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THE SPANISH HOUSING & MORTGAGE EXPERIENCE
José Ramón Ormazabal
Spanish Mortgage Association
Moscow, 27 Oct 2007
http://www.ahe.es
• The origins & evolution of the market
• Fundamentals of the growth of the
market
• Current situation & prospects
• Mortgage Market Legal Modernization
TABLE OF CONTENTS
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THE ORIGINS OF THE MODERN MORTGAGE MARKET
The Mortgage Law (1946)• Provides legal security to registered charge holders.
• Establishes the role of Public Land Registry, Public Notaries in the Registration Procedure and the Judiciary in Foreclosing Procedures.
• Establishes the principle of Right of Credit. Accessoriness.
IT PROVIDES LEGAL & OPERATIONAL SECURITY
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THE ORIGINS OF THE MODERN MORTGAGE MARKET
0
0,2
0,4
0,6
0,8
1
1,2
1,4
DK NL E D UK F PT I
TIME TO REGISTER MORTGAGE, MONTHS
TIME TO REPOSSESS, MONTHS
0
10
20
30
40
50
60
70
DK NL E D UK F PT I
SOURCE:EUROPEAN MORTGAGE FEDERATION
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THE ORIGINS OF THE MODERN MORTGAGE MARKET
LAW 2/1981 & ROYAL DECREE 685/1982
THE MONCLOA AGREEMENTSOctober 1977
ITEM V.9ITEM V.9Removal of Legal and Administrative obstacles
preventing the creation ofAN EFFICIENT MORTGAGE MARKETAN EFFICIENT MORTGAGE MARKET
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The 1982 Mortgage Market Law
• Opens up the Mortgage Market to all types of Banks.
• Fosters the creation of single purpose Mortgage Entities.• Establishes the conditions for Loans to be under the umbrella of this Law:
- Purpose of the Loan - Maximum LTV’s. 70%. (80% for housing) - First rank charge over full property dominion - Damage Insurance Policy
• Valuation methodology, rules and supervision of Valuers are established.
THE ORIGINS OF THE MODERN MORTGAGE MARKET
• Establishes new rules for Mortgage Funding Instruments.
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EVOLUTION OF MORTGAGE LENDING OUTSTANDING
0
100.000
200.000
300.000
400.000
500.000
600.000
700.000
800.000
900.000
1.000.000
1.100.000
Mill
ion
Eu
ro
DEC -8112,921
Source: Bank of Spain and Spanish Mortgage Association (AHE)
JUL - 071,.005,594
Million Euro
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SPAIN IN 1996
• Unemployment Rate: 24%• 5 years of negative housing cycle. Accumulation of
unsatisfied housing demand.• Solid Banking system with strict Banking Supervision.
Need to commercially grow in a context of poor consumption level. High liquidity with low credit demand.
• Newly elected Government. Need to streamline the economy to comply in January 1998 with Euro convergence rules.
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1996
42,0757,93
2006
60,0
40,0
MORTGAGE CREDIT
OTHER CREDIT
Source: Bank of Spain and AHE
2030405060708090
100
dic-
96
jun-
97
dic-
97
jun-
98
dic-
98
jun-
99
dic-
99
jun-
00
dic-
00
jun-
01
dic-
01
jun-
02
dic-
02
jun-
03
dic-
03
jun-
04
dic-
04
jun-
05
dic-
05
jun-
06
dic-
06
%
1996: 23,50% 2006: 90,56%
TOTAL DOMESTIC PRIVATE LENDING
1996-2006 MORTGAGE CREDIT AS A % OF:
GROSS DOMESTIC PRODUCT
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0
50.000
100.000
150.000
200.000
250.000
300.000
350.000
Mortgage Backed Securities Covered Bonds
5
10
15
20
25
30
35% 37%
7%
Secondary Market Evolution (AIAF)Mortgage Covered Bonds (Cédulas) Dec-06: € 214.8 billion (05-06 growth: 43%)
MBS Dec-06: € 93.7 billion (05-06 growth: >40%)
Total MCB & MBS: € 308,5 billion (05-06 growth: 40%)
Mortgage MCB & MBS as a % of Mortgage Credit
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HOUSING ACTIVITY
Source: Ministerio de Fomento
100.000
200.000
300.000
400.000
500.000
600.000
700.000
800.000
Uni
ts
HOUSING STARTSHOUSING COMPLETIONSLíneas 3
IN 2006 HOUSING STARTS: APPROX. 740,000HOUSING COMPLETIONS: 584,881
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EMPLOYMENT EVOLUTION IN THE CONSTRUCTION
INDUSTRY (People ‘000)
900
1.100
1.300
1.500
1.700
1.900
2.100
2.300
2.500
2.700
% of total new jobs in construction: 19,6%
Peak to valley value: approx 1.526.000 people new employment
Source: INE
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250
300
350
400
450
500
550
PT IR BE AT FR H SW DE UK IT DK FIN GR ES
(*) Source: The Housing Unit (UEPC)
Simple Average: 440,2
528
HOUSING STOCK PER 1,000 INHABITANTS IN EUROPE
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HOUSING PRICES EFFECTS ON THE MARKET
Positive Effects: Rise on Real Estate Wealth
Setbacks: Increasing need of Mortgage finance 1. Deterioration of the debt to income ratios…2. Lower-Income groups out of market: young people…But still, Net Real Estate Wealth,…a very positive effect....
