The closure of branches creates conflicts between banks and big fortunes.

New source of conflict for banks: the frenzy of closure of branches is creating problems with big customers of private banking, threatening to turn into a new headache for commercial relations of banks.

The origin of the conflict are the sale & lease back agreements, which banks and savings banks signed at the beginning of the crisis, between 2007 and 2008. They sold nearly 4400 branches to funds and big fortunes with the commitment of becoming a tenant and paying a fair annual rent for periods of around ten years. With these agreements, the institution obtained liquidity in a complicated moment in the market; while customers acquired a real estate asset with an assured profitability.

What they were not counting on was the worsening of the crisis which has obliged institutions to close more than 7000 branches out of the 46000 which existed in 2008, and with plans to continue reducing the number. Different studies establish that there is still room for a reduction of 15%-20%.

Up to now most complicated situations have been solved amicably. But there are already cases where banks have threatened to present the case to court.

The worse situation can be found in those branches where the institution is a tenant, without a previous sale agreement. There are already court decisions which allow banks and savings banks to cancel the leases paying one month of rent per pending year.

Things do not look so somber in the sale & lease back agreements. “For the moment banks do not dare go to court on those branches which were sold, as it is clear that the object of the sale was not the property itself but the lease agreement, Jose Carlos Torres explains, director of Zaphir Asset Management, real estate agency for Aguirre Newman.

Nevertheless, Guillermo Santos, strategy director of iCapital, thinks that the conflicts between investors and institutions will increase. Negotiations with these customers are being resolved as follows, Santos explains.

  1. Profitability: Banks are trying to bargain down the signed agreements. Institutions agreed initially to pay a rent/coupon of between 5% and 10%. This alternative only intends to reduce fixed costs.
  2. Change of branch: Another possibility would be for the bank to offer a change of branch to the investor. This modification (included in many agreements) may be for worse in many occasions, as the new branch is located in a worse area than the original one.
  3. In some cases, institutions are offering to continue paying the rent even though they leave the branch or to look for a new tenant (…).These are exceptional solutions which some institutions are turning to so as to maintain a good relation with their VIP customers.

Apart from the closure of branches, “most of the branches sold in 2008 and 2009 have an overvalued price, which was inflated by the banks so as to obtain gains with each sale”, sources from an important family office are pointing out. (…)

Source: Expansión

Radical change of the rules of the game for raters.

The second modification on the regulations of the mortgage market by the Ministry of Economy so as to protect debtors changes the rules of the game for raters in the foreclosure procedures.

First, in those procedures where a bid takes place, banks will be obliged to accept the valuation presented by the debtor. (…)

So, the property will be auctioned based on the value established by the appraisal provided by the debtor, not the bank. This will prevent the institutions from presenting the famous “second assessment”, which reduces significantly the value of the property so as to take it over at a lower price or to obtain more in the auction. This is always a disadvantage for the borrower, who cancels a smaller percentage of the debt.

On the other side, “it is also prohibited for financial institutions to acquire, directly or indirectly a significant participation in the rating companies.”

This means that banks will not be able to acquire more than 10% of a rating company. Up to now the maximum participation was of 25%. The intention is to “reinforce the independence of the rating companies opposite to the institutions.” It is worth mentioning that the financial sector has at one point controlled more than half of the rating companies.

And those rating companies which obtain at least 10% of their total income from banks or are owned by a financial institution should have “the necessary mechanics to favor their independence and thus avoid any conflicts of interest. These mechanics should include at least “an internal regulation of performance which establishes those incompatibilities between executives and administrators”. The Banks of Spain will revise these transparency measures and will be able to establish minimum requirements.

This modification also enables the Board of Consumers and Users to demand the Bank of Spain to initiate disciplinary proceedings against a rating company. Up to now only administrative institutions could demand this. Finally infractions from rating companies are increased, being some of them “very serious”.

Source: Expansión

Banks will have to decrease the default interest rates for mortgages from 20% to 6%.

The Government will close in the next few days a fundamental reform on the mortgage market, in order to protect borrowers from the spate of evictions which has taken place in the last few years. The intention is to “improve the position of the debtor”, decreasing the default interest rates dramatically in all mortgages on principal residences, so that they cannot be over the legal interest of money (now at 4%) plus a surcharge of two percentage points. That means, a maximum of 6%, opposite to the average 20% which is being charged right now, according to the mortgage experts. The default interest rates range between 18% and 29%, according to the sample of Adicae, who has analyzed 18000 deeds. “The average is near 24%”, sources close to this association are revealing.

