New Eviction Law could increase risk of losses for Spanish Banks

Spain, responding to street protests and reports of suicides linked to foreclosures, introduced rules to help protect families from eviction, increasing the risk of creditor losses and weakening an already fragile banking system.

Banks won’t be able to remove families who can’t pay their mortgages for two years, Deputy Prime Minister Soraya Saenz de Santamaria said yesterday after the government’s weekly Cabinet meeting in Madrid. The rules apply to households earning less than 1,597 euros ($2,041) per month combined with certain other conditions such as young children in the property.

Spain is trying to balance the threat of social unrest with protecting the banks, four of which have been nationalized. While the rule is designed to help the poor without triggering a larger rise in non-payments it may increase the size of the nation’s bank bailout and harm the interests of European lenders with $110.4 billion of exposure to Spanish lenders.

“It seems clearly meant for extreme cases and is supposed to not overly dilute the rights of banks,” said Bernd Volk, the head of covered bonds and agency research at Deutsche Bank AG. “However, it seems difficult to assess the practical relevance as anyone can probably claim that some criteria apply and stop paying the mortgage.”

The government passed the law under royal decree after 400,000 homes have been foreclosed on in Spain since the collapse of the property boom five years ago. Prime Minister Mariano Rajoy said this week he would rush through measures after Amaia Egana became the second person in the past month to commit suicide in Spain over an eviction when she leapt to her death from her apartment in Baracaldo as officials arrived to change the locks on Nov. 9.
Program’s Conditions

Under the terms of the agreement, families that aren’t paying their home loans also have to meet another condition to qualify. These include having at least three children; having one child under three; having a disabled dependent to look after; being a single parent with two children or a victim of domestic violence; or being unemployed and not receiving benefits.

“There seem to be loopholes which could be exploited, which in turn could finally trigger a rise in non-performing mortgage losses, according to Volk, who is based in Zurich. This is expected anyway taking into account Spain’s very high unemployment, he said.

Via – Bloomberg

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