Monday, June 21, 2010

When a Bubble Fixes a Burst Bubble: Home Loans Get Easier For Spaniards

BUSINESS

JUNE 21, 2010

By SARA SCHAEFER MUÑOZ And CHRISTOPHER BJORK, Wall Street Journal

Spain has one of the world's most-troubled housing markets, yet some buyers are suddenly able to get mortgages with 100% financing, and developers are building new homes on empty lots despite a huge glut.

The reason: Spain's banks took possession of a large inventory of homes, buildings and land two years ago, forgiving the debt in hopes of heading off defaults. The plan was to resell the properties when the market bounced back and evade the worst impact of the looming housing crisis.

But Spain's housing market has only gotten worse, and now the bill is coming due as the banks labor under the weight of an estimated €59.7 billion ($73.8 billion) in real-estate assets on their books. Under pressure to make further markdowns on the assets by their main regulator, the Bank of Spain, many banks are now scrambling to unload the properties as quickly as possible.

In some cases, that means offering deals to consumers that are suspiciously like those that got the global housing market in trouble in the first place. The tactics include not just 100% loans, but also low initial teaser rates for buyers or initial payment deferrals for as long as three years.

At the same time, banks that own big plots of unbuilt land are announcing plans to build new houses to give the illiquid lots more value, despite the country's estimated glut of one million empty homes.

"On the one hand, they are selling the properties that already exist, and on the other, they are building houses," said Fernando Encinar, the director of research at www.idealista.com, a Spanish real-estate website.

The banks making such financing offers, which range from giants like Banco Santander SA to Spain's small regional banks, say they are for primary homes and only available to credit-worthy buyers.

To be sure, such financing accounts for a small portion of the Spanish mortgages; 81% of mortgage loans to households in Spain have a loan-to-value ratio below 80%, according to March data from Bank of Spain. The higher the loan-to-value ratio, the riskier the mortgage is considered to be.

Some analysts, however, suspect the strategy is simply kicking today's housing problems into the future. "They're making a bet," said Alfonso de Gregorio, director of wealth and fund management at Gesconsult, a Spanish fund manager. "Wait for the economic crisis to resolve itself, push forward the problems by three or four years, and try not to let it show too much on the bottom line."

Others worry that the generous financing, which helps maintain the prices, is muddying the long-term picture for a sour Spanish housing market. Unemployment in Spain is currently 20% and is likely to rise with the austerity measures recently announced by the government of Prime Minister Jose Luis Rodriguez Zapatero. A recent Standard & Poor's report said that housing prices, which have fallen 16% from their peak in 2008, could fall another 12%.

"In other countries, the prices have adjusted significantly," said Rafael Repullo, professor of economics at the Center for Monetary and Financial Studies in Madrid. "The sooner they adjust in Spain, the better."

Two years ago, debt-for-asset swaps were seen as a way for banks to get ahead of the housing crisis bearing down on them. The program usually targeted developers who hadn't yet missed payments, but who the bank judged would have problems over the long term. Banco Santander was one of the first to aggressively pursue a debt-for-asset program two years ago. It now holds €4.2 billion worth of these acquired assets, with loan-loss provisions on 33%. Competitors made similar deals.

But last month, offloading such properties became more urgent as the Bank of Spain unveiled proposals that would require banks that haven't already to set more funds aside against potential losses on these assets. This gives the banks a choice: take more hits in the coming months or unload the assets into a difficult market.

The Bank of Spain wants "banks to be banks, and not real-estate companies," said Javier Ariztegui, deputy governor, in a speech Friday.

He said it is reasonable that banks use the tools at their disposal to minimize losses, but that doesn't mean they should postpone recognizing them.

Banks are piling on incentives. Midsize Banco Espanol de Credito SA offers deferred deposit payments and 100% financing "for many of our houses," according to its website. Larger lenderBanco Bilbao Vizcaya Argentaria SA and smaller Banco Pastor SA offer generous financing and lower teaser rates, as well.

"Need a home? Now is the moment!" says Caja Madrid on it website, where it also advertises financing options and special offers, such as an apartment in the small city of Manresa, near Barcelona, for €247,000.

"Escape your old home!" says the site of Valencia-based savings bank Bancaja, which advertises no payments for as long as three years at the start of the mortgage.



Such programs are having some impact. Santander sold 2,045 of the 2,745 homes it has placed on sale through its Altamira subsidiary since January, 2009, said a spokesman. Caja Madrid said it sold 10 times the amount of properties in the first five months of 2010 compared with a year earlier.

Meanwhile, to grapple with illiquid empty lots on their books, banks such as Caixa Catalunya, Banco Sabadell SA and Banco Popular SA are working with developers to build cheap housing on the land to boost its value. In April, Caixa Catalunya announced plans to build 400 apartment units on empty lots in Madrid, and 100 more in Barcelona, through Procam, its property-management subsidiary. Sabadell is in talks to build public housing on some land in Barcelona, and eventually sell it to the local government.

"You have to find different exit strategies, and how to get your best return on the land," said a Sabadell spokesman.

Write to Christopher Bjork at christopher.bjork@dowjones.com