Thread: Hopefully just a bad dream theory

Now here's a thought that maybe someone can help me with... It is not a prediction however a possible theory. I write it hoping someone can tell me I am so wrong. No-one has so far.....

The number of Spanish properties that have been repossessed by the banks are continuing to rise. Many have already been put up for auction but the outstanding debt and interests puts them in a price bracket that makes them impossible sale options for the banks. This has left only one alternative for the banks. Strike up agreements with large real estate agencies to sell the unwanted stock.

Fine but that still does not change anything. Not even the most naive buyer at this time is going to see the investment potential in the repossessions that are being offered at this time. Lets face it the auctioneers, bank managers and their mates are all likely to have already sold or bought the juiciest of repo homes before they have even reached the general public.

Some banks have therefore resorted to not even selling the property for a price but instead offered first time buyers with an attractive financial plan that allows them to afford a property of say 250.000 euro when their actual budget may only be 185.000 euro.

The estate agent that is viewing properties with that same first time buyer finally strikes a deal and finds them their perfect home. An agreement is reached lets say for 178.000 euros. Wonderful! Mr Estate agent and the happy home owner is close to making a sale......mmmmm we'll see.

The only thing now is getting the mortgage. No problem in theory, the buyers both have fulltime jobs, they both earn a good wage, they do not have any other debts, even their car loan is paid off and they also have savings. A dead Cert. I hear you say.

When the agent gets to the bank the manager simply says ok bring in the credentials and we'll look at the option. In the meantime what the agent does not know is that they are also being offered a repossession home that would normally be completely out of price range of the buyers but because the bank is so desperate to off load the stock, they are prepared to offer this financially viable candidate the debt of their lives. And guess what some actually take them up on the offer.

Why would you turn it down. There is not a hope in hell that the mortgage for the 178.000 euro house is going to be approved but the 250.000 euro bank owned house with an extra bedroom, larger garden, and lower interest rate is a less problematic and more attractive option..... And guess what the monthly repayment is practically the same as what a hypothetical mortgage for the 178.000 euro property would have cost them.

That is not the worry however. My worry is that there does not seem to be any laws in place that prevent Spanish banks from putting all of their repossessed homes on the market all in one go. Who cares? I hear you say if they are unsellable why should it be a problem.......

How about this then. What if the banks decide to start writing off their debts? Maybe they have started already....

Let's say that the bank takes a look at their overall debt and concludes that they have an overall debt of X billion euros

Let's say that as a result of that financial review they decide to have a meeting to decide how much debt that they are prepared to right off.

Let's say that the meeting is concluded by righting off X % of that debt.

Let's say that this then allows the agencies who have signed exclusivity agreements with the banks, to sell their product at a very attractive price. Wonderful I hear you say, problem solved!

What about the developers, agents and above all home owners that have been fighting through this crisis, paying their mortgages punctually, keeping their businesses afloat and keeping their bank managers happy?

What happens when the market that has been flooded with completely unsellable bank owned properties is then converted into highly attractive and competitively priced properties in relation to what the home owners and developers are offering.

As there is no control over what the banks can and cannot do this can only lead to one thing:

1. The courageous developers and agencies start to enter into financial difficulties for not being able to sell at all not even at the most attractive price. They cease to earn and cease to pay VAT / IVA and cease to pay their business loans.......

2. The home owner is also unable to drop his / her price enough to make it attractive as the pending capital on the mortgage alone is above the price that the banks are offering. And guess what the bank manger will say when Mr home owner / property developer / estate agent, wants to try and renegotiate with the bank?

In the meantime the government only starts to notice the problem when they are hit where it really hurts them as a result of a sudden decline in VAT IVA payments and corporation tax......

Knowing Spain the controls will be put in place after the problem has occurred and not before. I remain positive and have faith that this is just a "bad dream theory", and none of this is going to happen. Somebody please tell me I am completely mistaken.