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The
Bank of Spain has confirmed that it had advised all banks that they
no longer need to set aside the full value of high-risk mortgage
loans - those for more than 80 per cent of a property's value -
after two years of arrears. These new turn of events have come about
after pressure from banks who want to avoid further losses next
year by relaxing lending rules.
Now,
the banks would only need to lend the difference between the value
of the loan and that of 70 per cent of the mortgaged property. In
the case of a mortgage for the total cost of a new home, for example,
banks would provision for 30 per cent of the property's value. However,
the Spanish central bank has told banks to update their Spanish
property valuations procedure to be in line with the current economic
climate.
It
has long been understood that the "residual value" of
mortgaged properties at 70 per cent, is a risky loan with lenders
being forced to assuming that a 100 per cent mortgage is irrecoverable
after two years of nonpayment, against six years for most other
credits. Due to this tough stance on off-balance sheet investment
vehicles, the Spanish lenders have been saved from the worst effects
of the US sub-prime crisis. Its insistence on precautionary bad
loan provisions has also allowed them to withstand the collapse
of the domestic housing market about two years ago.
However,
the non-performing loan rate for the financial system has almost
increase four fold in the past year, to 4.27 per cent of total assets,
which is higher in some Spanish Caja's and saving Banks. Recent
statistics have suggested that the value of property repossessed
or swapped for debt by Spanish banks is about €16bn.
In
light of the recent events, the Bank of Spain took over a Caja based
in the Castilla La Mancha region; while another two expressed that
they were in merger talks. At the same time, the Spanish government
is setting up a bank restructuring fund, which will supposedly provide
up to 90bn for rescue operations, with Spanish lenders welcoming
the new ideas.
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