SERIOUSLY THOUGH! - what are the Spanish banks to do?

Which brings up another question, I've been told that Spanish banks have really cut back on mortgage lending and valuations making it doubly difficult to sell. I know of several instances where people have had good buyers lined up but they couldn't get a mortgage. So how bad is it?

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Hi Headless,

It's not that people should expect banks to be more flexible because they have made foolish investment decisions.  I have no pity for them.  It is that IF the banks don't become more flexible in the current financial climate, they will go under.

Let me try to explain how I see it.......

Banks are the biggest borrowers of all.  They borow from the general public (through current and deposit accounts), through share issues, and from each other internationally.

They make money by lending other members of the public money in the form of loans (of which mortgages are a large part).  They also make some in the services that they provide, and commissions from insurance companies etc.

Right - here's the problem - let's say that an imaginary bank has loaned 1 billion euros in the form of mortgages to clients.  Every month they will have mortgage payments coming in servicing the loans on, say, 10,000 homes.  They have liquidity.

NOW, say that 5,000 of those houses are re-possessed.  Say that only 1,000 will reach their reserve (i.e. the outstanding debt) at auction.  Now the bank is the owner of 4,000 properties that are effectively worthless, but are costing the bank standing charges such as rates, sewage and rubbish charges, community fees (SOMEONE has to pay them!). 

Now, the accountants look at the bank's books and realize that the bank is technically insolvent, and by law has to file for bankruptcy.

What if that happens to ALL of the banks? 

Could someone with much better insight than I please file a post explaining where I have gone wrong - or am I right?????

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Hi Rob in Madrid,

Have just seen your post.  You're absolutely right!

There was a detached 5 bedroom house (looked great on the photo in the paper) in Michigan, I think, that the bank could not sell.  In the end, to get shot of it they sold it for ONE DOLLAR and that took 19 days to find a buyer!!!  In the end, a neighbour bought it but said that she wouldn't live in it, it was mainly to keep the squatters out.

Will we all become squatters in property owned by bankrupt banks?



This message was last edited by Max Kite on 9/19/2008.

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Hi Max,
     Yes, I understand your point. But isn't capitalism about ups and downs. Someone makes a bad call and then needs to pay for it. My point being that for things to get better, they really need to go back to fundamentals, to basics, and that can only happen if the weak go to the wall. And that includes banks. Keeping a business running on taxpayers life support, or with any other "prop" can only delay the consequences of the effects of taking the medicine. The cure will not kill the patient. 
    People have been using their house (read:home) as an instrument for gambling. It's not like they put the cash into something that'll help them in the future. No sir....they just bought useless shit. And now reality bites. Personally I think prices will more than halve. A good return on any "normal" commodity is around 8-10%. For a house that's the rent. The flat I rent in Gandia is 550 Euro per month. So, by market rule of thumb it's really only "worth" 66,000 E....and the owner wants 180,000E. And rents are falling too boot. Oh, and I predict the next bubble will be based around alternative energy.

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Headless, if you had put your hard earned cash into owning a property instead of renting  a property, I think you would have a different perspective. Not everyone buys off-plan with huge mortgages they can't, in reality afford. Owning a property is in most cases the biggest financial outlay one is likely to make. Prices may fall, but in time they will rise again. It's what happens.

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Headless - you are talking about monetarism (or Thatcherism if you like), and I agree with you, but even Maggie had to bail out some of the institutions.

BUT I'm talking about something far more serious than what happened in the 80's.  What Maggie did was to clear out a lot of dead wood and in the process she made the economy leaner and meaner; and our Gord inherited that and blew the lot.

I also agree that Spanish property prices are ridiculous.  I always have a laugh when I scan the estate agent's pages in the free press.  280,000€ for a 3 bed probably without escritura? Ha!!  Why would a Brit pay that when they can buy in Bulgaria (never been there - but they tell me it's very nice) for 20,000€?  They could get ripped off twenty times in Bulgaria for the same as a property here in Spain.

You too could suffer from this.  I guess you are retired or have an independent income.  If not, then how safe is your job?  If you are a builder, then you have probably already lost it.  If your landlord can't keep up the mortgage, then you could be looking for other accommodation soon.  When the institutions suffer, everyone suffers.

I'm getting off the point, all I'm asking is whether the Spanish banking system is going to crash, not really commenting on whether it should or not.  I hold no candle for the banking fraternity, and it would probably be enjoyable to be the proverbial fly-on-the-wall in some of the boardrooms at the moment.

Would like an informed opinion from someone though please!

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Roberto - I understand the Spanish Banks compensation scheme is for up to €20,000.

