According to latest estimates one in five Spanish mortgages are considered high risk with a strong likelihood of their becoming non-performing. The most vulnerable sector is the 80 per cent Value to Mortgage applications granted between 2003 and 2007.
Mortgages were then rubber stamped with no more than a cursory glance at the paperwork underwriting loan applications.
Property exhibitions throughout northern Europe led to a buying frenzy; it was a period when banks, overwhelmed by applications, dropped their guard. 80% L2V mortgages became commonplace. The rise in non-performing mortgages is a reality reaction to over optimism by both lenders and buyers of the period. The brakes were put on in 2007 following the decision to raise interest rates.
The other critical factor for mortgage default risk is the income needed to meet mortgage payments. By the second quarter of 2009 this had risen to 38.6% of disposable income, tipping many homeowners into arrears. Certainly improving interest rates are behind increased optimism.:
Those with large mortgages and high L2Vs are better off by a few hundred euros a month, but the capital value of their bricks and mortar investment is sinking like a stone in water with few signs of bottoming. Their scenario is to pay for a loan higher than the value of their home. Few are winners in the bankers’ casinos.
PROFESSIONALS GO WEST
The prediction is that talented young professionals will check out of Spain. They are already house hunting in Australia, Canada, and Brazil. These countries are relatively unscathed by the recession.
Enthusiasm for greener pastures is further fuelled by Spanish deflation, which means real income is unlikely to grow for several years. Much has been made of a miniscule drop in defaults but the ratio of bad loans has still tripled over the last 12 months. Massaging figures and swivelling crystal balls is no antidote to market realities.