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Spain shudders as ill winds batter US mortgages

The chill winds of the home loan crisis in the US are having a sobering effect in Spain, where mortgage lending and house prices have risen faster than anywhere else in continental Europe.

As with the US, low interest rates and a buoyant job market have made home ownership affordable to lower income groups in Spain. Fierce competition has driven some Spanish banks into the riskier segments of the market. In particular, Spain's 4m-strong immigrant population - young, low-skilled and with no credit history in Spain - have proved to be too large and tempting a group to ignore. Mortgage brokers who specialise in arranging loans for immigrants are doing a roaring trade.

Caja Madrid, Spain's fourth-largest financial group, boasts half a million immigrants as customers, who account for almost 20 per cent of the savings bank's mortgage portfolio. Other banks have followed suit, opening branches staffed with Moroccans, Chinese and Latin Americans in immigrant neighbourhoods and tailoring mortgages to the special needs of migrants.

Grupo Santander, thelargest Spanish bank, offers 40-year mortgages with a five-year grace period on capital repayments. Some banks offer loans for buying houses in their customers' home countries, such as Morocco or Ecuador.

Asprima, a property developers' association, estimates that one in three new homes was sold to an immigrant last year. But because immigrants earn less than Spaniards, their debt burden is greater. Asprima estimates that an immigrant family borrows on average eight times its annual income to buy a home in Spain, compared with six times for a Spanish family.

Spanish banks say they are prudent in their lending and are tightly supervised by the Bank of Spain. As a result, non-performing loans remain low at less than0.75 per cent of total credit, according to the Bank of Spain, which also obliges banks to set aside big loan loss reserves.

Roberto Higuera, chief financial officer at Banco Popular, a mid-sized bank, says Spanish lenders are far more conservative than those in the US or Britain. "Remortgaging homes to release funds for consumer spending, or investing in equities, is extremely rare in Spain," Mr Higuera says. "The buying-to-let market is also very small." As a rule, Banco Popular does not like mortgage repayments to go above 30 per cent of net household incomes, he says.

BBVA, Spain's second largest bank, says it is also prudent on the mortgage front. As a rule, the bank does not finance holiday homes or property devel-opers, says Isabel Goiri, BBVA's head of investor relations: "Yes, home loans have risen very rapidly in Spain but we are in an entirely different situation [to that] in the US," she says. Before Spain joined the euro, only the wealthy could afford the high interest rate peseta mortgages that were avail-able for most of the 1990s. "Spain has been playing a very strong catch-up game."

But there is anecdotal evidence that low-income families are finding difficulty keeping up with their mortgage repayments.

"We have families who are doing OK but an increasing number are struggling," says the Association of Ecuadorean Migrants in Barcelona.

In Madrid, Roger Saavedra, a 34-year-old Peruvian cabinetmaker, says he has had to let out one of the tiny rooms in his 50 sq metre, two-bedroomed apartment to keep up with his €160,000 mortgage. "My wife stopped working after the birth of our second child, andeven working extra time, I cannot make the repayments on our mortgage," he says.

Mr Saavedra, who works as a bricklayer, says his biggest fear is becoming unemployed. Most jobs in the construction sector are short term, and Mr Saavedra says competition for jobs is getting tougher. Labour figures show unemployment among immigrants is on the rise.

Nevertheless, Fitch Ratings says it sees no risk of contagion from the US sub-prime mortgage meltdown.

"We haven't detected any change in the perception of the risk profile of Spanish banks," says CristinaTorrella, a banking analyst with the credit ratings agency in Barcelona.

The recent rises in interest rates, she says, have been well digested. "Unless unemployment rises sharply, loan defaults will remain very low," Ms Torrella says.

Copyright The Financial Times Limited 2007

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