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I came across this in the Latino version of MSN.  Basically, it says that anyone's account in a Spanish bank that has the FDIC logo is covered up to the sum of $100,000.  Not an issue for me, and I wonder if, when the proverbial really hits the fan, whether thee Yanks will be able to back this up with hard cash.  

Sorry - I have no idea why this is coming out orange. 

Tu dinero en el banco está asegurado por el FDIC

El sistema bancario funciona sobre las bases de que el dinero de las personas estará al resguardo y cuidado por el banco y disponible totalmente cuando los ahorristas lo deseen. Para ello está la Corporación Federal de Seguro de Depósitos (Federal Deposit Insurance Corporation) más conocida como FDIC, supervisando las actividades de los bancos asociados y, en caso de dificultades, garantizando el dinero de los depositantes.

 

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Pero no todos los productos que se pueden adquirir por medio del banco están respaldados por el FDIC. Ningún producto de inversión está garantizado por el FDIC o por ningún ente gubernamental.

 

Así que, aunque puedas comprar Bonos de Ahorro (Savings Bonds) en el banco de la esquina, ese instrumento NO está garantizado por el FDIC, aunque los bonos del tesoro están respaldados por el poder económico y la capacidad de crédito del gobierno, pero esa es otra historia.

 
A bit more - this is saying that not all products of the banks are guaranteed by FDIC e.g. savings bonds. 

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Maria has posted on her blog about the bank guarantees in place. Click here.

Mark

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Tish,
  But if you own your HOME then why care about rise or fall in "value". Forty years ago, one's "worth" didn't actually include the value of ones house. Everyone needs a roof.

Max,
 Since my early 20's I've been a photographer, shooting everything from Grattons catalogue to spending 6 months of each year over the last 7 years working out of Tokyo. During the yuppie boom of the late 80's, I bought property in London's Docklands, restored and flipped them. Unfortunately, I left the last one alittle too late to flip...and ended up giving it away. Though I lived the foolish/fab lifestyle of the time (remember those brick Motorola phones?), Morgan +8 and flat on the river, my bad timing left me with a big fat "0".  And, more importantly, an education! These last 10 years I invested my savings buying and restoring a number of properties in Budapest, Hungary, getting in there before most people realised just how cheap it was.  Reading the tea leaves abit better this time round, I off loaded them last year. 

Though I understand that high prices meant people felt they had no option but to take on board huge mortgages, they did have another option. To rent. When I was young, we were told that renting was money thrown away. But that was when mortgages were cheaper. Of course people were brain washed into believing that they could instantly improve their lifestyle through purchase...but I thought everyone knows that the bank owns the house until the last payment, which for most is 30 years down the line (which will include 3 - 4 property cycles).

It will be nice when all go back to living within their means. Saving for what they want. How quaint! (Though the problem now appears to be WHERE to put those savings).

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Having a friend who is a bank Director i can tell you that the way they are acting towards defaulters at the moment is because they have not experienced this before,the Spanish as a whole will beg,steal and borrow to keep up there payments,although now they are suffering as well with hikes in rates and the slowdown in the economy.
I was watching the Finacial news yesterday as it seems that most of the Banks shares were up,this is not to say that they are not suffering as much as the rest of the world.
They are looking at changing the way they work in this situation but as it was explained to me,this will take some time as they have to change the law at source,as we all know the sytsem is not the quickest here.
He told me that defaulters were up 122% for the last quarter,quite scary actually.
At the moment they will give you three months before it is handed to the legal department,they will then start adding interest and legal fees,they will NOT take your keys back as a submission,on discussing this with my friend they find it amazing that you can actually do this in the UK,as an estate agent in the UK you would think nothing of someone dropping a set of door keys on your desk and saying "i give up". This has happened on and off through my 18 years in the trade ,so this is not a new phenomenon in the UK.
In Spain however your debt is your debt,you may walk but the bank will follow,by the time it actually comes to repossession you could end up with on avearge 12% more to pay on top of your outstanding mortgage amount,plus obviously arrears and interest incured from missed payments,and yes they will chase you to your home country,as my friend mentioned, England is a lot closer to Spain than it used to be,i think we all know what that means.
The option of remortgage is expensive and near impossible with the banks terrified of any lending at the moment,it can be done but is certainly not an easy path.
I think the rate should drop in the next couplke of months but i am not sure wherther a token gesture will pull some peoples heads back above water.
What the banks are talking about doing is getting POA to sell any defaulters property at a price that will be mortgage value=costs=commissions,if they cant do this because of mortgages that have pushed the price above current market value then they will have to take a hit on the price and pass the difference on to the defaulter as a bad debt,at the moment they cant do this as property cannot be legally sold without first clearing the mortgage(yes i knowe it happens with off plan but Atlas and Aroca are not a good example) the banks wiill have to stick to banking guidelines.
With the banks now having 3 departments to get tjrough before any6 mortgage is approved the lending criteria is a lot stricter and this is good news for the future although does nothing at present to rescue a market that desprately needsa kick start not just for the sake of the agents but for the whole country,such a large proportion of the economy is based on the construction industry.
The government are actually offering legal immigrant workers 6 months social security payments to leave Spain,if they agree to stay away for 3 years they will receive another 6 months when they arrive back in their country of origin.
Although this may take some of the strain off the system so many of these people consider themselves now Spanish and actually do the jobs that the Spanish refuse to do,i know the UK has the same issue with the poles etc...
Beleive me, people who say that the Spanish are burying their heads in the sand are wrong,they know what is happening,i have friends who fear for their jobs after being with their current employers for a long time,its hard times all round.
The bottom line is the banks will change the system but it wont happen quickly enough for this current batch of problems as usual the plans for the gate have been issued,consruction may start  as the horse looks to bolt next time,at the moment they are wandering around looking for it with a rope at the ready.

