Spanish Defaults Surge as Banks Forced to Come Clean

Bloomberg

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Liliana Proano Males won't be decorating her house in Madrid this Christmas because she's about to lose it.

Males and her husband, who was fired from his job during the depths of the financial crisis in 2009, can no longer afford their mortgage. With Spain's persistently high unemployment rate now at 26 percent, the couple is among the 350,000 homeowners who may be foreclosed upon by lenders in the next two years as the housing crisis worsens, according to AFES, a Madrid-based association that advises on restructuring debt. Since 2008, about 150,000 families have been hit with a foreclosure.

"We refinanced three years ago, but now the noose is around our necks," Males, 42, said. "Not only do we still owe more than the original loan. We're losing our home as well."

As mortgage defaults rise, lenders will have to set aside money to cover losses, hurting profits, according to Juan Villen, head of mortgages at Spanish property website Idealista.com. Spanish banks absorbed $120 billion of impairment charges last year after Economy Minister Luis de Guindos forced them to record more defaults on loans to developers. The government took $56 billion in European assistance to shore up its failing lenders.

"Mortgage defaults do tend to keep rising late in the cycle because they are the last debt that people will stop paying and the problem is already quite bad," said Benjie Creelan-Sandford, a bank analyst at Macquarie Bank Ltd. in London.

Defaults Jump

More than 5 percent of Spanish residential mortgages were in default in the third quarter, up from 3.5 percent a year earlier, according to data released Wednesday by the Bank of Spain. The level was 0.7 percent in 2007, the year before the real estate market imploded. AFES estimates a rise to 6 percent next year. Defaults as a proportion of all loans by Spanish lenders climbed to a record 13 percent in October from 12.7 percent the previous month, the central bank said Wednesday.

Defaults are rising partly because of changes required by the Bank of Spain that force lenders to book more soured mortgages.

"When the real estate bubble burst in 2008, banks used refinancing en masse to cover up non-performing residential mortgage loans," AFES President Carlos Banos said. "Refinancing only served to draw out the situation and exacerbate the problem."

Banks refinanced mortgages and granted grace periods in return for adding financial penalties and notary expenses to the principal of loans. Lenders assumed that Spain's economic crisis would last only a couple of years and that borrowers would be able to make their payments, Banos said.

Loan Review

In April, the Bank of Spain ordered lenders to review their portfolios of refinanced loans, including mortgages, to make sure they're classified in a uniform way. Lenders had 208 billion euros of loans on their books that they'd restructured or refinanced as of the end of 2012, according to the regulator.

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