Immigrants Lose in Imploding Spanish Housing Market

Today, borrowers like Numke are the most likely to fall behind on mortgage payments and lose their property, according to a Moody’s Investors Service study of 890,000 mortgages from 2006 through 2008. The average default rate for foreign residents is “strikingly high compared with mortgage loans to Spanish residents,” Moody’s wrote in the report last month.

Faced with mounting losses, Spanish banks have reduced new lending, which the National Statistics Institute in Madrid said fell 35.8 percent from a year earlier in November, the 19th straight decline. The bad loans to immigrants are also complicating a push for Spanish banks to recognize greater losses on real estate they accumulated during the crash and driving buyers from the 182 billion euro ($240 billion) Spanish residential mortgage-backed securities market.

“Deals with a significant portion of foreign residents, whether immigrants or vacationers, are double no deals for me,” said Alexander Fagenzer of Union Investment GmbH in Frankfurt, which oversees 120 billion euros. “Incentives for those borrowers to keep paying are significantly lower than for Spanish residents,” and that’s “key in a country facing high levels of unemployment and declining housing prices.”

Source: Business Week

Spanish banks report fall in profits

IMS - International Mortgage SolutionsThis week has started to see the Spanish Banks publish their results for 2011.

La Caixa, now renamed CaixaBank, and floated last year, has reported profits are down 13%.

Sabadell group profits are down 39% and Banesto has seen profits tumble by three quarters.

On the positive side they all at least still made a profit.

Most of the down turn in profits is due to the drop in income between the interest payable and interest earned and the higher provisions they have been forced to make to cover bad assets on their balance sheets.

Loans in default, as a percentage of their loan books, continue to rise each month partly driven by more defaulters and partly driven by the fact that every bank is decreasing its loan book size.

Risk departments who were on the back foot during boom times and forced to bow to commercial pressures are now very much ruling the roost. They are by nature normally cautious and, with no pressure being applied from sales, are wielding their new found power in a dictatorial and intransient manner.

There is on most occasions little common sense or commerciality being applied. Any deviations from criteria are rejected and ability to look at an application in its entirety to assess  risk properly  has all but disappeared. A well constructed challenge to an initial decision can still bear fruit but experience and a good understanding of risk managers psyche is paramount to making this happen.

Many branch staff are finding it difficult to come to terms with the new world and often still over promise direct clients both in terms of what is possible and costs. We are back to the days of Spanish banks working on the basis that if a client applies for a mortgage, no matter what is finally agreed, the client will complete even if the terms bear no resemblance to what the client was expecting to get.

Many, including Lloyds and Barclays, are focusing solely on a certain type of client by having minimum levels of income required, minimum value of property or minimum loan sizes but have pricing that a “vanilla client” would not want, or need to pay. It is difficult to see how these banks are going to square the hole on pricing against the type of borrower required.

Loans above two hundred thousand euros are becoming more difficult to find, whatever the strengths of the client’s situation. Again this makes no sense as there is no evidence that one larger quality loan is worse to have than 10 poorer quality loans, in fact for most sensible people the reverse would seem to be true.

Potential borrowers can expect the Banks to be very pedantic on paperwork requirements, to request what clients may feel is unnecessary, to have unusual and unfathomable idiosyncrasies to their risk assessment and appear on many occasion to have issues with perfectly good applications.

Matching a clients profile to the current banks available has now become one of the most important things upfront. There is no point in applying as a single applicant to a bank that will only lend to married applications. There is no point in applying to a Bank that will not lend if more than one property in the applicants country of residency is owned, if you own more than one property. There is no point in applying to a Bank if you are self employed if they will not take into account dividend income.

Once access has been ascertained the next consideration is best terms of those lenders available for that application. The rate range from worst to best is the largest it has ever been. Margins above Euribor range from 1.70% at bottom end to a massive standard rate of 3.85% at top end.  The linking of compulsory products also means all costs need to be taken into consideration. It may be better for instance for certain clients to have a higher rate and no life costs versus another client who may find it more beneficial to have life cover and a lower rate.

Any clients who want to brave the battlefield without professional assistance need to make sure the bank explains all the terms clearly and they should shop around.

International Mortgage Solutions

( p.s. Many thanks to Heather at International Mortgage Solutions for her informative updates. )

Spanish banks ‘encouraged’ to sell assets

Mariano Rajoy
Rajoy will "encourage" banks to sell assets

In an address to the Spanish parliament last week newly elected Mariano Rajoy says Spain’s banks will be encouraged to sell off their real estate portfolios in 2012.

Mr Rajoy said the true value of the aptly named “toxic assets” held by many of the country’s financial institutions needed to be clarified.

The Guardian quoted Mr Rajoy as saying: “We must clear up doubts about the value of certain assets, especially in real estate, which make access to the markets for the financial sector more difficult and also damage the credibility of our public debt.”

