How the subprime mortgage found a home in the Spanish market

To the rest of the world it became known as the subprime mortgage, but in Spain it is remembered as the "welcome mortgage." It was specially designed for immigrants in 2005, at the height of the property boom, by Spanish mortgage brokers such as CreditServices. With nothing more than a three-month work record in Spain, these companies offered new arrivals to Spain mortgage loans that covered 120 percent of the value of a property. All the costs, fees and commissions would be covered by the loan, and the buyer would become a Spanish homeowner without having put down so much as a cent. The loans were organized through US companies, none of which had any physical presence in Spain, preferring to use fronts such as CreditServices instead.

CreditServices once had 600 branches throughout Spain. It now has just 80

The company owner said he had earned more than one million euros in commission

At one point, the company was signing around a thousand such mortgage deals each month. The US banks behind the scheme were particularly interested in the profile of CreditServices' clients because they were in no position to negotiate and accepted higher interest rates than those offered by Spanish banks, or because they were unable to decipher the complex calculations that would see their repayments rise incrementally over the years.

What's more, the immigrants weren't about to bolt: they had come to Spain for good, says Javier López, the president of CreditServices. He adds that the company offered other financial products to a range of clients, and that at its peak, CreditServices had almost 600 branches throughout Spain. It now has just 80.

There are few better analogies for Spain's boom and bust economy than CreditServices. Its rise and spectacular fall has seen it go from mortgage giant - at its peak it had some 50,000 customers a year - to debt collector. "I'm adapting the business to new realities," says López, adding: "We have come up with some new products, but they aren't as profitable." Five years on from the collapse of the property market, López says that unless Spain's banks offer refinancing terms, some seven million home owners will end up defaulting in 2011. He should know - many of them will be his subprime customers.

In October 2007, at a conference to announce Banco Santander's quarterly results, the bank's number two, Alfredo Sáenz, addressed the issue of subprime mortgages. "Of course there are subprime mortgages in Spain," he said. "It stands to reason." He then went on to add: "The criteria by which mortgages are termed subprime in the English-speaking world can be applied to Spain."

The CEO of Spain's biggest bank also referred to "vices that we all know about," meaning the concession of loans way above the 80 percent of a property's value considered prudent, or the practice of giving mortgages whose repayments would require significantly more than 35 percent of annual income, and "forced" valuations to push up the price of a property.

Sáenz was merely describing the bare bones of the situation. People like Jairo González and Noemí Ramos, an Ecuadorian couple in their mid thirties, can provide a more detailed picture. They bought a property in January of 2007, when the property bubble was fast deflating. The loan was negotiated through an outfit called Central Hipotecaria del Inmigrante, based in the working-class Madrid suburb of Aluche.

"Before they handed over the keys to the property you were buying, you had to sign as the co-owner of another," says González. Once that was done, there was no way out. The mortgage intermediary charged 17,000 euros in commission, and the sum was not recoverable if he and his wife decided not to go through with the purchase. They only discovered the mess they had gotten themselves into when they sat down in the notary's office to sign the papers. They knew that they had been tricked, but couldn't afford to lose 17,000 euros. Noemí Ramos is eight months pregnant with their first child, and the couple expect to be evicted any day, with the property they bought sold off to pay their debts to the bank. The complexity of the operations that enabled people like Noemí Ramos and Jairo González access to mortgages that they were never going to be able to pay back would have many financial experts and accountants scratching their heads.

"On my paperwork it says that one of the co-owners is a 60-year-old lady who was given a 30-year-mortgage. How did that come about? Well, they put down a couple in their mid-twenties on her contract as co-owners, so the repayment period was calculated on the basis of the three," says González. He adds that the owner of the company that organized the mortgage told him one day that he had earned more thanone million eurosin commission.

