Now here’s a thought that maybe someone can help me with… It is not a prediction however a possible theory. I write it hoping someone can tell me I am so wrong. No-one has so far…..

The number of Spanish properties that have been repossessed by the banks are continuing to rise. Many have already been put up for auction but the outstanding debt and interests puts them in a price bracket that makes them impossible sale options for the banks. This has left only one alternative for the banks. Strike up agreements with large real estate agencies to sell the unwanted stock.

Fine but that still does not change anything. Not even the most naive buyer at this time is going to see the investment potential in the repossessions that are being offered at this time. Lets face it the auctioneers, bank managers and their mates are all likely to have already sold or bought the juiciest of repo homes before they have even reached the general public.

Some banks have therefore resorted to not even selling the property for a price but instead offered first time buyers with an attractive financial plan that allows them to afford a property of say 250.000 euro when their actual budget may only be 185.000 euro.

The estate agent that is viewing properties with that same first time buyer finally strikes a deal and finds them their perfect home. An agreement is reached lets say for 178.000 euros. Wonderful! Mr Estate agent and the happy home owner is close to making a sale…...mmmmm we’ll see.

The only thing now is getting the mortgage. No problem in theory, the buyers both have fulltime jobs, they both earn a good wage, they do not have any other debts, even their car loan is paid off and they also have savings. A dead Cert. I hear you say.

When the agent gets to the bank the manager simply says ok bring in the credentials and we’ll look at the option. In the meantime what the agent does not know is that they are also being offered a repossession home that would normally be completely out of price range of the buyers but because the bank is so desperate to off load the stock, they are prepared to offer this financially viable candidate the debt of their lives. And guess what some actually take them up on the offer.

Why would you turn it down. There is not a hope in hell that the mortgage for the 178.000 euro house is going to be approved but the 250.000 euro bank owned house with an extra bedroom, larger garden, and lower interest rate is a less problematic and more attractive option….. And guess what the monthly repayment is practically the same as what a hypothetical mortgage for the 178.000 euro property would have cost them.

That is not the worry however. My worry is that there does not seem to be any laws in place that prevent Spanish banks from putting all of their repossessed homes on the market all in one go. Who cares? I hear you say if they are unsellable why should it be a problem…....

How about this then. What if the banks decide to start writing off their debts? Maybe they have started already….

Let’s say that the bank takes a look at their overall debt and concludes that they have an overall debt of X billion euros

Let’s say that as a result of that financial review they decide to have a meeting to decide how much debt that they are prepared to right off.

Let’s say that the meeting is concluded by righting off X % of that debt.

Let’s say that this then allows the agencies who have signed exclusivity agreements with the banks, to sell their product at a very attractive price. Wonderful I hear you say, problem solved!

What about the developers, agents and above all home owners that have been fighting through this crisis, paying their mortgages punctually, keeping their businesses afloat and keeping their bank managers happy?

What happens when the market that has been flooded with completely unsellable bank owned properties is then converted into highly attractive and competitively priced properties in relation to what the home owners and developers are offering.

As there is no control over what the banks can and cannot do this can only lead to one thing:

1. The courageous developers and agencies start to enter into financial difficulties for not being able to sell at all not even at the most attractive price. They cease to earn and cease to pay VAT / IVA and cease to pay their business loans…....

2. The home owner is also unable to drop his / her price enough to make it attractive as the pending capital on the mortgage alone is above the price that the banks are offering. And guess what the bank manger will say when Mr home owner / property developer / estate agent, wants to try and renegotiate with the bank?

In the meantime the government only starts to notice the problem when they are hit where it really hurts them as a result of a sudden decline in VAT IVA payments and corporation tax…...

Knowing Spain the controls will be put in place after the problem has occurred and not before. I remain positive and have faith that this is just a “bad dream theory”, and none of this is going to happen. Somebody please tell me I am completely mistaken.

Hi Gareth,
Good post.

I believe you’re talking about the possibility of the banks undercutting the rest of the market, putting both developers/agencies out of business and derailing any sensible homeowner’s ability to sell their (probably already) underwater home. Is that correct?

If so, look no further than the US to see exactly this situation occurring in real time. The consequence is probably not as dire as you might imagine however. Yes, it depresses prices for a long time and loads the market with a ton of crap to wade through (that the insiders have already cherry picked for the best stuff), but it’s sort of inevitable that it happens (and better over a balanced medium term than a short term crash or long term zombification of the market).

