The number of mortgage foreclosures in Spain has risen to nearly 400,000 since the global economic crisis began in 2008. Almost 170,000 of those have ended with residents being evicted, according to the General Council of the Judiciary. The Spanish government has stated that between 4,000 and 15,000 of these cases involve evictions from a primary residence where the creditors are banks. Although the official numbers are not very exact, there is growing concern in Spain about those families that have been left without a roof over their heads, spurred by numerous newspaper headlines about suicides related to the loss of homes.
These evictions are one of the most serious problems caused by the crisis and the bursting of the real estate bubble in Spain. The total number of unemployed in the country has reached 5.7 million, and 25% of the active work force is not at work. In addition, there are 1,737,900 households in which the family breadwinner does not have a job. Given this situation, many families have lost their ability to make payments on their mortgages.
In order to deal with this problem, the Spanish government has approved a series of urgent measures to reduce the vulnerability of its home-owning citizens. Eviction orders will be frozen for a period of two years for those families that meet a series of requirements: those with three or more children; single parents who care for at least two children or have children below the age of three; those families that include disabled dependents; those whose unemployed members no longer receive unemployment benefits; and victims of violence in general. In addition, there are financial requirements: a maximum family income of 1,597 euros a month, and economic circumstances that have suffered a significant change. For example, this could include a mortgage payment that now exceeds 50% of net income or mortgage expenses that have multiplied significantly over the past four years.
Manuel Romera, director of the finance department at the IE Business School, criticizes the government's response for several reasons. First of all, he believes that it will not help to reduce the frequency of evictions because very few families can meet these requirements. “They have taken this measure simply because political demagogues who want to calm public opinion do not realize that behind these movements, there is a very large and very important financial market.” Secondly, he argues, “it can negatively affect” the Spanish credit market. “If they cannot carry out the loan guarantees, financial institutions will loan less money to people, and when they do so, their loans will be for only a very low percentage of the appraised value of the housing,” he notes. As a final result of this decision, he argues that the Spanish economy can be damaged. “If there is no credit, [Spain] won’t be able to emerge from the crisis.”
Romera adds that unexpected legal changes of this magnitude create a negative image of the country and send a message that there is little legal stability and security for foreign investors. “It makes no sense that the rights of the creditors are less [important] than those of the debtors. It is also absurd that those who do not pay their mortgages have more rights than those that pay them,” he says.
Juan Ramón Rallo, professor of economics at King Juan Carlos University and director of the Juan de Mariana Institute, also believes that the measures approved by the government will not put an end to the evictions. “A moratorium on evictions does not resolve the problem. It delays it and focuses on a two-year horizon, when in theory, they will need to execute all of the accumulated increases during these two years" by bringing to light all of the non-payments that have been made and executing the evictions, he asserts.
The government has promised that its recently approved measure is only the first step in a series of reforms that it wants to tackle. The team led by Prime Minister Mariano Rajoy wants to modify regulations regarding charging interest on payments in arrears; introduce a mechanism to give more independence to appraisal companies in the banking sector; impose limits on purchasing ordinary housing in order to avoid over-indebtedness; and create mechanisms for avoiding abusive clauses in loan contracts.
The prime minister also agreed to create a social fund that would provide rental properties at affordable prices to those people who have been left without their usual housing. According to Luis de Guindos, minister of economics, the market for rental apartments in the new social fund will be provided by those properties that are in the hands of the banks as a result of legal judgments resulting from non-payment.
Romera believes this approach is correct. “When a citizen winds up in the streets, you have to provide him with a public entity, such as the one that has just been created with a social housing exchange for rental homes — a place where he can live.”
Looking to Other Countries
During the crisis, analysts have made comparisons between what has happened in the real estate markets of the United States, Ireland and Spain. Each of these three countries has been affected by the bursting of a bubble, which led to a decline in housing prices, an increase in delayed mortgage payments, and prevented some families from being able to deal with their mortgage obligations. Some time ago, both the U.S. and Ireland took measures to avoid a wave of evictions, and some experts have cited them as possible examples for Spain.