The couple is just one of many tens of thousands who are now waking up to the horrible reality of owning a property bought through a subprime mortgage, and who believed the lies they were told about how they could repay loans worth hundreds of thousands of euros on monthly salaries of around 1,000 euros. Needless to say, all of those properties have fallen sharply in value over the last couple of years, so these new homeowners cannot even sell their properties to pay off their debts. And because the properties are bought between a number of co-owners, when one person in the chain is unable to meet their repayments, the bank takes action against the others. In 2009 alone there were more than 90,000 repossessions; the figure for this year is expected to be double that. The hardest hit by the collapse of the subprime scam will inevitably be the most vulnerable: those on the lowest wages - many of whom are now unemployed - and who bought into the dream that they too could become homeowners.

These low-income families from Latin America were prey to unscrupulous operators who had set up a complex system that seemingly allowed them to buy not just one, but two properties, and using the money from the very banks that would have turned them down if they had approached them directly. Lawyer Rafael Mayoral, who works with such families to help them hold on to their homes, describes the scam: "The mortgage company had a list of clients of different ages and in different situations, and would move them around like pieces in a jigsaw puzzle until they fitted into an operation." He has already brought charges of fraud on behalf of Jairo González and Noemí Ramos against the person who negotiated their loan, along with those behind the loans of four other people who are co-owners of the properties.

The coming months will see many more such lawsuits. Carlos Guerrero, a lawyer at Sofos Consulting in Barcelona is a specialist in repossession cases. He says that the sums that his clients are being expected to repay are so astronomical that he is considering bringing charges against the banks, real estate companies, and valuers involved in the subprime scams as well. "This is fraud on a massive scale," he says. "There is a clear intention to defraud, and there are people whose lives have been ruined. This is a scam."

"In 2006, the banks' lines of finance were cut," he continues. "But many bank managers were still able to get their hands on money for loans. The mortgage companies knew who they were, and so along with the bank manager and his pal the property valuer, they cut a deal to share out the commission." Guerrero says the key to these scams was the valuer. "The value of a property was decided in accordance with the amount of money the bank manager knew he could get his hands on," he says.

Guerrero reads out a deposition he has recently brought before the courts. "We were the victims of a series of frauds carried out by what seemed to be legal means with the aim of eluding the financial risk controls, and that were dependent on the supposed professional credibility of those involved and their apparent legality. We put our interests in these people's hands believing in their diligence and professionalism, in their good faith, and in the prestige of the entities they worked for." In this particular case, the mortgages were signed by Caja España, Ibercaja, Caja Madrid and Caja de Ahorros del Mediterráneo.

Another lawyer, Mario Barguño of Equilibrio Financiero, who also works with families struggling to get their finances in order in the face of claims from debtors and banks, says he has even come across cases of forged documents, such as wage slips, so that applicants could meet the requirements for a mortage. "The banks were caught up in a race: whoever wasn't lending money was losing."

Needless to say, the mortgage companies see things differently. Germán Navarro is the spokesman for API, the body that represents the country's 5,500 mortgage brokers. He says that he is all too aware of the legal loopholes that allowed low-income immigrants to borrow money to buy a property.

"The trick with these kinds of operations is to act fast, so as to fly under the radar of the Bank of Spain," he says. He explains how the country's central bank updates bank loans every 10 days. If two loans are carried out at the same time, the Bank of Spain is unable to detect whether the person being given the loan is able to repay it or not. The maneuver involves a borrower being the 80-percent owner of one property, and the 20-percent owner of another, or by guaranteeing the loans of others, who in turn guarantee those of other borrowers.

Navarro says that he does not approve of such practices, but he also says that mortgage brokers are not to blame. "Who is tricking whom?" he asks: "The borrower, or the bank? It is up to the banks to decide on how loans are granted and what the requirements are and the procedures to be followed." He says that his job, and that of any mortgage broker, is to find the bank best disposed to lend money for a mortgage. "For example, a bank branch needs customers. The manager of the branch tells the brokers that he needs to generate a certain number of clients. So he says to you, 'The other banks won't look at you, but if you come to me, no problem'."

Navarro's position is that the risk factor is not his problem. "The job of the broker is to handle as many operations as possible. The broker is not interested in knowing whether somebody is solvent or not - that is the bank's problem. You tell the client that they will have to pay - 1,000 a month for the next 25 years. If he accepts that deal, then it's not up to me to tell him what to do. And if the bank is happy..."

