Tighter regulations for Spain’s banks?

The European Central Bank
The European Central Bank

The last few days have seen the announcement of an immediate package of € 30bn from the Europe for injection directly into the Spanish Banks.

One of the areas the Spanish Government have had to agree to, to allow the rescue plan to move forward  is the immediate transference of regulatory power from the Bank of Spain to the European Central Bank.

Some will argue this is a gradual but clear chipping away of sovereign power and the start of things to come.

At ground level the more immediate questions are what impact this will have on mortgage lending in Spain.

Mortgage lending and advice in Spain currently is unregulated. Any company or individual can without prior experience or knowledge offer mortgage advice. Consumer protection on miss selling is nonexistent and Banks themselves are able to sell product without any clear transparency upfront, add unnecessary and unrequired linked products and few generate legal and binding offers of lending prior to completion.

Whilst most of the issues facing the Banks currently relate to commercial or semi commercial lending, and whilst there has been a tightening of processes and criteria’s post the boom, as has been seen in many other countries the regulatory focus will probably focus on the requirement to be able to document and evidence what has been done rather than actually ensuring what happens is fair reasonable and of sound risk.

It can be expected that in the medium term mortgage advice will be regulated and some form of qualification required. This in itself is a step in the right direction as long as it is implemented in a sensible manner rather than just being some form of bureaucratic process as is very much the case in the UK.

One can but hope the regulator will look at all the practices implemented by the Banks in terms of lending by providing far more consumer protection, insisting on more transparency upfront, without yet again tying the Banks up to a point where the only safe thing to do is a reject an application in case the regulator questions why you have lent.

In the short term the Banks will be wary of lending until the dust settles so this extra liquidity will definitely not find its way into the credit markets. The money will be used instead to prop up balance sheets and allow Banks to stay solvent as the recession deepens.

International Mortgage Solutions

Bailout good for banks, not for borrowers

IMS - International Mortgage SolutionsIt was announced this week that the final details of the package for Spanish banks will be delayed from the 9th of July to the 20th July.

Any misinterpretation by the public that this rescue package would ensure credit started to flow again in Spain was quickly quashed  by bank leaders like the Chief Executive of Sabadell group who stated the banks who require aid, which is most of them, will find it more difficult to lend rather than the other way round.

BBVA Chief Executive also went to press this week stating that BBVA had no intention of reducing the price of the vast assets they hold to sell them through but would in fact hold on to them until prices increased. For BBVA it could be argued this is an option given their size and overall balance sheet strength but for other lenders it will not be. BBVA will find prices drop further because of what other banks have to do so how long they can hold out without being realistic remains to be seen. Brave words that I doubt he will finally be able to stick by.

On the ground mortgages still remain available for purchasers with average rates now 3% to 3.5% above 12 month Euribor with the Euribor dropping slightly again this month from 1.26% to 1.21% for completions in July.

Average rates for those buying bank owned stock are between 1.5% to 2% but often at the cost of negotiated purchase price.

International Mortgage Solutions

Spanish Mortgage Update – April 2012

The early months of 2012 has seen little by way of good news on both the purchase and mortgage side in Spain.

For the second quarter margins above Euribor which have seen increases across the board early in the New Year do at least seem to have stabilized. No Bank has increased its margins since the cheap ECB funds were made available. Euribor itself has dropped to 1.49% for April making average overall rates in the region of 4.5%.

Mortgages are still available and for some Banks their focus is now on the nonresident market as for the first time in history non residents are seen as a lower risk than residents.

Under pressure from the Government and following changes in legislation Banks are now being forced to more accurately assess the value of stock on their balance sheet and we have started to see much more realistic pricing of Bank stock.

Most Banks have stated over the last few days that they have budgeted to sell double the number of properties in 2012 in comparison to 2011 and discounts and special mortgage terms will reflect this. Whilst this may not be good news for private sellers as the Bank are the agent and the supplier of the funds, recovery will only happen fully when the Banks have shed their surplus stock.

Whilst possibly painful this process must take place before both the mortgage market and the property market can start to move forward.

Buyers considering buying bank stock with a mortgage from the Bank should always ensure they still obtain independent advice for both finance and legalities buying from a Bank does not mean you can assume everything is in order.

International Mortgage Solutions

Lending down 3.3%

Spanish banks lending slowed
Banks are holding onto their cash

As Spain continues to be gripped by economic downturn, rising unemployment and possible recession bank lending slowed at a record pace.

In December lending fell by 3.3% compared to the previous year, the largest single drop since Bank of Spain records began 50 years ago. Bad loans represent 7.61% of the total, up from 7.52% in November as borrowing considered “doubtful” rose to a staggering 136 billion euros. Five years ago, before the crisis struck this figure was around 11 billion.

