by Don Quijones, Wolf Street:
“We probably have the best mortgage system in the world,” explained Francisco González, Executive Chairman of Spain’s second largest bank, BBVA, seemingly with a straight face last week at the annual World Economic Forum in Davos.
Given the devastating effects Spain’s “mortgage system” has had on the country’s economy and society over the last decade and a half, González’s sweeping statement is hard to fathom. It played a central role in stoking one of the most mind-boggling real estate bubbles of modern times, which was followed, in time-honored fashion, by a devastating crash that would have probably destroyed Spain’s financial system if it hadn’t been for the government’s taxpayer-funded bailout. To date, over 600,000 mortgage holders have been evicted from their homes in its aftermath.
In 2013, the European Court of Justice ruled that Spain’s mortgage law was wholly incompatible with a European directive on abusive practices in consumer contracts — that dates back to 1993! As El País reported at the time, one of the “anomalies” of the law in Spain was that if a homeowner failed to meet just one monthly mortgage payment, the bank could (and often did) initiate accelerated proceedings to evict the borrower and take possession of the property:
Even if the borrower alleges the contract he has signed is abusive and a court agrees with him, if the eviction has already been carried out the homeowner has the right to compensation but not the right to recover the property. The bank can also ask for full repayment of the loan even after obtaining possession of the property in question.
Perhaps this is what González had in mind when he spoke so glowingly of Spain’s mortgage system. It truly is a great system — from the banks’ perspective!
Little has changed since the ECJ’s 2013 ruling. In the face of such inaction, the European Commission last year demanded a complete overhaul of the country’s foreclosure laws, which would make it more difficult for the banks to speedily foreclose on delinquent owners, in turn hampering their ability to securitize and offload real estate assets on to international funds, such as Goldman Sachs and BlackRock. Again, progress has been painfully slow, except for in the North-Eastern region of Catalonia.
Now, the “world’s best mortgage system” is facing its biggest scandal, which could lay waste to one or more of the country’s shakier banks. Just before Christmas the European Court of Justice (ECJ) ruled that Spain’s major banks would have to refund all the billions of euros they had surreptitiously overcharged borrowers as a result of the so-called “mortgage floor-clauses” that were unleashed across the whole home mortgage sector in 2009 [A Nightmare Before Christmas for Spanish Banks].
These floor clauses set a minimum interest rate, typically of between 3% and 4.5% but in some cases as high as 5.5%, for variable-rate mortgages, even if the Euribor dropped below zero, as happened last year. While this is not strictly illegal, most banks failed to properly inform their customers that the mortgage contract included such a clause.
Now, 40 out of 42 banks have to pay back all the money they’ve overcharged almost one and a half million mortgage customers. The problem is that doing so could hammer the final nail in the coffin of one or more of the more cash-strapped entities. As Spain’s Supreme Court feared in its 2013 ruling against three banks (including, ironically, BBVA), forcing Spain’s financial institutions to reimburse all the funds they had surreptitiously overcharged customers since 2009, when the scam began, could seriously destabilize Spain’s financial sector.
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