Spain will hold do-or-die general elections on December 20. The Rajoy government hopes that recent improvements in economic performance will be enough to cast its gargantuan political scandals to the back of voters’ minds.
The economy is firing on all cylinders, it claims. To paraphrase Finance Minister Cristobal Montoro, Spain’s economy should serve as a shining example to the world. It is expected to grow by 3% this year, no mean feat in a region plagued by sub-par growth.
However, not everybody’s buying the government’s version of reality: poverty is growing at a startling rate, unemployment continues to hover on the wrong side of the 20% mark, and public debt is almost three times what it was at the beginning of the crisis.
To make matters worse, the European Commission has just pointed out, albeit as quietly as possible, that despite all the untold billions spent over the last four years trying to save Spain’s rickety financial system, the risk exposure of Spanish banks remains inordinately high. Many banks have been caught engaging in “abusive” mortgage lending practices and could end up having to pay back customers billions of euros.
But not until after the elections!
For years now, Spanish banks have been featuring so-called “floor clauses” in their variable-rate home mortgages, often without informing homebuyers. The variable rate is usually based on Euribor plus a differential. But these clauses set a “floor” or minimum interest rate that clients have to pay the bank, even if Euribor drops far below that figure. And in today’s zero-interest-rate environment, with Euribor at 0.05%, that can make a big difference.
For an average mortgage of €150,000, the clause would impose a cost of between €179 and €213.8 per month, resulting in annual losses of anywhere between €2,155 and €2,566, explains Manuel Pardos, president of Spain’s Association of Bank and Savings Bank Users (Adicae). If the mortgage is worth €200,000, the total annual cost of the clause could reach as much as €3,421 per year, and up to €4,276 for loans worth €250,000 euros.
In May 2013, Spain’s Supreme Court declared all floor clauses in mortgages that did not comply with the required transparency requisites null and void – but not illegal. This sentence affected 400,000 mortgages from BBVA; 90,000 from Novagalicia Banco; and approximately 100,000 from Cajamar.
As soon as the sentence was passed, some banks decided to eliminate mortgage floor clauses altogether from all of their loans while others, including La Caixa, Banco Sabadell, Bankia and Banco Mare Nostrum (BMN) stuck with the practice. After all, it was a vital source of their profits.
Then, in October this year, the Supreme Court ruled that the practice was abusive and sentenced three banks – BBVA, Cajamar and Abanca – to return the difference to borrowers, but only on payments made since May 2013. In other words, the court publicly acknowledged that homeowners had been swindled out of billions of euros worth of savings. Nonetheless, the banks could not be made liable for all (or even much) of that money, since doing so would potentially cripple their finances.
But the European Commission disagrees, saying that the refunds should extend all the way back to the first mortgage payments, the rationale being that if a clause is declared void, “it is so from its origin.” As El País reports, the matter is of vital – some might say existential – significance to the banking sector.
There are currently 2.5 million mortgages with floor clauses in Spain. If refunds were to be mandated retroactively, it would mean billions — perhaps even tens of billions — of euros in payments.
For many Spanish citizens, this change in law will have come too late to make any difference. According to Platform for Mortgage Victims, an advocacy group formed in 2008 to give legal advice to homeowners, the floor clauses have caused roughly 10% of the more than half a million foreclosures that have taken place in Spain since the beginning of crisis. That’s over 50,000 homes.
In Spain, mortgages are full recourse, forever. Debt is neither forgiven nor forgotten. Even when a bank, often with the heavy-handed assistance of the forces of law and order, has repossessed someone’s home, that person could still be left on the hook for thousands, if not hundreds of thousands of euros of debt to cover not only the difference between the mortgage balance and the value of the home, but also special fees the bank charges, plus interest, and other items.
But for the banks, there is no limit to the state’s taxpayer-funded magnanimity and forgiveness.
Once the dust has cleared after this month’s elections, it will probably be just a matter of months before the new government – likely a cozy alliance between the governing People’s Party and the relative newcomer (and City of London supported) Cuitadans – dips once again into the pockets of cash-starved taxpayers to set things right and bail out these banks again, triggering yet another round of Troika-administered austerity, even as still no one can accurately say how much the last bank bailouts cost.