Spanish banks could be €50bn short of new capital requirements, says Moody’s, revising its previous estimate of €17bn based on old requirements. This is roughly 5 per cent of Spanish GDP and considerably higher than the Spanish government’s estimate of €20bn.
Overall savings banks’ exposure to the real estate sector is €217bn, by Bank of Spain data. Of that, €100bn, or nearly half, is considered “problematic”. €28bn are under surveillance and considered risky; a further €28bn are more than 90 days past due; and €44bn are foreclosed. Problematic indeed. The most troubling sentence from the Moody’s report is that just 40 per cent of the €217bn loan exposure is collateralised by finished, completed housing:
Feel the pain and move on in the UK housing market. Specifically, set up a UK Tarp to buy troubled mortgage-backed assets from banks. That’s advice to the Bank of England from Fathom Consulting’s monetary policy forum, quoted by Stephanie Flanders.
Fathom argues that the US and UK are falling into the Japanese trap – only drip-feeding cheap debt to households rather than businesses. In so doing, they argue, households feel richer and spend more, and lenders safeguard the value of the assets they are lending against. But the problem doesn’t go away. Far from it. The problem is just postponed, and at the current rate of house price decline, will amount to a £180bn funding gap by 2012 when the BoE’s Special Liquidity Scheme is due to end.
The report is only available to members, but I recommend a read of Stephanie’s take:
As the BoJ and ECB report easing credit standards, the Bank of Ireland has just proposed a new consumer code that includes stricter tests for mortgages and consumer credit. New provisions for housing loans include a 2 per cent stress test on the bank’s standard rate and stricter rules on what will and won’t count as proof of income. Self-certified declarations of income, for instance, would be out.
Another significant suggestion in the mortgage market applies to brokers. Mortgage intermediaries are not currently covered by rules that bind insurance brokers, for instance, to disclose the commission they receive on certain products. The new code would extend this requirement to them.
UK house prices are going down very quickly, up very quickly, or mostly static (using Halifax, Rightmove and Nationwide indices respectively). But we should not discard indices when they diverge: the apparent confusion masks something useful. Below is a handy guide to interpreting UK house price indices.
Each index tells us something, and the differences between them tell us even more. Asking prices are rising (Rightmove, non-adjusted) while mortgage approval prices are falling, particularly at the lower end of the market (Halifax and Nationwide). The Rightmove index could suggest prices are about to start rising again, but is more likely accounted for by seasonal effects as Rightmove itself points out.
Ben Bernanke, chairman of the US Federal Reserve, said on Monday that regulators were “intensively” probing banks’ foreclosure practices and expected to produce results next month. Some of the largest US banks have halted moves to claim back homes from borrowers after it emerged that they had cut corners in preparing paperwork; state attorneys general are investigating allegations of fraud.
The Fed chairman told a conference on the future of housing finance that regulators were “looking intensively at the firms’ policies, procedures, and internal controls … and seeking to determine whether systematic weaknesses are leading to improper foreclosures”.
The impact of foreclosure documentation problems on the housing market is “still uncertain” and may cast a cloud over the sector for “the foreseeable future”, said William Dudley, president of the Federal Reserve Bank of New York.
Mr Dudley, a member of the Fed’s policy-setting Federal Open Market Committee, is a supporter of further monetary easing, saying recently “further action is likely to be warranted” by the central bank. This was interpreted as a sign that purchases of US Treasuries by the Fed – quantitative easing – would step up in November.
When the IMF evaluates a situation, the result is usually evenly balanced: it’s quite bad, they might say, but then this and this are quite good. So you notice right away if that counter view is missing and they say simply: this is quite bad.
This is how US real estate has been evaluated in the IMF’s latest Global Financial Stability Report. Look for the box Risks of a Double Dip in the US Real Estate Markets (p. xxxiii) – and then look for the good news.
“Powerful downside risks” to residential property prices include low demand; surplus of houses for sale; high rate of foreclosures; and rising ‘strategic’ defaults. But commercial real estate is worse.
“Banks face about $1.4 trillion in CRE loans expected to mature in 2010-14, nearly half of which are seriously delinquent or ‘underwater’,”
Central banks are debating whether they should extend their remit to spot asset price bubbles – but research from the Bank for International Settlements has just found that the ageing population will depress, if not reverse, price rises in future.
“In English speaking countries it seems that baby boomer purchases drove up house prices in the past, while their sales will drive real house prices down in the future,” writes author Előd Takáts. The US has apparently enjoyed an 80 basis point per annum (bppa) boost to date, but is facing a negative impact of 80bppa in future.
Eurozone housing markets are springing back to life. The European Central Bank reported on Tuesday that mortgage lending grew in June at the fastest annual rate for almost two years. Its latest bank lending survey, based on responses from 120 banks, showed second quarter demand for mortgages was the strongest since early 2006.
All of which tells a positive story about the eurozone—at least for eurozone optimists. While attention has focused on the problems of Greece, Spain and Portugal, households elsewhere have spotted that mortgage interest rates are at exceptionally low levels, and have been sufficiently confident about their economic prospects to buy a house.
A less positive interpretation is that consumers are worried about the stability of the euro and see bricks and mortar as a better investment. Gilles Moec, European economist at Deutsche Bank, warns that the ECB might also be less than pleased. He points out the sharp contrast between the revival in mortgage lending and the lifelessness of lending to companies.
If rumour is true, things are looking up for the 100,000 Hungarians more than 90 days past their mortgage due date. What’s left of Hungary’s international loan may end up in a mortgage-relief fund, intended to allow people to rent their homes, reports Reuters.
The new fund – reported in daily Magyar Hirlap and not yet confirmed by officials - would buy property (that would otherwise stand to be repossessed) from commercial banks, allowing mortgage-holders to rent the property. The paper also said that the bad loans of households would be replaced by state loans, though it did not name a source.