So will the mortgages of the future: without Euribor, more expensive and less effort to pay
Just five years ago, Spanish entities were disputing the mortgage market by offering their clients loans for 100 percent or more of the price of housing, with terms of up to 40 years and with differentials that in some cases only reached 0 , 25 percent on the Euribor.
Then came the crisis, demand and mortgage supply subsided and waned, financial markets closed and with them died the housing lending model that had been in vogue until then.
The crisis, although it is not yet known when, will happen, but mortgages will never be the same as before, because the bank, once again ready to give loans, will have also changed the way they face the risks.
In 2007, a year before the bankruptcy of Lehman Brothers started the worst nightmare for financial institutions around the world, Spanish banking granted 145.296 million euros in loans to housing.
These were times when the banking business was expanding and mortgage lending helped accelerate the entry into profitability of the new offices.
There is nothing left of all that. Now it is necessary to reduce the overcapacity of the system, to purge the excess of offices and to adapt it to the level of business rational and free of bubbles.
Credit granted to mortgages
Mortgages will no longer be the same
It is necessary to invest with prudence the funds that so much cost to the entities obtain of the wholesale markets and to respond, when the situation of the entity allows, to the demand that has survived to the economic recession.
If before a competitive mortgage offer carried a differential well below 1 percent, now the entities establish differentials ranging from 2 to 4 percent.
The 40 years of maximum life have been transformed in 25 or 30 years in exceptional cases and as for the amount of the loan the usual, if it is a first dwelling, is that it does not exceed 70 or 80 percent.
Crash in the concession
The hand is only open if the customer wants to acquire one of the hundreds of thousands of properties that the bank has in the portfolio and is content to sell, as is the market, with the least possible loss.
In that case, the conditions are almost identical to when more than 800,000 homes were sold per year in Spain, for 320,000 operations last year.
With banking-hardened conditions, lower demand and falling floor prices, the amount of the annual housing loan has collapsed to 37.5 billion euros in 2011, barely a quarter of the 2007.
Rate of interest APR of the new mortgages
there is some forecast that forecasts an increase in the next months, but rather the opposite. All measures, national and international, which aim to, or as an excuse, the reestablishment of credit to companies and families will not achieve its goal, according to experts and the financial sector itself.
Problems with regulation
First, the changing regulation establishes higher levels of capital for financial institutions. The Basel Committee and the EBA at the international level. In Spain, first the decree promoted by Elena Salgado, and the most recent, the reform of Luis de Guindos.
The latter, like that of Salgado, has among its main objectives to facilitate the opening of credit. However, the requirement of an extra capital mattress, which should reach 20 percent of the land exposure and 15 percent of real estate developments, will require entities to reinforce some 15 billion euros, a requirement that hinders the granting of new credits, by the consumption of own resources that causes its concession.
In addition, if the bank should make provisions collection it will have fewer resources than to allocate to the loans. The endowment effort stands at another 37,000 million, with the aim of covering any losses due to its exposure to brick
Tighter and more costly regulation punishes the flow of credit, which is blocked, in the opinion of the banks, due to a lack of solvent demand and economic recession. That is, until there is a recovery of activity loans will not increase. And when this happens - which in the best of cases will be in 2013 - mortgages will not be as before the crisis or during the crisis.
Goodbye to Euribor?
First because the interest rate, predictably, will not depend on the euribor. Financial institutions consider that this index does not reflect well the cost of money so that the sector can grant mortgages. With the distrust between banks at highs, this indicator has ceased to be the reference of the interest that some institutions lend themselves to others, and has become an artificial indicator, in the opinion of the sector.
For several months now, the bank has been looking for a more reliable and predictable indicator for its customers with the regulator. Some have begun to replace the Euribor with the IPRH, which is the average rate of mortgage loans for more than three years for the acquisition of free housing by the group of entities, which is around 4 percent. At present the euribor, which has been used since the creation of the euro, is below 1.5 percent after the collapse of recent years.
Payment in payment
Another element that will raise mortgage costs are the changes introduced by the Code of Good Practices, which has been adhered to the entire sector as a whole.
The introduction of the payment into payment, if certain requirements are met, will force the entities to be more demanding with the conditions for the granting of these credits. If risk scales indicate that the client is likely to fall into insolvency in the future, the concession, if it occurs, will be made for less money and, presumably, with a higher spread.
If mortgages have changed now, forced by the economic recession, shortage of liquidity, the outbreak of the housing crisis and the process of deleveraging families, when you think of the business model that will impose itself in the future, the sector discards that return the conditions prior to 2007.
Then, in the midst of an abundance of funds, with an expansive process of construction and economy generating employment and growing at 4 per cent per annum, institutions, in measuring risk, gave a key importance to the value of loan guarantees.
This is one of the practices that have proven to be erroneous as the crisis progresses, with the deterioration of the client's economic situation and the devaluation of the property.
Roberto Higuera, vice president of Banco Popular, explained this change a few days ago. The veteran manager affirmed that it is necessary to return to the good banking practices, although this supposes an increase in the price of the credits. "Loans must be based on repayment capacity, not on the valuation of collateral."
The cost of the loan, more expensive
The consequence is clear: the new approach will increase the cost of the loan. "This is not going to please customers, because it will mean giving loans at more expensive prices. It was exaggerated to give credits to euríbor plus 0.2 percent," said Higuera.
Banking, in effect, applied a very low differential, since the war for customer acquisition, unlike now, focused on assets and mortgages in particular. Thus, the mortgage itself, for the small margin, left hardly any benefit for the bank. This came from linking the client when closing the loan: payroll, insurance, domiciliation
How much have the floors gone down?
Annual variation of housing prices in Spain, by percentages
