Spanish Housing Related Suicides and Rules ... No Debt Discharge, Even in Bankruptcy

Spain's laws regarding foreclosures and mortgage debts undertaken by home owners seem like something left over from the dark ages.

While we in the U.S. may rightfully be accused of being too lax, Spain unquestionably is too harsh. So much so that two recent suicides have caused a national uproar and protest movement to occur.

Spanish Banks Freeze Some Evictions has the story:

"Spain's largest banks said Monday they had agreed to a two-year freeze on evictions of homeowners "in extreme financial need," amid a public uproar following the suicides of two homeowners facing expulsion.

The decision by the Spanish banking association AEB, for what it called "humanitarian reasons," came as leaders of the governing Popular Party and the opposition Socialists were to begin working on a bipartisan deal to change Spain's mortgage laws, some of which date back to the early 1900s....

Housing foreclosures are one of the most visible human dramas of Spain's economic crisis, with the number of court-sanctioned evictions climbing steadily since the collapse of a decade long housing bubble in 2008. Rising unemployment, which now exceeds 25%, is aggravating homeowners' difficulties in meeting mortgage payments.

Spanish courts authorized nearly 19,000 evictions during the second quarter of 2012, compared with 5,614 in the first quarter of 2008, according to Spain's General Council of the Judiciary. Courts have approved 203,808 evictions since 2008, from homes, warehouses and other types of property.

Of the €603.74 billion ($767.41 billion) in outstanding mortgages as of June, €19.12 billion, or 3.2%, were in default, according to Bank of Spain data.

Spain's mortgage laws give particular leverage to banks and other creditors. Even as they are forced to cede their homes to banks when they can't pay their mortgages, under Spanish law homeowners continue to carry mortgage debt left over after the bank auctions the home.

The issue gained prominence after two suicides in the past three weeks. A former politician in the Basque town of Barakaldo threw herself out a fourth-floor window, and a newsstand owner in Granada hanged himself just before or while being evicted, police said. A third homeowner facing eviction survived a suicide leap from a balcony in Valencia in October. . . .

In the past, Spanish banks have resisted major changes to mortgage legislation, warning it would drive up lending costs and increase defaults.

In Spain, "we're seeing terrible things and inhuman situations," Spanish Prime Minister Mariano Rajoy said late Friday during a meeting of his party. . . .

In the U.S., homeowners can free themselves from mortgages through bankruptcy proceedings....

Spain's financial sector is struggling to absorb large amounts of bad loans to real-estate developers, and the government this summer was forced to seek as much as €100 billion in European Union aid to bail out the weakest banks.

Allowing current mortgage holders greater power to renegotiate or ditch their debts across the board would force banks to re-evaluate the risk related to all such housing assets, said Miguel Hernández, a real-estate expert at the IE Business School in Madrid.

In that case, banks might have to further weaken their balance sheets by provisioning more money for potential losses."

SUMMING UP

Nothing good happens, either to borrower or lender, when people borrow money and later find they can't repay the loans as agreed.

In Spain, however, home related debt defaults and foreclosures have taken on a whole new meaning as people who owe money on home mortgage loans and are unable to repay it are never rid of their obligations. Even after foreclosure and bankruptcy. While that's not exactly what happened in medieval times and debtor imprisonment, it's close.

During the past several decades, we have "modernized" credit throughout the world and made it easy for people to borrow lots of money. By so doing we also have created enormous problems for those borrowers unschooled in the ways of basic personal finance. And overzealous lenders have suffered as well, as bad loans have weakened banks and thereby reduced the total amount of credit available to society as a whole.

In the U.S., homeowners have much of their personal wealth tied up in their home values. Meanwhile, government residential mortgage loan guarantees (Fannie Mae, Freddie Mac and FHA) now account for approximately 75% of the value of residential mortgages in the U.S.

So Spanish financial institutions hound individual borrowers until their debt is completely satisfied or they commit suicide, while in the U.S. we socialize the cost of default and stick it to the taxpayers as a whole.

Either way something is terribly wrong about all this. We need to help people learn more about the basics of borrowing to purchase assets and what happens when those assets decrease in value. 

The aftershocks of the housing price bubble have become a huge problem for both Spain and the U.S., and will continue to be for years to come, no matter how the losses associated therewith are handled.

Thanks. Bob.