Antonio Barroso, analyst with Eurasia Group, told the Associated Press that there is still a division between the Popular Party, who have the majority in Parliament, and the Bank of Spain regarding the option of establishing a central bank to deal with all the toxic assets.

The value of property in Spain has taken a large hit over recent years with the latest Tinsa report showing a national fall of 8% between November 2010 and November 2011.

Lender bucking the trend

mortgages in spainIn an environment of very difficult lending it would appear Ubiquitous Mortgages are able to buck the trend and completely out-price all of the world’s major banks.

While other lenders have withdrawn from the European market, with many French Banks closing the doors to international clients, Spanish Banks doing the same and many international lenders like Lloyds and UCB either withdrawing totally or partially, Ubiquitous Mortgages, owned by Mark Foreman, are out there with rates that appear unbeatable, rates that are the same wherever you buy immaterial of underlying interest rates in that country, and rates that cannot be replicated by the major financial institutions.

Why Ubiquitous, who say they are the lender, would take a completely different view of the markets to other lenders and be able to finance the capital required to lend at rates well below the current cost of funds is not clear.

According to their website, which has been updated recently, they have the enormous sum of £250k paid up share capital. This massive amount of capital obviously allows them to borrow on the open market at rates well below those of the largest Banks in world like Barclays whose Chief Exec earns more than that in a quarter.

Unless they have a banking license in all the countries they lend in it must be private lending and therefore not covered by any banking regulation within the countries they operate in. Either way they are apparently able to sit outside of the current liquidity requirements for all lenders, as having £250k liquid cash would hardly allow you to lend anything if you were to fall within current balance sheet requirements stipulated by most central banks and regulators. Of course the balance sheet may have much more cash to cover risk but then if so why not mention it.

To insinuate on their web page a mortgage broker is unstable because they usually only have £100 paid up share capital will not give comfort to any client who knows only too well there is a huge difference between being a service provider which a broker is and an apparent worldwide lender.

To even raise paid up share capital as an argument to use Ubiquotuios seems ludicrous because of more concern to a client could be the fact they have admitted to such a small amount of paid up share capital.

The conclusion clients may come to is that they may not be the direct lender at all and are at best in fact an agent for another financial institution, who either has private investors who only want to earn just over 3% a year, or have a tranche of money from a lender who can buy funds very cheaply or have such a high level of liquid cash they can lend at rates that for other banks would be unprofitable. If this is the case why say you are the lender as this is misleading?

Either way a sensible client would certainly want to see the type of legal document they would be asked to sign. Clients would also want to understand how this is covered legally in the country of purchase or equity release, how the money for monthly payments will be collected, and what could happen to interest rates in the future even if it appears to be a fixed rate for life so they can get their lawyer to check its validity before parting with any money. To request this is not unreasonable and the information should be readily available.

It would also appear that lending criteria is not always clear as interestingly in the last couple of weeks one client has been told by Ubiquitous that they have a minimum loan size of €150k (when the client only required 60k on a 300k purchase), whereas another client who was buying at 150k and needed 70% was not told there was any minimum.

A valuation fee for an automated valuation is required and often this valuation, according to various comments from previous clients on the web, comes in too low to allow lending.

It is a little strange that the client who only wanted 60k was told of a minimum loan of 150k requiring a minimum valuation level of €215k rather than the minimum €85k valuation that would be needed if he had the loan size he wanted. The more cynical clients might say the minimum loan level quoted was to allow a “get-out” on valuation as it could be difficult to substantiate not achieving 85k valuation on a purchase of €300k even in today’s difficult times.

Automated valuations which apparently Ubiquitous can do in a variety of countries, even those where house price data per region is scant, require no visit to the property and no way of substantiating it, have actually been done. The fee however is as high as for a full formal visit form an authorized valuation company.

Valuation fees are quoted at £239 and despite stating on the website that there are no application fees a registration fee of £95 is also payable. This is £334 for every client who has been told they are approved and who is willing to hand the money over with no guarantee of lending finally being given and with little cost incurred by Ubiquitous who deal online and by email only. Perhaps it is little wonder they have £250k paid up share capital.

International Mortgage Solutions

Are there positives on the horizon?

MortgageDespite all the current bad news across Europe buyers are still interested in Spain.

At the medium to the top end of the market where prices appear to have stabilised there remains a reasonably high interest in having a bolt hole in Spain.

Of particularly high activity are clients who live and work in Africa or the Middle East in specialized industries like Oil. Having lived abroad for many years most find the prospect of returning to the UK as their main base unappealing.

At the other end of the market more and more developments are now being offered at discount prices with high loan-to-value rates and really good margins above Euribor.