Banks remain cautious about lending with the prospect of a second recession slowing the demand for mortgages. Economists estimate the Spanish economy could shrink up to 1.5% in 2012, while unemployment, currently at 23%, is also likely to increase throughout the year and into 2013.

After the crisis took hold of Spain in 2008 many bankrupt developers and defaulting clients forced the banks to add many properties and building plots to their books. It is these bad assets that are weighing heavily on the banks performance figures.

Speaking on state radio yesterday, Economy Minister Luis de Guindos said that the government is currently engaged with the banks to try to reduce the number of evictions being enforced against people who are unable to keep up repayments. Many of the people affected bought their homes before the crash when prices were higher and borrowing was easy. Some blame the banks for irresponsible lending. Others blame the borrowers for borrowing beyond their means.

Protest and help groups have been set up all over Spain to try and prevent more people being evicted from their homes by the banks. In Madrid this week one defaulting borrower was granted a further eight days in which to pay after crowds gathered around his property to prevent the bank repossessing his family home.

Bank lending on independent properties remains limited

IMS - International Mortgage SolutionsA consumer survey undertaken by a consumer group in Spain, who visited 46 Banks requesting a loan for a property, in all cases were either told loans where only available for the banks own properties or the bank tried to sell one of their own properties to the client.

For agents who send clients to a bank directly this could become an increasing problem as clients, when visiting the branch to arrange the loan, may find themselves bombarded with alternatives that have high level attractive mortgage terms at the expense of the price you pay for what you get.

The new government has now clearly stated that no “bad bank” will be created to allow banks to drop bad assets into, and that banks must adjust asset values on their balance sheets to better reflect true value and support this loss from future profits.

Whilst this could have downward pressures on prices the real issue of bad assets for the banks is not the individual properties they hold but large developments, land and commercial properties. How much affect this will have on individual residential one off properties remains to be seen.

As the banks now know the write downs will have to come from future profits, and due to further downgrades by the ratings agencies, most banks have increased margins above Euribor again and linked and highly profitable products must be sold with the loan.

Whilst due to costs of funds, even at higher margins banks struggle to profit from a loan in isolation, in the years to come when markets calm down and interbank cost of funds drop banks will hold highly profitable mortgages as they refinance their books every year.

Lending is still available but presently 2.25% above 12 month Euribor is looking very competitive.

One of best rates remains Deutchse Bank where for clients only requiring 50% the standard costing is 1.8% above 12 month Euribor.

Lloyds International in a not unexpected move dropped their interest-only facility from 5 years to 2 as from the start of January. Given the pricing of having this product this move is unlikely to affect applications as taking interest only had already become non-cost effective.

We anticipate little change to the ongoing issues in 2012 with early feedback suggesting banks will look to lower their loan book levels and keep credit tight.

International Mortgage Solutions

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

Bankia resumes lending

Bankia resume lending
Bankia was formed in December 2010

After a few months of closing the doors to non- resident borrowers it would appear the newly formed Bankia is back lending again.

Via Bancaja branches they are saying up to 70% loans are available although Caja Madrid branches are quoting 60%.  Either way this is a positive move from where they have been.

Rates appear to be based on overall profitability of the loan. Higher opening rates may achieve lower rates and once again the more compulsory products taken the lower the rate can be.

Rates apparently start from 1.8% above 12 month Euribor which in today’s market is very good.

Bankia was formed in December 2010 by the merging of seven of Spain’s savings banks. The group is controlled by Caja Madrid with 52% of the shares.

International Mortgage Solutions

Bank lending continues to tighten

Due to market factors long gone are the days when non-residents buying an independent property in Spain could expect to gain rates of 1% to 1.25% above Euribor.

With the average loan rate now 2.10% above 12 month Euribor rates are over 4% and loan to values above 60% are difficult to achieve.

Banks have however held very low margins above Euribor for their own stock and increasingly are becoming more inclined to offer up to 100% or more on a mortgage to gain a sale.

Margins from as low as 0.25% are available from Banco Popular Banks.  For buyers who are happy to focus solely on their stock this provides rates as low as 2.31% with loans up to 110%.

It would seem next year it is the Banks intentions to continue to tighten on loans provided to buyers sourcing an independent property  as they push through the system the backlog over supplied stock they hold.

For independent sellers who are trying to sell a property  they may need to rely on cash buyers only as mortgage rates increase and the banks become their main competition for buyers that do exist.

Banks do need to clear the surplus stock  but the two tier mortgage availability is being used to ensure the first pickings are theirs.

Given that cost of funds means to break even in the first few years of a mortgage the mortgages rates should be around 2% the Banks will be swapping one problem for another. This will cause lower profits over next few years from the Spanish Banks.

International Mortgage Solutions