The Spanish banks always looked vulnerable to me. I have criticised Santander several times on this blog.
But this story deserves more coverage. Ibex Salad – a blog about the Spanish stock market and olive oil business – is reporting that banks are taking the property they are repossessing from bankrupt property developers and selling it to their own staff at a 35 percent discount and with 100% percent financing.
This is called loss deferral. That is what distressed banks do.
But Ibex Salad makes the obvious point. For employees this has one side benefit – staff who borrow from the bank are more likely to keep their job. Probably a good deal for the bank staff – even if they are paying slightly over the odds.
John
Why loss deferral?
ReplyDeleteI assume the discount is in relation to market price.
If the property is valued in its books over the selling price, then the loss is instantly recognized, isn´t it?
And if it isn´t there is in fact a gain. And given that the buyer has a job (as long as SAN wants him to at least) and that the discount provides a cushion so that the collateral is good even with 100% financing, the mortgage shouldn´t be too risky.
This operations won´t make much money for the bank, but they serve to unload risk and real state.
i was also puzzled by the 'job security' comment. in most countries it is illegal to keep employees as collateral.
ReplyDeleteCome on - this is obvious...
ReplyDeleteIf you sell something with 100% loan - especially if that loan is limited recourse - you get a better price for it. Happened in US housing.
If Santander now sacks the employee the loss that was deferred is now realised.
Santander is about to downsize. If you are employee you have an opportunity to massively raise the cost of Santander sacking you.
J
Johns argument of course assumes a rational and internally well communicating bank.
ReplyDeleteJohn,
ReplyDeleteDon't assume Spanish mortgages are limited recourse. I haven't looked it up but they are almost certainly full recourse. This is common in Europe.
As long as the employees involved have assets, Santander is fine. On top of that, if they are fired and can then no longer afford the mortgage Santander will have their redundancy pay as additional collateral. Bloody clever really.
Now if they would just nationalize the banks in the US, the taxpayers would have no incentive to walk away from their mortgages anymore.
ReplyDelete40 acres and a mule. McMansion and an Escalade.