We expect this to continue in 2012 with more and more Banks looking to offload stock, improve liquidity and be more inclined to consider non-resident buyers on high loan-to-value on the basis that it gets rid of today’s problem.

What clients will need to be willing to accept, and agents and brokers be willing to show, is transparency on what fees it will cost for an agent to highlight developments to a client and provide the information the client requires. For clients wanting to ensure highest possible loan they will need to be willing to pay a broker to package the application for the lending to give best possible chance of success. Banks on these types of developments are either paying little or no commissions and will not pay for the mortgage.

The days of fees being earned and existing but being hidden and the days of clients expecting it to appear like someone is working for nothing will need to change.

It is reasonable and acceptable for an agent and a mortgage broker to make money, it just requires a little honesty upfront and for potential purchasers to appreciate that without the marketing of these developments and a good understanding of Bank psyche they may not be aware of, or able to obtain, the opportunities the current market can provide.

International Mortgage Solutions

Spanish banks give client specific mortgage rates

A number of Spanish Banks, Barclays Bank Spain and Caixa Bank included, have moved to giving client specific rates and terms. Mortgage applications will be input into the Banks scoring system and then provide a minimum rate and maximum loan to value.

The scoring systems are developed by analysis of the banks back book and categorises applicants into groups based on their overall situation. If a client is unfortunate enough to fall in a high risk group immaterial of their personal situation they will be penalized on rate and terms.

There will be, as more Banks adopt this approach, a lack of certainty when deciding which bank to apply to as to what in fact the final product may look like.

To get around this uncertainty it may become necessary to make multiple applications to ensure best terms are achieved. Headline rates given by Banks may in fact just be an absolute best case scenario with very few applicants achieving them.

Using an independent broker who can more easily make multiple applications to a number of banks will help as long as the broker is independent and willing to do the work involved in sending an application to more than one bank.

International Mortgage Solutions

Cost of funds in Spanish banks

Last week saw continuing press reporting on the pressures the Banks in Spain are under on cost of funds.

The key issue in layman terms is that the cost of borrowing for the banks of the money they then lend on and the cost of borrowings to support existing loans on the books is at an all time high. No longer can Banks rely on paying their savers less interest than they lend money out at as saving deposits no longer supply all the funding needs they have.

On top of savers not supplying all the funds lent in an effort to shore up liquidity and asset values the Banks are in any case currently often having to offer depositors  higher rates than they can lend the money back out at.

The impact on borrowers is higher margins above Euribor, as the Banks attempt to shore up profitability, and the adding of profit earning and often unnecessary related products like life insurance to the loan.

All Banks in the last 12 months have increased the margins they charge on new loans, this is across the board but for non residents the rises have been on a percentage basis more than those for the resident market where banks need to hold competiveness to attract new customers from the Spanish population.

The area where banks are still offering lower margins is where clients considering buying bank owned stock. Rates as low as 0.50% above Euribor can be gained and loans up to 100%. Whilst on the face of it this may seem very attractive the terms on the loan are often the quid pro quo on price you pay for the property. agreement and

Because the terms of a Spanish mortgage are held in a deed not a credit agreement they cannot be changed easily or without costs. The ability to move the loan in more preferential market or gain a lower tracker rate with existing lender in years to come when costing pressures have abated is at present a non starter.

If cost of funds drop in the future the Banks in Spain will become very profitable again as the costs of  re-financing their existing books will drop whilst the rate being paid by these existing borrowers will remain high. Banks will know clients are tied into high margins above Euribor without the ability to easily move.

Two future possibilities could help this.

  • One would be for the government to completely overhaul the remortgage market and remove the requirements currently linked to moving a loan and reduce costs of doing so becoming a free market as seen in the UK. Removal of mortgage deed tax and no requirement for a notary being the biggest required changes.
  • The second will be when Banks have an appetite to lend again for lenders to make a commercial decision to assist with costs of move to attract customers from a competitor to themselves.

All of this is a long way off so for the foreseeable future whilst Euribor rates may stabilize and possibly even drop the margin being paid above this will remain high.

International Mortgage Solutions

Valuation gap in Spanish property

Spanish property valuations are causing friction between banks and investors.

The Financial Times revealed financial institutions have, on occasion, refused to sell real estate assets because the price offered by the buyer has been considered too low.

Wences Bunge, head of Credit Suisse’s European real estate group, said “Sellers have not adjusted expectations to the new reality. But I believe we are starting to see that reality.”.

Wences also pointed out that experienced investors are staying away from Spain’s property market and he does not expect this to change in the next 12 months.

According to Jones Day in Madrid economic uncertainty is the main reason why buyers may be postponing their purchase.

Meanwhile, delegates at Reuters Global Wealth Management summit were told that property prices in Spain’s coastal regions had reached rock-bottom and that the number or transactions was starting to show signs of recovery.