Desperadoes: Part 2, why don’t you come to your senses?

November 30, 2012 | Bankruptcy, Banks, Catalonia, Deed-in-lieu, Ecosystem, Eurozone, Foreclosure, Global news, Homeownership, Markets, Restructuring, Short sales, Spain, Workouts

By:David A. Smith


[Continued from yesterday’s Part 1.]


In yesterday’s post, which used an intriguing Wall Street Journal (November 11, 2012) article on the possibility that Spain will reform its antiquated and self-defeating mortgage-damnation system, we saw that under current Spanish law defaulting borrowers can never escape their debts, with destructive consequences that persist over the years and decades, and that this is acting as a gargantuan drag sail on the Spanish economy.


A protest against evictions outside a bank branch in Madrid on Friday.


By itself that would be bad enough; worse is that the lack of resolution on Spanish mortgage foreclosures threatens the nation’s fiscal stability because it undermines banks’ capitalization and imperils any austerity-based restructuring that Spain may be pitching to the European Central Bank.


Frustrated citizen outside the nationalized Bankia Bank


Spain has €182 billion of residential mortgage-backed securities (RMBS), and their spread to benchmark rates is up over 530 basis points – which is stratospheric.  Spanish lenders have at least €175 billion in ‘troubled’ property assets (Bank of Spain definition).


And freedom, oh freedom, well that’s just some people talkin’
Your prison is walkin’ through this world all alone

These numbers are plenty large enough to put Spain’s whole Euro capitalization in jeopardy.


The issue gained prominence after two suicides in the past three weeks. A former politician in the Basque town of Barakaldo threw herself out a fourth-floor window and a newsstand owner in Granada hanged himself just before or while being evicted, police said. A third homeowner facing eviction survived a suicide leap from a balcony in Valencia in October.


The Spanish meltdown is sounding like the microfinance crisis in India’s Andhra Pradesh, where a bad situation was made infinitely worse by precipitous political rabblerousing.


The deaths have prompted large street demonstrations in several parts of the country and extensive coverage in the Spanish press. Graffiti accusing bankers of murder have appeared on the walls of some bank branches. A policemen’s union said it would provide legal support for officers who refuse to participate in evictions.


The police cannot do that.  They must enforce all the laws, not just the ones where they are in sympathy, or Spain will descend into chaos, as Greece is.


Shops gone out of business in downtown Athens


In the past, Spanish banks have resisted major changes to mortgage legislation, warning it would [a] drive up lending costs and [b] increase defaults.


Certainly both premises are possible.  Though default has become rampant in Spain, there’s no evidence it has been strategic mortgage default, though as I’ve previously posted, I believe the claims of widespread American strategic mortgage default are overblown.


In Spain, “we’re seeing terrible things and inhuman situations,” Spanish Prime Minister Mariano Rajoy said late Friday during a meeting of his party. Foreclosures are “a difficult issue,” he added, “but I hope that soon we’ll be able to give good news to the Spanish people.”


Such news will be welcome, but unlikely; Spain is teetering on the edge of having to accept further budgetary cuts in exchange for another European Central Bank funding round:


European authorities will transfer €35 billion to Spain’s state bank rescue fund on December 15 in exchange for massive layoffs at Spain’s four nationalized banks, including state-rescued Bankia , El Pais newspaper reported on Sunday.

The cash injection from European bailout funds will be disbursed to troubled Spanish banks two weeks after it is paid into Spain’s bank restructuring fund, or FROB, the paper said.


Bankia, which sought a €23.5 billion bailout from the state in May, is expected to be forced to lay off up to 6,000 people from its current 20,000 staff, while NovaGalicia Bank is seen laying off 2,000 of its 5,800 workforce, said El Pais, citing European and banking sources.  The banks would have to close 1,000 branches between the two of them.

Been a long time since the arrow went that way


Catalunya Caixa (CX) and Banco de Valencia, the other two nationalized lenders, are currently being sold off, and conditions would be imposed on the buyers, the paper said.


All this is brutal stuff. 


You’re losin’ all your highs and lows
Ain’t it funny how the feelin’ goes away?