House Price Index Base100=1995
100
150
200
250
300
350%
Source: Ministerio de Vivienda
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2005 Owner Occupation Rates in European Countries
86
8077
75 74
7168
6764
57 5654
5249
43
40
45
50
55
60
65
70
75
80
85
90
ES IT IR PT GR UK BE LU SF AT FR NL DK SE DE
Ave. EU25: 65,0%
Source: European Mortgage Federation
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HOUSEHOLD REAL ESTATE WEALTH NET OF MORTGAGE DEBT
200
300
400
500
600
700
800
%
% of GDI % of GDP
754 %
479 %
380 %
267 %
(*) Since mar-05 the data estimated due to the change of housing prices statisticsSource: Bank of Spain
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STRUCTURE OF RESIDENTIAL GROSS LENDING 2004-2006
2004 2005 2006
First Home: 34,3 35 36,8
Second House 20 22,5 24,7
TOTAL HOUSE 29 31,5 34,4
Others (*) 15 21 21,5
SOURCE: AHE (*) Including Renovation, Improvement works, garages, etc.
2004 2005 2006
First Home: 71,5 71,9 68,95
Second House 60 64,5 65
TOTAL HOUSE 65 66,5 68,2
Others (*) 40 46 45
DEBT-SERVICE TO INCOME RATIO (%)
LOAN TO VALUE (%)
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THE SPANISH HOUSING & MORTGAGE EXPERIENCE
1. FUNDAMENTALS OF DEMAND
HOW HAS THIS EVOLUTION BEEN POSSIBLE?
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4.482.568
499.773
0
500.000
1.000.000
1.500.000
2.000.000
2.500.000
3.000.000
3.500.000
4.000.000
4.500.000
5.000.000
Non-residents growth: > 4 million>10% of total population
EVOLUTION OF LEGAL FOREIGNERS IN SPAIN
50
100
150
200
250
300
350
400
450
500
550
6003.85 million new households
NUMBER OF HOUSEHOLDS (000s)
Source: INE
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0
5
10
15
20
25
30
35
UNEMPLOYMENT RATE
Unemployment rate Unempl. Rate for women
11,368,30
24,1716,09
31,9623,9
Evolution of number of people in employment (million people)
0
5
10
15
20
25
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Men Women
2006: 11,8
2006: 8,2
Total 06: 20,0
Source: INE
RISE 94-06
Men: 3,7Women: 4,0
Total: 7,7
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THE SPANISH HOUSING & MORTGAGE EXPERIENCE
2. FUNDAMENTALS OF (MORTGAGE CREDIT)
SUPPLY
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LTV and Loan term evolution. 1st. Time Buyers
55
60
65
70
75
80
85
10 15 20 25 30Term (years)
LTV
Evolution of Mortgage Market Reference Rates
2
4
6
8
10
12
14
16
IRMH Euribor
1990
1995
2000
2007
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Interest Term Installment per Minimum Installment as %Rate (years) 10.000 euro Salary Minimum Salary
1990 16,66 12 160,93 300,57 53,51995 11,01 17 108,60 376,83 28,82000 6,37 22 70,52 424,80 16,6
2006 4,12 26 52,28 540,90 9,672007 5,5 27 59,31 570,60 10,39
AIndebtedness capacity evolution
Access to Access to housing housing
A:A: x 5,15x 5,15
B:B: x 3,3x 3,3
A/B:A/B: approxapprox x x 1,51,5
Source: Bank of Spain and INE. Data up to July 2007
0
20.000
40.000
60.000
80.000
100.000
120.000
140.000
160.000
eu
ros
Average Mortgage Loan Amount B
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THE SPANISH HOUSING & MORTGAGE EXPERIENCE
CURRENT SITUATION
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MORTGAGE LENDING OUTSTANDINGYEAR TO YEAR VARIATION RATES
23,4
18,8
27,5
12,6
26,9
12,4
14,5
