Spanish loan delinquencies as a percentage of the total have risen for the 8th straight month to a new record high of 13.00% (even as sovereign bond spreads continue to plunge to multi-year lows signaling all is well). With unemployment rates stuck stubbornly high, however, reality is starting to dawn in the Spanish banking system as mortgage defaults are rising following the Bank of Spain's order for lenders to review their portfolios. As Bloomberg reports [10], the default rate for Banco Santander alone jumped to 7% (from 3.1%) following its "reclassification" of loans that it had refinanced (never expecting to be repaid) and with home prices still falling, "there is an urgency to come clean" as regulators see the need for banks to cover a further EUR5 billion shortfall in provisions.
The slow-and-steady rise in deliquencies smacks of an industry that is dripping out there problems - hiding facts from reality and the spike for Banco Santander is merely highlighting the mis-statement...
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Via Bloomberg, [10]
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.”
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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 web site Idealista.com. Spanish banks absorbed 87 billion euros ($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 41 billion euros in European assistance to shore up its failing lenders.
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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,”
Which led to a broad 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.
The review led the regulator to the preliminary conclusion that classifying all refinanced loans correctly would cause a 21 billion-euro increase in defaults. Lenders would need to generate a further 5 billion euros of provisions to cover the losses.
The default rate for Banco Santander SA (SAN)’s Spanish mortgages jumped to 7 percent in September from 3.1 percent in June as it reclassified loans that it had refinanced.
“As a bank this will be the main focus area, whether you are properly recording your non-performing loans, especially the refinanced ones,” said Alexander Pelteshki, an analyst at ING Financial Markets in Amsterdam. “There is an urgency to come clean.”
But it's not going to get better any time soon...
“Until Spain starts creating jobs and credit starts flowing again, house prices aren’t going to recover,” Beatriz Toribio, head of research at Fotocasa, said. “We expect further price declines, albeit smaller than in previous years, in 2014.”