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Spanish mortgage law could crimp bank revenues

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Spanish mortgage law could crimp bank revenues

Spanish banks could face pressure on revenues as the government moves to make mortgages more transparent and consumer-friendly.

A draft law must be enacted to conform with the EU mortgage credit directive, which was supposed to be adopted by countries by March 2016. Spain, in a political impasse last year and left without a government for 10 months, was one of several countries threatened with action at the European Court of Justice if it did not pass the law.

The government will discuss the changes in September, and, according to press reports, may go further than the directive's requirements. This follows a series of court rulings regarding controversial mortgage floor clauses, whereby many banks missold mortgages with caps on interest rates, causing borrowers to lose out on low rates.

According to government sources quoted by Spain's Expansión newspaper, the new law has additional features compared to the European directive and will be far more "protective" than any other European mortgage law. Banks will no longer be able to charge a fee for early mortgage repayment, unless the repayment happens in the first three years of the loan, in which case it can request a refund of up to 0.5% of the amortized capital.

The changes would also encourage the greater take-up of fixed-rate mortgages by eliminating cancellation fees and costs for changing lenders. The majority of Spanish mortgages have traditionally been at variable rates, but mortgage floor clause lawsuits and the low interest environment has meant that about half of new mortgages are now at fixed rates.

Revenue pressure

These are factors that could increase risks for lenders, as they will potentially lose out on revenues, especially when interest rates start to tick up, said Javier Santacruz, an economist at the Instituto de Estudios Bursátiles who specializes in research on the Spanish banking sector.

"There is more protection for borrowers, but this implies more uncertainty for banks," he said in an interview. "The project has many aspects that could negatively impact the banks."

Banco Santander SA, Bankia SA, Banco de Sabadell SA, and Bankinter SA would be most affected because of their large exposure to the mortgage market, he said.

Santander CEO José Antonio Álvarez has said the country's existing mortgage laws have been "extremely effective," and warned that "upsetting the balance" could have negative repercussions, Europapress reported. If there was more certainty, it would reduce costs and risks for everyone, both for borrowers and the bank, he said.

The CEOs of Bankia and CaixaBank SA, another big domestic lender, have both welcomed the new mortgage law as a positive move that will lead to greater legal certainty and better security around mortgages.

Santander, Bankia and Sabadell did not respond to requests for comment for this story. Bankinter did not want to comment until a definitive version of the law has been published.

A delicate topic

Mortgages are a sensitive subject in Spain. The end of the country's property boom in 2008 and the ensuing crisis led to hundreds of thousands of evictions and several eviction-related suicides. A law passed in 2013 was designed to make it harder to evict borrowers who are behind in their mortgage payments.

But while the new law is designed to protect consumers, it might make it harder for people to get a mortgage as conditions would be tightened.

"If [the EU] directive is implemented very strictly, it will have a huge impact on home ownership in Spain," Sergio Nasarre, professor of civil law at the Universitat Rovira i Virgili, said in an interview. "If it is more flexible, it will be useless. It will not be effective in protecting vulnerable householders."

He also warned that, depending on how it is implemented, the new rules could prevent some people from ever being able to either buy a home or rent a property. Rents in Spain are generally more expensive than a mortgage, he said.

"[This could leave] many householders in a very difficult situation," he said.

In addition, the law does not cut red tape and in many ways complicates the process of having a mortgage, Nasarre said — meaning it may not bring an end to the current spate of legal challenges against banks in Spain.

While the draft law gives greater powers to notaries to point out abusive elements such as floor clauses in contracts, it does not go far enough in ensuring that there are no any new types of clauses in a mortgage contract and that a mortgage is really transparent for borrowers, he said.