16,7
21,9
24,5
24,1
20,79
19,2
19,6
21,820,7
19,1
13,2
15
8,9
16,9
21,4
28,4
12,6
5
7
9
11
13
15
17
19
21
23
25
27
29
Source: Bank of Spain and Spanish Mortgage Association (*) Data of 2007 corresponds to July
INCREASE IN TOTAL OUTSTANDING JULY 2007: 18,8%
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NUMBER OF MORTGAGE LOANS PROVIDED SINCE 1995
530,7
652,3
817,8
921,4938,7
931,01.022,3
1.076,6
1.266,2
1.505,4
1.670,01.600,0
0
200
400
600
800
1000
1200
1400
1600
1800
'000 M
ort
gage L
oans
Source: Bank of Spain and AHE
1.7 1.6 million mortg.
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EVOLUTION OF HOUSING PRICES IN SPAIN
100
150
200
250
300
350
Ind
ex 1
00=19
95
0
2
4
6
8
10
12
14
16
18
20
An
nu
al r
ate
%
New House Price Index Year to year Variation rate
9,1%
12,8%
17,2
5,8%
Source: Ministerio de Vivienda
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PROSPECTS 2007
Positive evolution on households’ income and employment and Demographics and Foreign Investment
MODERATION OF DEMAND and gradual PRICE ADJUSMENT
GROWTH MORTGAGE LENDING OUTSTANDING IN 2007: 14%
GROWTH IN HOUSE PRICES (approx 3%)
DESPITE Increasing path of real mortgage interest rates
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Source: AHE, Bank of Spain and INE.(Data for 2007 estimated for the 3th quarter)
HOUSEHOLDS’ AVERAGE MORTGAGE DEBT-SERVICE ANNUAL COST
3.0003.5004.0004.5005.0005.5006.0006.5007.0007.5008.0008.5009.0009.500
10.00010.50011.00011.500
eur
os
Initial Cost Current Cost Estimated Cost for 2008
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Mortgage delinquency rates
0
1
2
3
4
5
6USA France Italy
UK Canada Australia
Spain
Percentage of outstanding amount of loans
Source: OCDENote: Loans refer to mortgages for all countries except Finland and Italy where they include all loans to the households sector. For Italy, they refer to new bad debts during the year as a percentage of outstanding loans.
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92
7367
6258
51 48 48
0
10
20
30
40
50
60
70
80
90
100
UK NL FR DK PT IT E D
WEAK POSITION IN EUROPE WITH REGARDS:INNOVATION– NEW PRODUCTS – TYPE OF BORROWERS
8581 81
77
6562
58
35
0
10
20
30
40
50
60
70
80
90
DK NL FR UK IT D E PT
TYPE OF BORROWER AND PURPOSE RANGE OF PRODUCTS
Source: “Study on the Financial Integration of Mortgage Markets” EMF and Mercer Oliver Wyman
WEAK POINTS OF THE CURRENT MODEL
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WEAK POINTS OF THE CURRENT MODEL
Since 1994
• INTEREST RATE: VARIABLE RATE (30% -> -> 98,25%)
• REFERENCED: EURIBOR 12 MONTHS• VARIABILITY: 6-12 MONTHS
ATYPICAL PROFILE IN EUROPE
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Share of adjustable-rate in housing loans
Per cent
0
10
20
30
40
50
60
70
80
90
100
J PN NLD DEU DNK CAN FRA USA SWE NZL GBR AUS ITA IRL FIN ESP
Outstanding loans New loans
Source: European Mortgage Federation and OECD
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FUTURE LAW OF MODERNISATION OF MORTGAGE MARKET
• To expand mortgage product completeness
• To promote portfolio transfers
• To fine-tune regulation on mortgage funding instruments.
• To promote the development of equity release products. Regulation on Reverse Mortgage
• To enhance Valuation Companies independence