But of course, one important thing has changed in the aftermath of the collapse of the property market. "A decade ago, it didn't matter how much money you were lending, because the property would double in price by the next day. So it didn't matter if the borrower couldn't pay, because the property kept on rising in value. That is the guiding principle here," says Navarro, laying the blame at the feet of the valuers, whom he dubs "His Master's Voice."

"Valuation is a tricky business. Obviously, bank managers had their friends," he says. In other words, properties were valued according to the needs of the bank manager. "I am sure that in every bank at one time or another somebody must have raised the alarm, and I'm sure that the person would have been demoted to making the tea the next day," he says.

In any event, even as the property tsunami was about to come crashing down, new ways were being dreamed up to grant loans to people that couldn't repay them. For example, Josep F. was paying 300 euros a month on his 60,000-euro apartment when in 2008 he decided to take up the offer of a "change your house mortgage" through brokers UCI, linked to Banco Santander. He was going to set up home with his girlfriend, was earning around

1,700 euros a month, and was told that he would have no problem meeting the repayments on a property valued at 330,000 euros. "They sell the whole thing to you in terms of 'don't worry, you'll simply sell the house.' But they knew that this wasn't the case." He and his girlfriend signed a deal whereby they only paid the interest for two years, during which time they would be able to sell his old apartment, which would reduce their total mortgage to 240,000 euros.

But the old apartment remains unsold, and in just three months, the couple will be facing a 2,000-euro-a-month mortgage repayment, which will sink their finances without trace. What's more, before signing the deal, nobody told him that the full extent of the debt he owes is actually 427,000 euros. "The best clause in the whole contract is the one that says that the notary pledges that you are fully aware of the conditions and terms of the contract that you are signing," says Josep. "The notary also pledges that you were given the contract to check it over. We had negotiated a 35-year repayment period, but this was changed without our knowledge to 40 years."

So why have mortgages of this type continued to be granted, even after the collapse of the property market, and when the risks are all too evident? "It was clear by 2007 that unemployment was going to skyrocket," says Javier López. "But the banks needed the money. Branch managers were given 20-percent-a-year target increases. I remember branch managers telling me that they needed a thousand mortgages before the end of the year or they wouldn't get their bonus. He says that 90 percent of these mortgages were financed through US banks.

He also rejects any suggestion that the banks, the mortgage brokers, or the valuers acted wrongly. He also denies that borrowers did not know what they were signing. "People don't like to think about risk, they want to buy. Why do you think we ask for a guarantor? That only happens when we think that there is a risk of non-repayment. The Americans told us that given that the guarantors are putting everything they have up as collateral, then we could go ahead. How can you call a mortgage with three guarantors subprime? These deals are not signed in a bar. The borrower is aware of what they are getting into in 99 percent of cases."

Nobody knows exactly how many "welcome" or subprime mortgages are out there. In November, the Bank of Spain's magazine Estabilidad Financiera published a piece pointing out that between them, Spain's banks and savings banks are exposed to more thanone trillion euros in loans (a sum equivalent to the country's GDP). Of these, 600 billion euros are for home loans. Of that, 16 percent are for more than 80 percent of the value of the property. At the beginning of December, the Bank of Spain said that banks must publish the details of their exposure, information that had been confidential up until now.

For the moment, until the good times return, mortgage brokers have turned their skills to creating new financial instruments more in keeping with the times. If borrowers are going to be able to continue repaying their loans, then they will need to reduce their monthly repayments, and that means extending the period of time that they can do so, which in some cases means until the borrower is into their nineties.

This may be simply making the problem worse in the long run, but from previous behavior, mortgage brokers and banks haven't exactly distinguished themselves with their long-term approach. Meanwhile, more families are being evicted and losing their homes. In just one Madrid court alone, there were 970 evictions in 2007; that figure rose to 2,944 last year. Up until June this year the figure stood at 2,000.