In 2009, Ireland enacted an important change in its law regarding personal bankruptcy. “The crisis took Ireland by surprise, and the country had an old bankruptcy law that was very hard on [bank] clients,” says Paul Moran, a professor at the Instituto de Estudios Bursátiles, a financial training institution. Moran has studied the effects of the crisis in Ireland and Spain in depth. “The government had to adopt changes, and it was inspired by the Anglo-Saxon model of the United States to accept losses as something normal. Ultimately, it established new legislation and a code of good practices for facilitating bankruptcy.” The Irish authorities forced financial institutions to hire personnel specialized in renegotiating mortgages in such a way that, at any [bank] branch, a customer can sit down with an agent specialized in getting his payments started again. “Nowadays, in Ireland, if a client cannot pay his mortgage, he has the right to turn to his bank to renegotiate it. This practice has become commonplace,” noted Moran.
In the U.S., President Barack Obama announced last February a broad package of measures to address the depressed real estate market. This included devoting between US$5 billion and US$10 billion to helping U.S. homeowners refinance their mortgages. The proposal was open to those homeowners who have kept up with their payments for the past six months, and who have missed no more than one payment during the previous six months before that.
In Spain, several associations of consumers and bank customers have cited the U.S. mortgage market as an example to follow. A debate has opened up in the country about the need to establish a legal procedure for borrowers known as "dacion en pago." In such a case, when a debtor cannot meet his mortgage obligations, he can settle his debt by turning over his house to the bank. The property, however, cannot be in negative equity.
"In many states in the U.S., such a provision exists, but this does not preclude eviction,” notes Rallo. “It only manages to settle the debt by turning over the house.” He notes that in Ireland, “it takes a period of two years to renegotiate the mortgage and avoid eviction. These are feasible measures that, nevertheless, should be agreed on beforehand in the contract.”
“Dacion en pago”would happen only in very extreme cases in which the banks consider that people are bankrupt, and they see no other way that they can get repaid, so they accept the property instead of payment as a last resort to avoid lengthy and costly judicial processes. “The process of ‘dacion en pago’ makes sense if it is the bank that assumes the risk that the asset declines [in value]. But this approach makes no sense [in the case of this proposal]. [Here,] it is the person or the family that makes the investment, and who has to assume the risk that the investment fails — which is the way things actually happen in the majority of markets,” notes Romera.
Halting the Human Drama
This year, the government of Spain has put into action its Code of Good Practices for financial institutions, in which it provides the option of ‘dacion en pago,’ and the resulting removal of the debt. From March through June, Spanish banks have only accepted the use of this option in 2.9% of all cases that have been resolved, according to the Ministry of the Economy. In fact, the government itself has acknowledged the failure of its Code of Good Practices to put a stop to the evictions.
Given that fact, what has to change in the Spanish mortgage market to make it work more effectively, and put a stop to the growing wave of evictions? According to Romera, “I would not change anything about the current mortgage law.” He believes that “the legal guarantee in any loan is very important for providing security and credibility to the marketplace, and for attracting investors, and that’s the way things are these days. The only thing that you can modify is the process of fulfilling the law, so that you don’t leave anyone out on the street through the creation of a social housing fund in order to put a roof over those who have been evicted.”
According to Rallo, “The only fundamental, sustainable way to solve the issue of mortgage arrears and consequent evictions is to emerge from the [economic] crisis as soon as possible, and neither this nor other measures by the government are contributing to that [goal].” Nevertheless, he believes that “the government cannot do much to attack the symptoms of the economic crisis that wind up leading to evictions and the foreclosure of homes, among other problems.
Rallo believes that it is the banking sector itself that is trying to solve the problem of mortgage arrears, and so he argues that the political authorities should not intervene in the market. “There is a lot more that needs to be done, beyond not creating obstacles to the recovery or not stopping the necessary decline in housing prices and rental properties, or not [having the banks retain] those properties that would have a bad impact on sales prices. The banks are already trying to achieve a refinancing of mortgages in order to avoid winding up with properties that depreciate at an increasing rate. But when we are dealing with an irremediable insolvency, mortgage guarantees must be executed. This is precisely what a mortgage contract involves.”