20 Percent of mortgages in Spain are now considered to be a high risk and in danger of becoming “non performing” according to Expansion, a top Spanish tabloid.
Mortgages which were contracted after the year 2005 are of course at the greatest risk, where the loan to valuation was more than 80 percent of the total. In the years 2006 to 2007 17.7 percent of all mortgages granted were loans to value of more than 80 percent.
In the years before 2006, the majority of all the data was gathered by the Genworth Financial, whose study showed that mortgages with over 80 percent loan to valuation rose from 12.2 percent in 1996 to 26.4 percent in 2005.
Between the years of 2003 and 2006 this type of mortgage was more popular, however the ECB’s decision to raise interest rates saw a decline in its popularity as the possibility of a price correction became more likely.
Another key risk for the default on mortgages is naturally, the amount or percentage of your monthly income that one devotes to paying back the loan. According to the Bank of Spain, this has risen dramatically in Q2 of 2009 making the average a massive 38% of the average person’s disposable income.
The big downside to this is that now more than ever, Spanish households and families are incredibly vulnerable to a rise of any kind in the interest rates and although the cash flow may have increased slightly, the chances are they haven’t looked at the capital account side of their financial future.
Households with hefty mortgages and higher loans to valuations may be healthier in the pocket, by a few hundred Euros in the short term, but you can pretty much guarantee that the capital value of their investment is decreasing by the minute.
The long and short of it is that they are being given money in one hand and having more taken away from the other whilst they weren’t looking. Soon they will be in the position whereby they are paying the interest on a loan that is far higher than the worth of the property held.
The next problem is that Spain is now in deflation. Incomes are being reduced and the value of Spanish property is still falling. This coupled with the fact that the loan to value will rise regardless, means that the percentage of a person’s income that is needed to pay back the mortgage will keep on rising.
Also, recently there were new, more relaxed guidelines distributed throughout the central bank with regards to high risk mortgages. Before now, provision was made by banks for the full value of high risk mortgages after two years in arrears. (Those above 80 percent of the total property value)
As property values rarely fall to nothing, this was considerably demanding and regardless of this big ‘change’, which allows banks to only have to account for the difference between the value of the loan and 70 percent of the property value, it gives the distinct impression that rend results are being massaged.
A spokesperson and analyst for Iberian Equities has estimated that these new rules mean that banks will no longer need to make provisions of approximately 22 billion Euros in the months to come. (This is if non performing loans reach only 8 percent by the end of next year.)
In conclusion, the saving banks in Spain whom are heavily exposed to many developers, are looking to make an estimated 16 billion Euros profit before provisions this year.
Although “mañana, mañana” is an all too popular phrase in Spain, deferring these financial problems until tomorrow will not alter the inevitable difficulties facing the Spanish financial system.
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