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Tish,
  But if you own your HOME then why care about rise or fall in "value".
I don't. Did I say I did?

Forty years ago, one's "worth" didn't actually include the value of ones house.

Of course it did!!

 Everyone needs a roof.

Not everyone has one though.

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Hi Headless,

I did a photography course years ago at Sutton college - just for the interest - not a career.  I enjoy it, especially now that I can rehash / crop etc. digitally.  Great fun.  And free!  No film, no dev. no stop bath.  No Ilford multigrade.  

The point re: renting / mortgage is that for my family and I there is little difference in the monthly outgoings.  If I can't pay the mortgage, then how would I pay the rent?  You played the market and made money out of it.  I have never done that.  Never had enough to invest.  Full stop.

The house we live in now was bought for 90,000€ and didn't have a roof.  Now it has a roof and is half finished, but I know that it is virtually worthless at this time.  I don't have and never have had a second home.  Am considering myself lucky to have a first one at the moment!

GEORGIA - Thankyou for that very informative and helpful post.  I think that has answered lots of people's questions.

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Hi georgia thanks, good update. Unfortunately I think things are only going to get worse, read today the sale of white goods along with cars and house sales are all down some 30% not good news. Headless I agree with you on the rental point of view but it's really hard to keep renting when the housing market is really booming. As TJ might say (anyone got any idea where he's gone to, this is right up his alley) the worse time to buy a house is when the market is booming. Best time is after it's crashed.

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"It will be nice when all go back to living within their means. Saving for what they want. How quaint! (Though the problem now appears to be WHERE to put those savings)."
Wise words. Hear hear!

Valverde, thanks, I got a PM from Maria earlier. I knew Eu regulations state a minimum guarantee of €20k, but was unsure whether Spainhad a higher level of protection (such as the UK)

Max, thanks, but your info was for the US 

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Roberto,

What a Wally I am - yes it's US Latino.  Why does it come up on my MSN home page?  

Oh, I realize now - the yanks don't realize that there is a world outside their back yard.  
 

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I think I'm correct in saying Latino is an American Spanish term - like Hispanic. It refers therefore to people of Latin American origin, of which there are an awful lot! It does not, however, mean Spanish. I have often found when Googling for something in Spanish, that I get a lot of Argentinian hits, unless I specify in the search preferences that I want results for Spain, not just Spanish. So whilst I agree about the yanks not knowing there's a world beyond their backyard, I'm with them on this one! And anyway, the Spaniards tend to be a little blinkered when it comes to the world beyond the countries where they left their language behind. (Hence the fact that most of the offers in Spanish travel agencies are for trips to Latin America!)

Anyway, now that I have my answer, I'll be busy next week spreading my ill gotten around a dozen different banks - just in case, you know.

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 Re - Eu regulations state a minimum guarantee of €20k  - In the UK you have to be careful because many banks are part of a large organisation.  Don't know if the same applies in Spain but anyone wanting to invest more that 20k needs to research to ensure that each bank is not connected to the other.

When we were first looking for a holiday home our first choice was Florida, on researching I found that you have to pay lhigh taxes on homes plus home association fees, maybe that's why homes are going so cheaply.  The yearly taxes alone can be crippling, even without a mortgage.

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I've toyed with the idea of buying a pied a terre on Liverpool docks. Do you know how much the rates and maintenance charges are???????????   Not sure what this has to do with the thread topic though.

So, which Spanish banks are part of Santander, and which belong to Lloyds TSB HBOS? Anyone?
Solbank, Atlántico & Sabadell are all one, and have a 12 month deposit available now offering 5.9% in euros or 6.5% in £ - not bad.

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