Moody's: Spanish mortgage borrowers full recourse condition is robust, despite recent policy change

In Spain, conditions that guarantee the payment of a mortgage loan if the sale of the property at auction yields an amount that is lower than the outstanding debt ("full recourse") are being weakened, says Moody's Investors Service. However, the rating agency says that the full recourse feature of the Spanish market is still strong. 

"Our loss assumptions for Spanish residential mortgages heavily rely on full recourse conditions, and significant changes would trigger an increase in our expectation of losses. That said, Moody's base-case scenario is that the nature of the full recourse to mortgage borrowers remains robust, despite recent government initiatives," says Alberto Barbáchano, a Vice President and Senior Credit Officer at Moody's. 

"Under certain circumstances, recent policy changes would weaken full recourse conditions, which are a key strength of the Spanish market," says Juan Miguel Martin-Abde an Analyst at Moody´s. 

A non-recourse legal framework adversely affects the borrower's "willingness to pay". In theory, if house prices were to fall, borrowers with little or no equity in their properties would hypothetically be likely to default, regardless of their ability to repay a non-recourse mortgage. In such a scenario, the default frequency would increase as more borrowers walk away from their properties, which in turn would increase loss severity. 

Moody's report, entitled "RMBS -- Spain Full Recourse to Mortgage Borrowers Remains Robust Despite Recent Policy Changes," is available on www.moodys.com. The rating agency's report does not constitute a rating action. 

Moody's says the most recent Spanish government's initiatives aim to alleviate pressure on financially vulnerable borrowers, either by reducing their debt burden or by delaying house evictions. Several measures have been introduced to reduce borrower debt. For example, for first home properties, if the borrower pays 65% of the remaining debt in five years after repossession - or 80% in ten years - the lender is required to write-off the rest of the debt. 

Laws have also been amended to provide for a write-off regime for individuals entering insolvency. A number of passed laws have increased the moratorium period on evictions from properties being repossessed by creditors. The last update extended the moratorium by two years to May 2017. 

However, despite all the modifications, full recourse framework remains broadly unchanged. Changes to the legal framework were either minor, or applicable only to a small number of borrowers because of the tight eligibility criteria. 

The number of Spanish foreclosed mortgages that were taken to court stabilised to 68,000 cases in 2015 from a peak of 93,600 cases in 2010, close to the financial crisis. However, they have not returned to pre-crisis levels (around 26,000 foreclosures in 2007). This has also led to a reduction in the length of time taken to foreclose, thereby lowering the severity of losses on the loans. 

In Moody's view, available data underestimate the actual number of properties that have been repossessed by Spanish financial entities. Firstly, more than one property may have been involved in one foreclosure process. For example, it is possible for a single foreclosure process with a real estate developer to be linked to more than 20 residential properties. Secondly, Spanish mortgage lenders have generally become more willing to accept "Daciones in Pago" (payment in kind). Spanish banks hold €84 billion worth of foreclosed properties on their books as of December 2015 (according to the Bank of Spain).