(…) The reinforcement of the protection of debtors had been agreed by the Government and the socialists at the end of 2012, but had not been made public, according to sources within the commission created in order to solve the problem of the evictions. The PSOE will include this proposal of default interest rates in the amendment prepared for the project, which will be debated in Parliament on Wednesday, according to socialist sources.

(…) The agreement between PSOE and the Ministry of Economy could not be formalized in November and was postponed for the processing in Parliament. Now, as the decree has been “converted” into a Draft Law, positions have neared much more, thanks to the amendments. Now, the intention of the Government is that “under no circumstances will it be agreed that the mortgage assures interests (to the bank) for a period longer than three years”, instead of the five years established by the Mortgage Law. This means that debtors will pay interest rates of 6% during a maximum of three years, instead of 20% during five years. A great difference.

(…)The proposal prepared by the Ministry of Economy also stipulates the suppression of the article 115 of the Mortgage Law. The mortgage creditor will not have the legal ability to impose the debtor the extension of the mortgage in order to ensure due interests which have not been paid. This agreement will be allowed, but it will no longer be a “privilege” of the financial institution.

Another novelty is the proposal made by the Government of an extrajudicial procedure for the sale of the property when the debtor fails to pay the mortgage.

How will this be done? “At any moment prior to the bid, the debtor will be able to present a buyer to the court who offers an amount of at least 70% of the assessed price”. One the bank has been notified, it will have “20 days to present a buyer for a higher price or to take over the property for that amount, ending the procedure”. The assessment presented by the debtor will prevail over the one presented by the bank. (…)

Source: Expansión

Banks are selling seized properties at bargain prices but…. with the former owners inside.

The hurry of banks to sell their properties as soon as possible is leading to some strange situations. It is common practice nowadays to “sell properties without possession”, which consists of the pre-sell of a seized property by the bank, but with the owners still residing in it, awaiting normally an eviction. These sales are therefore made at a lower price.

This operation seeks the optimization of the allocation through the payment of less taxes and maintenance costs. The buyer knows he has given a deposit for a house with tenants, receiving in exchange a bargain price, but he has to wait for a certain period of time before being able of occupying the property.

Fernando Acuña, managing partner of Taurus Ibérica, declares that this type of sale is known as “sale of a property without possession”, and it takes place in allocated properties with tenants awaiting their eviction, after the auction finishes without a purchaser.

Any person can have access to these sales, but they are normally taken up by investors used to these practices with no fear of entering such an operation.

The process of property sales without possession is as follows:

  • The buyer gives a deposit, which varies from bank to bank and which can be around 3000 Euros or 15% of the total value of the house.
  • The seller takes the responsibility of allowing the entrance of the buyer to the property after a certain period of time, after the eviction has taken place. There are also temporary contracts, of around six months, where after this period of time it is possible to renovate or cancel the process. If the latter happens, then the buyer would receive the deposit back. This contract would be renovated every six months because it is not possible to know in advance how long the eviction process will take.

Another possibility would be when the bank offers the buyer the possibility of assuming the cost of the execution of the eviction in exchange for a more attractive price. This means that the buyer needs to hire a lawyer and an attorney in order to carry out that process.

This type of sale is a “blind purchase”, as the individual interested in a property cannot find out if the house is in a good condition nor can he know how he will receive it. This is why the price is so interesting, as it is accepted that the new owner will need to refurbish the property. According to Fernando Acuña, there are individuals who do not mind taking such a risk because they know that if the property goes into the market, it will be sold immediately.

Another way of getting rid of properties as quickly as possible would be to sell them before the legal auction takes place. If the financial institution succeeds in selling the property, then it can cancel the pending debt. As an example, if the bank sells a property for 100.000 Euros, but with a mortgage of 150.000 Euros, those 50.000 Euros are cancelled from the debt of the mortgage owner. Financial institutions save on registering costs, on taxes, like the real estate tax, or on maintenance costs of these properties.

Financial institutions also resort to a credit cession with a grace period: the bank sells the mortgage debt and the right of recovery to a third party and before the auction, in exchange for a discount, or forced sale. This consists in transferring the property to a third party with a discount after the auction and the third party can be the real estate subsidiary.

Source: Idealista