Let me know if I’m on the right track. I didn’t follow everything you were saying.

I am talking about the banks “undercutting”, the market that is correct,  however I was also expressing my concerns regarding the laws that are clearly not in place in order to control how much undercutting can go on.

Unlike the USA and UK where I am informed that there are controls in place to prevent the banks from completely flooding the market, Spain appears to be completely exposed.

Also unlike some of the “sub prime loans” and similar financial plans offered in the states and the UK, Spanish mortgages are 100% secured loans with the Bank of Spain. For every euro that a Spanish bank lends the bank is obligated to secure the loan in the Bank of Spain in accordance with Spanish law. Therefore my theory means that potentially writing off debt to reduce stock and get back on track could be viable if the bank of Spain are prepared to play ball. I am not saying that this will happen but unlike the UK and the USA it is possible.

Bank of Spain has already started to bail out some of the suffering entities due to not being able to sustain so much unpaid debt. i.e CAM.

It is inevitable that the market is going to be flooded anyway because there are so many properties to sell but the way the whole situation is administered makes the difference in getting out of the hole sooner or much, much later.

There is a lot going on in my last post so understand that it may take a few reads to get the full gist of what I am trying to say. Sorry if that has misled you in anyway.

Hi Gareth,
Firstly I will hold my hands up and say I know little/nothing about politics or economics.

I do know that we are first time buyers and have just been knocked back everywhere for any kind of loan or even a mortgage.  (We both have jobs, but that doesn’t seem to count as we are self-employed.) Also there is a theory (I do not know enough to know how true it is), that mortgage lenders (here and in UK) will not loan anything under Eu100,000 K as it is ‘not worth their while.’ 
(We have 2/3rd of the capital and just need a top up for the last bit.)

We know of many repossesion properites that you are talking about, and have been offered same, but with the conditions you also mention that a mortgage then has to be taken up with the bank selling the property.  (At which point they knock us back again as we are ‘small fry.’) 

Jumping a bit in your post - You say that any mortgage is matched Euro for Euro by the Bank of Spain.  Does this mean if a Spanish bank is in trouble, the national pot is also affected? 
Could Spain really handle this potential debt (if it is not already happening?) 

We have a good stable income and although self-employed, we have still managed to pay our Eu 550 pcm rent (plus all bills/living expenses) for the past 10yrs. 
I guess what I am saying is - is our money not as good as someone who has a ‘contrato fijo’ who is just as likely to lose their job as the next person in these stringent economic times.

Re your post/worries.. (again, apologies if I am slow on the uptake), you think that Spain is under even more financial threat due to the actions of these banks? 
If so, I would agree with you that if the govt/someone does not rein them in, then the economy will be (if not already) but hit big time.

Any large financial institution is powerful, and it is necessary to ring alarm bells (in the hope someone will hear them), even if it is just a ‘theory.’

Keep posting, I am sure we are all intrested.  😊

I am no financial expert either so agree with you going out on a limb as apposed to beyond my post 😉 I know that the banks need to secure their loans and have actually edited my post because I agree after reading it that it makes you interpret it differently. I have been searching for exact figures but have not come to a conclusion as to what they area and what the banks are obligated to secure for each euro that is lent.

Whatever. It is true that there are shorter and more interesting theories and subjects to worry about. Sorry for speaking my mind and boring you to death. You are very valiant for reading it though

No worries Gareth, this is what this forum is for 😊
Re ‘secured loans’, I still can’t fathom how the UK (and every other country in Europe) has lost out - and even closed down due to bad loans.
My father was an investor in The Southsea Mortgage company (Portsmouth), which then folded, leaving him out of pocket. (He did at least get his 85K back as protected by the FSA, but he did not consider to spread his other funds :( 
It would ‘appear’ (I did not read through all the stories that were published at the time), that they lent large amounts (I mean very large amounts!) to property developers, who then went belly up in the recession.
What the status is of the land that I presume was purchased to build these developments on is anybody’s guess.

How could such a thing happen if the loans were secured? 
Don’t answer that 😉 

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I am just a simple person who enjoys fine wine and sunshine 😊