Think foreclosure complications are just a US phenomenon? Think again.
From Moody’s Investors Service — a timely report on litigation procedures for Spanish mortgages.
The premise here is interesting. Before the crisis Spanish homeowners who encountered financial difficulties were usually able to sell their homes to cover any debts they might owe.
Now, with the precipitous drop in home prices, that’s no longer the case. Banks are forcibly foreclosing on homes, with mortgage debt being recovered either through court or extrajudicial enforcement.
So, in the first quarter of this year, you saw a record 27,561 foreclosed mortgages reported in Spain — with an increasing number going through court proceedings. The number of Spanish foreclosed mortgages taken to court grew by 126 per cent to 58,686 in 2008, and 59 percent to 93,319 in 2009, according to Moody’s. Though even those figures might be under-reported. From the credit rating agency:
However, we believe that these figures underestimate the actual number of properties that have been repossessed by Spanish financial entities for two reasons. First, because more than one property may have been involved in one foreclosure process – indeed, it is possible for a single foreclosure process with a real estate developer to have involved more than 20 residential properties. And second, because Spanish mortgage lenders have generally become more willing to accept “Daciones in Pago”. According to the Bank of Spain, banks and saving banks currently hold €20.5 billion worth of properties on their books.
Dacione en Pago are a kind of mortgage novation, or modification, that can be undertaken by the banks. It’s a voluntary agreement, where the lender accepts the property as payment in kind, releasing the debtor from their debt.
These various novations have been a talking point for Spanish bank results, incidentally, with some analysts worrying they may help conceal a rising tide of non-performing loans. Just think of what Hamp — the US government’s centrepiece mortgage modification programme — did for American banks earlier this year.
But whatever the impact on financial institutions, Moody’s is quite clear on the effects that the increased number of court-processed foreclosures might have on Spanish RMBS — or Residential Mortgage-Backed Securities :
The increase in the number of new foreclosure cases being brought to courts has led to an increase in the length of time required to process individual foreclosures. This has led to a commensurate increase in the length of the foreclosure period seen in Spanish RMBS. Until Q1 2008, the foreclosure period was relatively stable at around a year or 18 months. However, according Spanish servicers, this period has since risen to as much as 24 to 30 months, depending on the region. In addition, the current reduced demand for housing means that it takes longer to sell the collateral. Lenders may end up holding properties subject to foreclosure that fail to sell in an open auction. The severity of losses on these loans becomes higher as the interest accrues during the costly and long foreclosure period.
Again, this is somewhat similar to what happened in US housing — with the timeline between delinquency and liquidation extending in recent months, as foreclosure processes are overwhelmed or mortgage mods distorted liquidation periods.
(Apologies in advance but…) The foreclosure pain also falls on MBS in Spain.
(And to make up for it) Here are some colourful graphics from the Moody’s report.
Spanish catastrophe, datapoint del dia – FT Alphaville
Extend and pretend in US housing is reeeaaally extended – FT Alphaville
For sale in Spain! – FT Alphaville