Here's a report that makes for interesting reading. I have heard from clients that many banks have seemed happy to take back property from people without legal action or repossession, and then offering them with high LTV mortgages, effectively 100%, which never crystallises the loss or bad debt, as it switches the debt to another customer. So the banks have been able to show that they haven't been affected by the credit crunch and bad debts because they have been able to show the debts differently in their books. Plus if they hold the property it can be valued as an asset in the accounts rather than selling at auction and recognising a loss. Having more provision for bad debts (unpaid Spanish mortgages) would affect the reserves that they are required to hold, hence affecting the banks profits, and their ability to borrow and lend.
A new ruling by the Bank of Spain could force Spanish banks to release more discounted property onto the market and address what some agents are calling the “myth” that it’s possible to obtain genuine price discounts from banks.The rule will require banks to provision 20 percent of the value of property for at least a year which will erode the reported profits of banks holding onto large volumes of property containing less than 20 per cent equity.
According to Richard McEnery, Spanish Regional Manager at A Propertys, it is extremely rare to be able to obtain genuine market discounts from banks offering repossessed property. “Most properties aimed at the international market have 100% or even 110% mortgages. Banks are holding onto these properties as they don’t want to make a loss. In most cases it’s a myth that banks are offering the best [repossession] deals, the genuine discounts are coming from private owners who are desperate to sell”.
More developer bankruptcies ahead
The new ruling could change the commercial relationship between banks and struggling real estate developers. Recently, Spanish banks have been keeping the lid on their non-performing loan ratios by accepting property from developers who would otherwise go bankrupt. The new requirement is likely to change the economics of this practice. In certain cases, it will become more “profitable” for banks to let developers go to the wall and write off the loans rather than playing a wait and hope the market recovers game.
It’s no secret that the Spanish property market is structurally imbalanced. There are estimated to 3 million unsold properties on the market and banks are keeping prices high by failing to release inventory onto the market. Spain is still the world’s most popular destination with overseas property buyers but until this inventory is cleared, transaction volumes will remain much lower than they need to be and developers and agents will be sat on their hands with nothing to do.