Aside from being humiliating (which, let’s face it, is a commodity that a bankrupt debtor should sell, since it’s cheaper than money), it’s micromanagement and adios, sovereignty, where an unelected executive (Mario Draghi) is deciding, in the manner of a Renaissance moneylender, who shall survive and who shall expire.


Democracy is a luxury you no longer have: I call the shots now


The payment will be the first since the Spanish government was granted up to €100 billion of aid in June, in a European bail-out of the banking sector. It needs the money to clean up the balance sheet of financial institutions hit by the burst of a real estate bubble five years ago, which left them loaded with €184 billion in toxic property assets.


So the scale of the residential property value collapse in Spain (Spanish banks already have a €59 billion capital shortfall) is enough to imperil the nation’s viability and its independence. No wonder the Catalonians are agitating for political independence: secession from Spain.


A rising political tide, toward …


Spain’s financial sector is struggling to absorb large amounts of bad loans to real-estate developers, and the government this summer was forced to seek as much as €100 billion in European Union aid to bail out the weakest banks.


… Europe’s next country?


On the fate of the residential mortgage recapitalization law may hang the integrity of the Spain that Ferdinand and Isabella created over 500 years ago.


A country formed by the marriage of Aragon and Castille


No wonder Senor Rajoy and Senor Perez Rubalcaba are reaching across the aisles to each other; the Parliament in which they are majority and minority leaders may itself be at stake.


Political opponents recently; political bedfellows now?


Mr. Rajoy’s remarks followed low-key contacts between him and Socialist leader Alfredo Perez Rubalcaba, whose party has been pushing the government for months to oblige the banks, which receive state aid, to ease the pressure on mortgage holders.


Everything is connected to everything else.  If you relieve foreclosures too much, then too many bank loans will go bad, then the banks will need bailouts, and then the European troika will own all Spain.


“Our priority is that nobody be left without a home because of the crisis,” said Rodolfo Irago, a spokesman for the Socialist Party.


The idea of a home as entitlement is common in many parts of the world, especially in welfare-oriented societies (which include much of Europe and many of the oil-producing Gulf Region states) – but then, what if people cannot pay?


This year, the government set guidelines for banks dealing with foreclosures.


The voluntary codes were aimed at relief for households in which all members who want to work are unemployed and where mortgage payments are absorbing more than 60% of household income.


The initiative included the possibility of extending the life of the mortgage to help decrease payments up front and even forgiving some of the debt.


All of this makes sense, and quite possibly the relief provisions are good ones to have implemented.


Forgiveness is gonna cost you


Desperado, why don’t you come to your senses?
Come down from your fences, open the gate

However, as we’ve seen multiple times over the years, in the context of large organizations where authority is distributed, it may be very hard for the individual loan servicer to make the case up her internal food chain to senior management.


However, a group of leading judges said in a report this month that the voluntary codes have been ineffective at stemming the growth of foreclosure proceedings.


Right; what loan officer would do it, with the Bank of Spain breathing down your CFO’s neck, and the European Central Bank breathing down its neck?


I’m from the ECB and I’m here to help you


Allowing current mortgage holders greater power to renegotiate or ditch their debts across the board would force banks to re-evaluate the risk related to all such housing assets, said Miguel Hernandez, a real-estate expert at the Institut de Empresa Business School in Madrid.


Of course they’ll have to re-evaluate risk – and that, paradoxically, may be why they’re holding off – like Chinese development companies and provincial officials, they’re terrified of finding reality, especially if corruption was rampant in the price bubble that created this crisis.


In that case, banks might have to further weaken their balance sheets by provisioning more money for potential losses.


The Spanish banks already have a €59 billion capital shortfall, and as we’ve seen, there’s something on the order of €180 billion of RMBS floating about the Spanish markets.


“Spanish law is unjust” for the mortgage holder, Mr. Hernandez said. But Spanish banks, “with the problems they have now, will make sure these measures don’t affect their already weakened balance sheets.”


I think that’s impossible.  Spain must choose.


It may be rainin’ but there’s a rainbow above you
You better let somebody love you
(Let somebody love you)
You better let somebody love you before it’s too late

– Desperado, by the Eagles (Glenn Frey, Don Henley)


Spanish anti-austerity riots; September, 2012