‘High Risk’ Mortgages Account For 15% Of New Loans

4 January 2016 – Cinco Días

For the first time since 2008, all of the major indicators in the real estate market, including house prices, ended last year on a positive note. The improvement in employment was, undoubtedly, the factor that contributed the most to the increase in the sales volume and prices of homes. The second was credit. Not only did the number of operations continue to increase, also the Bank of Spain even highlighted in one of its reports that there had been a certain “relaxation” in the criteria for granting some kinds of loans.

One of the statistics that the supervisor publishes analyses the characteristics of new mortgages. According to this data, during the third quarter of 2015, the percentage of mortgages granted with an LTV of more than 80% increased to account for 15% of all new home loans granted. These mortgages are classified as high risk, since if the property decreases in value, the mortgage holder runs the risk of entering into negative equity, which is when the debt or liability (the mortgage) exceeds the value of the asset (the home).

The figure of 15% does not represent a series maximum, but it does fall at the top end of the range. The statistic was first published in 2004, when of this type of (high risk) mortgage accounted for 15.40% of the total volume of mortgages granted. By 2006, at the peak of the previous reale estate bubble, such mortgages reached their maximum, representing 18% of all new operations. It was not until the end of 2008, when the approaching crisis began to give its first clear warning signs, that these high risk mortgages decreased to their minimum level, of 10.30%.

The experts agree that this figure of 15% does not represent a concern yet, but they are certain that the Bank of Spain will be more vigilant this time around regarding entities that may be tempted to abuse such loans. The same sources explain that banks tend to end up granting high LTV mortgages, representing almost 100% of the appraisal value, when they relate to homes that have been held in their portfolios for a long time. Furthermore, they use these more favourable terms to speed up sales “although that does not mean that they do not perform the relevant solvency studies of the clients to which they are granting the loans” say sources at one appraisal company

Moreover, the fact that property prices are now on the rise once again dispels this higher risk, to a certain extent. On average, new mortgages now represent 62.4% of the appraisal value of properties, with an initial term of 22.8 years and an average interest rate of 2.5%.

Original story: Cinco Días (by Raquel Díaz Guijarro)

Translation: Carmel Drake

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