Luis Martín

The Spanish Subprime Prisoner

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So, back in 2002, you bought a house in Orange County. You signed an attractive $300K – 5/1 ARM loan and off you went to live your American Dream. Then, Lehman’s fall came about, taking your job/business, your house and your dream down with it. Today, with a ruined credit, you are living in a rental apartment and are struggling to get back on your feet again, or, at the very least, survive. Consider yourself lucky.

Had this happened to you in Spain, the same story would have unfolded, EXCEPT: when the bank took over your property at foreclosure, the law allowed it to do so at 60% of its appraised value, which in Spain means that you would STILL owe the bank – assuming a generously realistic $210K appraisal and that you probably still owed much of the principal – some $80K (well, euros). That’s right, while you hopelessly stare through the window of your apartment in the midst of the most severe economic crisis the world has experienced in over half a century, you better figure out a way to pay back the balance of your old house’s loan. Plus interest. If you are not able to pay, no problem: the bank will (through a court resolution), grab whatever assets you may have to cover the outstanding balance, and, if necessary, automatically extract a portion of your monthly paycheck from your bank account until the debt is fully paid off.

Meanwhile, the bank goes out and tries to find a new victim for your house. Not at the real market price, of course (those balance sheets need to stay ‘healthy’).

It is quite difficult to sell overvalued property in the current market, unless… the buyer gets 100% financing! Since Spanish banks will not offer anyone a loan to buy a house that is not part of their inventory, well, you get the picture: the biggest real estate bubble in Europe remains bloated, the banks’ numbers are still looking good, and everybody just prays to the Greek gods that someday, somehow, everything will be fine so that banks can eventually go back to being banks again instead of real estate agents.

Nobody really wants to address the problem, however, as the ramifications could be devastating (German banks do not want to prompt its Spanish debtors to ship them a bunch of overvalued bricks).

Since the financial crisis broke out in Spain, demands to change an insane system that places the entire burden of the real estate bubble’s burst on the citizens’ shoulders have been made by a small few. However, the government does not want to hear about it (Socialists and Conservatives alike), as they fear that “going American” would collapse Spain’s ‘world-class financial’ sector, send home prices plummeting, and add a “moral hazard” to the most speculative sector in the Spanish economy.

Social pressure is mounting in a country that is clearly diving back into a recession (an expected -0,4% GDP for 2012 according to Goldman Sachs’ most recent forecast). Considering the unwavering ascent of Spain’s unemployment rate, the highest in Europe at 21%, and the increasing potential for financial disaster in Greece, Italy and/or Portugal, time is running out for the subprime crisis in Spain to be solved through the voluntary and speedy implementation of sound financial regulation and free-market-coherent laws. Social unrest coupled with other fatal economic developments elsewhere in the euro zone could indeed make the entire system implode.

For now, as entire families are being thrown out of their homes every day (with increasing resistance from groups of “indignants” trying to stop the police from executing eviction orders), many of Spain’s subprime prisoners have been sentenced for life to pay banks for houses that they will never inhabit.

Figures:

  • Spain processed over 16,400 foreclosures during the first quarter of the year (21,2% more than the previous year).
  • Spanish banks’ current exposure to the real estate sector amounts to 364,000 million euros.

Note: Also read the Wall Street Journal’s article, “A Home-Price Puzzle in Spain.”

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