somewhat lower if toxic assets are swiftly transferred to Sareb, Spain’s new bad bank.
An unemployment rate of 25.1 per cent, the highest in Europe, shoulders much of the blame for Spaniards’ difficulty in paying their mortgages. That will climb to 26.9 per cent in 2013 and remain thereabouts in 2014, according to the OECD.
Since 2008, Spanish property prices have fallen by around 30 per cent and continue to drop, according to real estate appraiser Tinsa. That’s the most dramatic fall in Europe after Ireland.
