By any measure, the Spanish real estate boom was one of the headiest ever. Spurred by record-low interest rates, Spaniards piled into holiday villas along the Costa Blanca, gaudy apartments in Madrid and millions of starter homes throughout the country.
Marta Afuera Pons is juggling two mortgages — one on her house, another on an investment property that went sour — and is about 350,000 euros in debt. She is trying to persuade her lender, the savings banks BMN, to take back the mortgage and the property.
But since the frenzy drove Spanish home prices to a peak in 2007, they have fallen by at least one-fourth, and the bottom seems nowhere in sight. As Spain endures its second recession in three years and unemployment nears 25 percent, an increasing number of debt-heavy Spaniards can no longer meet monthly payments on the mortgages that their banks were all too eager to give.
With a rising portion of Spain’s 663 billion euros, or $876 billion, in home mortgages at risk of default, many economists say it is only a matter of time before some of Spain’s biggest banks will need a bailout. And the Spanish government, staggering under its own debt and budget deficit burdens, may not have the money to come to the rescue.
The implications of all this for the rest of Europe were a prime topic at last weekend’s meetings of the International Monetary Fund and the World Bank in Washington. The big fear is that the European Union will need to step in with a Spanish bailout — one much bigger than any of those already extended to Ireland, Greece and Portugal.
“Retail mortgages are set to become the Achilles’ heel of the Spanish banking system,” said Edward Hugh, a Barcelona-based economist and blogger who has closely studied the issue.
Two years ago, when Ireland’s banks succumbed to a real estate bust, the Irish government’s rescue effort eventually forced it to take 80 billion euros from the European Union and IMF. Analysts say that a similar rescue for Spain would cost at least 200 billion euros, or $264 billion — nearly double the 110 billion euros given to Greece, whose debt travails had long raised the question of which European economy might be next to require a rescue.
Last week, the Spanish central bank reported that the nation’s nonperforming loans had hit the highest level since 1994. And while the government’s official estimate of mortgages going unpaid is only 3 percent, Mr. Hugh and other economists say the actual numbers are probably much higher — in double digits for some lenders.
There is no doubt that the number of new home mortgages has fallen off sharply in Spain. The number of mortgages signed in February were down by 46 percent from a year earlier — the biggest drop since such data was first published in 2004, Spain’s national statistics institute said Tuesday.
The real estate boom, while it lasted, gave Spain the world’s highest rate of homeownership — with more than 8 of every 10 Spanish households owning the places they lived. But lenders are now depending on people like Marta Afuera Pons, who is juggling two mortgages — one on her house, another on an investment property that went sour — and is about 350,000 euros in debt.
In late 2010, Ms. Afuera Pons, who had just lost her job as a social security administrator, stopped making payments on the mortgage of 132,000 euros that she and the man she lived with had taken out for their home in Tordera, near Barcelona.
Separately, they still owe 185,000 euros to the same bank after receiving further financing in 2007 to buy a house that was never built, because the developer went bankrupt a year later.
Like many Spaniards, Ms. Afuera Pons is hitting the two-year limit for receiving unemployment benefits. This month, she will receive her last 1,100-euro unemployment check.
Finding no buyers for her Tordera house, Ms. Afuera Pons says she is trying to persuade her lender, the savings banks BMN, to take back the mortgage and the property. She would then probably move in with her mother, because her partner left last summer for Brazil and is now married there.
Ms. Afuera Pons says she accepts blame for her financial disaster but considers her lender, BMN, the enabler. She has joined an association of mortgage holders that has been staging demonstrations to demand relief.
“It’s now easy to say that wanting this new house was a risky investment, but the bank fully supported this idea,” she said. “Everybody lost any sense of caution, starting with the banks."
BMN said it would not comment on Ms. Afuera Pons’s specific case. But a spokesman, Miguel Portilla, said that the bank’s policy was “always to try to find every way possible to avoid throwing people out of their home and on to the street.”
Real estate experts in Spain estimated that about 300,000 properties have been repossessed since the onset of the financial crisis in 2007. Unwilling to take losses, banks have mainly held onto these homes. But now, facing pressure to raise more capital, banks are rushing to unload them, offering discounts of up to 60 percent.
Many investors also see a warning signal in the deteriorating performance of Spain’s 100 billion euro mortgage-backed securities market.
Much as their counterparts did in the United States during the American housing bubble, Spanish banks sold off the mortgages to financial companies, which repackaged them into bundles of securitized mortgages — investment vehicles that paid high yields and were bought by insurance companies and European pension funds and other institutional investors.
There was supposed to be a crucial difference, though. In the United States, many of the mortgages underlying the securities bundles that turned bad were subprime, meaning the home-buying borrowers had dubious credit histories. In Spain, the mortgages used as collateral for the bundled securities were considered to be prime — lent only to creditworthy borrowers.
But with unemployment nearing 25 percent, the distinction between a prime and subprime borrower can be hazy. Many of these mortgages are now failing, prompting a wave of downgrades by ratings agencies like Standard & Poor’s and Moody’s, which had given the mortgage-backed securities top-notch ratings during the boom, just as they did in the United States.
Investors are anxiously monitoring the Web site of a Spanish association of fund managers who deal in the mortgage securities. In some cases, up to 14 percent of the assets in certain mortgage pools are more than 90 days overdue.
“It’s really scary,” said an investment banker who buys and sells the securities but who was not authorized by his bank to discuss them publicly. “Every quarter the numbers get worse.”
According to the association’s Web site, among the worst performing mortgage securities in investment funds are the ones backed by Bankia, which is now Spain’s largest provider of home loans. Bankia said it does not comment on the performance of such funds.
Until recently, banks have been buying back, at full price, some of the worst performing mortgage securities in order to protect the mostly foreign investors that hold them, in hopes of preserving the banks’ investment standing. But as more loans default and capital becomes even more scarce, some banks are now facing up to the inevitable and are offering to buy back these securities at discounts of 10 to 30 percent.
Many analysts say that official data on Spanish real estate prices, down by 25 percent according to some measures, do not truly reflect how far prices have actually plummeted. Until price adjustments are made, and banks and securities investors book their losses — as happened in Ireland and the United States — economists say it will be impossible for the Spanish economy to truly recover.
As those losses are acknowledged, though, the question then becomes whether Spain can afford to absorb them. The government’s own bank bailout fund is running out of money. In a telling contradiction, Madrid has proposed that the country’s banks lend the government the money to keep the fund going.
Borja Mateo, author of a recent book on the Spanish real estate market, said there were now 1.9 million housing units for sale in Spain and about 3.9 million that could go on to the market in the coming years. With current housing demand now at about 175,000 units a year, Mr. Mateo predicted the glut would cause home prices eventually to fall by 60 percent.
Because the typical Spaniard has 80 percent of his or her assets tied up in real estate, a plunge in prices of this magnitude would be devastating. “What we are seeing,” he said, “is a massive impoverishment of a country.”