With a hat tip to the usual suspect, FT Alphaville recently published an item on mortgage delinquency rates in Spain, with specific respect to their effects on bank-issued mortgage backed securities. The accompanying chart is on the left (with our annotations to make it more comprehensible).Readers will note that the problems suddenly begin with the 2005 series. Our own personal observation that properties became appreciably more difficult to move at some point in 2006 is possibly be confirmed by the spike in delinquencies that corresponds to this and subsequent years. A simple explanation would be that it was at this point that lenders were forced, in order to salvage the cartel they had formed with builders and promotors (noted here), to start financing the economically marginal buyer - particularly hedgers, panic stricken (perhaps aided and abetted by the hard sell from their branch manager?) by the possibility that prices would never again be accessible.
An ugly surprise is the instantly upward trajectory of the 2008 figures. This might reflect that no amount of new-found prudence on the part of banks was able to compensate for the massive unemployment resulting from the real estate bust.
Also worth reflecting on is the value of the 'index'. Presumably weighted according to gross value of mortgages contracted (would there be any other way?), it is joind at the hip to two of the eight data series - 2006 and 2007. Evidently, the more untenable the situation became, the more long real estate the financials got, much-touted Spanish counter cyclical provisions nothwithstanding.
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2 Comments:
As usual your explanations are insightful. 2005 as the edge of reason in lending? That certainly seems to make sense. Tell me though, would the vast majority of these loans have been done at a sensible LTV, or did Spain have 100% mortgages too?
David
David,
In theory, many 2005 mortgages should have been granted to purchase at 2003, off-plan prices. The chart indicates that flipping was a pretty lucrative business. If not, the difficulties are much deeper than we assume.
The 100% LTV loan was not officially condoned. But optimistic, internally generated valuations got around that to a certain extent.
I know a builder around here who sold, in 2004, 22 not yet started units overnight via two bank managers - at 1/3 higher than the price he had been thinking six months earlier. The experience caused him to suffer from hallucinations and delusions. The projects he started in 2006 and later are mostly or totally unoccupied.
Interesting, to me, is that 2004 might have been the last year you could get into that game without eventually having your head handed to you on a platter.
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