Friday, February 25, 2011

Mortgages in Spain, Spanish banks and the Spanish property crash

Mortgages in Spain, Spanish banks and the Spanish property crash



Well, I thought I had seen it all when it came to the Spanish property crash, Spanish banks and their lending – most particularly with regard to mortgages in Spain. That was until I read an excellent article in El Pais (one of Spain’s leading national newspapers).

As you will see from this article, which is well worth reading throughout, (and is in English), sub prime mortgages in Spain were as bad as those sold in the US. Deliberately baffling to the people they were aimed at, they were no more than a sophisticated, institutional con and were partly responsible for the Spanish property crash.

In a way, the worst part about sub prime mortgages in Spain was that they were a con that everyone within the industry knew about. Indeed, it is impossible not to come to the obvious conclusion that their very presence in the marketplace indicated that the regulators and Bank of Spain knew about them as well and were colluding with the lenders. If they did not – then the inevitable accusation must be that the regulators and Bank of Spain were deeply negligent in not knowing.

Needless to say, the question in Spain, just as in the UK and the US, must be to ask what has become of the senior executives of the lending institutions behind sub prime mortgages? What has happened, dare I ask, to the chiefs of the Spanish banks who were involved in sub prime lending?

I suspect, like elsewhere in the world, the answer is: nothing.

I am struck by several comments made in the El Pais article, one of which is made by Mario Barguño of Equilibrio Financiero, an insolvency expert, who says: “The banks were caught up in a race: whoever wasn’t lending money was losing.”

Yes, indeed.

No control, no long term strategy, no regulation – just crazy lending that anyone, with an iota of sense, knew was madness. However, despite the obvious risks, the rush for ever greater sales commissions and bonuses mesmerised everyone, even those under a duty to act…

Of course, markets are driven by the old cliche of ‘greed and fear’. That is only human. But then for what exactly are democratic populations paying economists, national banks and regulators?

To ensure that neither excessive ‘greed’ nor ‘fear’ gain the upper hand and that scams are not perpertrated upon their populations. That, surely, is the underlying ‘definition’ of regulation in economic matters.

The odd thing about the El Pais article is that it mentions UCI (linked to one of the major Spanish banks, Santander) – which brought back memories for me. Some years ago UCI contacted me to see if I wanted to recommend clients to them for mortgages in Spain, for which I would receive a handsome commission.

I duly had a meeting with UCI in their swanky offices in Valencia. There, I spent half a day being briefed about what most of us would describe as self-certification mortgages. In effect (but not fully appreciating it at the time), I was being asked to become involved in selling sub prime mortages in Spain.

The trouble is that I never really understood what they were on about.

‘It does not matter what they (the borrowers) can really afford to pay’, I was told repeatedly. ‘Put anything down!’

‘Even if,’ I remember asking, ‘they say they are earning half a million euros a year – when I know they are not and they have no supporting paperwork?’

‘Don’t worry,’ was the answer, ‘we will lend depending upon the property valuation.’

None of this made much sense to me – but then I only have a humble law degree and have never claimed to be an economist, despite having worked as an equity trader in the UK City.

Of course, valuations on properties were conducted by the Spanish banks and no doubt by UCI too. However, the valuations were notorious, for years, for being consistently incredibly distorted (upwards) – which ‘justified’ the amounts lent. Everyone in the Spanish property industry knew about this. Clearly, a ´blind eye’ was turned, equally consistently, by the Spanish banks to the actual capacity of a borrower to make sustained mortgage payments on the amounts lent

An absolute, utter lunacy – which made the Spanish property crash completely inevitable and yet so totally unnecessary! The crazy lending was like squirting aviation fuel onto a roaring blaze.

Frankly, it is the unnecessary nature of the Spanish property crash that so angers me. I am still bemused about how it was ever allowed to happen. Furthermore, I am staggered that the negligence of the lenders and the regulators has ended up without the responsible higher executives being heavily sanctioned…

RELEVANT INFO. How the subprime mortgage found a home in the Spanish market and the Spanish economy – meltdown or all okay?

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