A judicial investigation has recently opened in the High Court against the executives of Bankia, the bank created by the merger of different entities (mainly regional savings bank, or “cajas”).
Bankia's main component, Caja Madrid was, during the 1980s, the fourth largest Spanish financial institution and second largest European savings bank. Caja Madrid had started to lower the risk assessment on mortgage applicants, to a level that has been described by the Court investigators as “alarmingly unprofessional”.
The inspection reports that were commissioned by the Madrid High Court, and conducted by the Bank of Spain, concludes that the basis for the financial problems had commenced between 2003 and 2007.
During those years, Caja Madrid slipped into a growing spiral of irresponsible lending via mortgages and off-plan building without proper risk assessments.
"It is clear the failure that has resulted have made swing the expansion of housing in a credit policy based on lending by more than 80% of the guarantee, some times over 100 % of the collateral (...)" is one of the conclusions; "loans were granted to those who, in fact, had no ability to pay," stated the inspectors.
By 2010, Caja Madrid alone had accumulated € 7.2 billion in “dubious or difficult to recover” loans, plus an extra € 6.2 billion in high risk financing. The inspectors described the profile of Caja Madrid as an "Entity with adjusted solvency and decreasing profitability."
Two circumstances led to the situation as described: a) the number of mortgages approved without a real risk assessment on the actual financial capacity of the mortgagees, and b) the over inflated appraisal of the properties guaranteeing the mortgages.
The combination of these two factors ensured that 20 % of the mortgages were granted in a way that menat is was virtually impossible for the bank to recover the loan. There are thousands of cases where applicants have insufficient income to pay-off the mortgage, yet many were given 110 % of the property’s value.
The investigation is still open and it is expected to reach the top executives of the bank between 2004 and 2010 (now already discharged of their posts at that time).
How is this situation affecting current mortgagees that cannot carry on with the mortgage repayments?
Quite directly. The Higher Courts are increasingly basing judgement on the value of the property at the time of purchase, and not (as the banks prefer) the market value at the moment of the settlement.
The reasoning is simple: the lending bank commissioned and approved the valuation at the time of purchase, so now it has to bear the consequences of it.
These inflated valuations helped to create an unsustainable market bubble that exploded by the end 2007, bringing down the property prices dramatically and affecting, not only the macroeconomics, but the day by day households finance.
Based upon these recent cases, the Magistrates are claiming that the weaker party in the mortgage should not carry entirely the negative consequences of the current financial climate, but very much on the contrary, the banks should be made responsible for it, hence take the consequences. The Judgements are constantly citing, for instance, that “the financial system is entirely responsible for this current crisis, and the banks are main players in that system”.
If you have a mortgage in Spain and are struggling to meet the repayments, please contact us. We offer a no obligation consultation and it is likely that we can assist.