Everyone is aware now of the sluggish housing market in Spain and the fact that many people are still losing their homes. There is, however, another segment of the housing market that is seldom spoken of, but which is also being hard-hit by the current situation. And the banks – who started the whole “tumble” – and who “profited greatly” in creating the “tumble” – are still profiting BIG !
First, let’s talk about the homeowner. In the late 1990’s, banks developed a GOLDMINE in the housing industry…the equity loan. They began a huge marketing programme to encourage people to take their money (savings) out of their homes and spend it. They touted that the homeowner could “use the money for anything you want – a holiday, home improvements, education, new car, whatever”. The banks then proceeded to appraise the home over the home’s actual value and loan people equity up to 125% of the home’s value. This meant that people would no longer have any savings in their home – they would owe the whole value of the home at that time. Anyone who didn’t take out the money and spend it, was considered foolish – to have credit cards or pay interest on anything else, when they had money available in their home that they could pull out. People used their homes like an ATM. Anytime the bills got too big, they just refinanced and took cash out or borrowed on an equity loan. Who made the most with interest and fees ? The banks.
Who made the most money on these loans ? Yes, the banks. The homeowners didn’t care about the fees the banks charged or the closing costs. The only thing they looked at was the big fat amount of money they could pull out and spend – as if it were the lottery. Who profited big ? The banks.
As times were good and home values steadily increased, another segment of the housing market developed. In times of affluence, ordinary people became investors, buying villas and apartments to offer as rental property. This is an intelligent way to save money on taxes and serve those who cannot afford to buy their own home, by providing a nice place to live for a reasonable monthly rent. The other advantage, of course, was the appreciation on the property and having someone else help you pay the mortgage on the loan. The problem, however, was that much of the money they used to invest, came from home equity loans that they had taken out on their primary residences. The banks made this easier by providing “second mortgages”, with high fees of course, and added prepayment fees and penalties to ensure they made a high profit, regardless of the life of the loan and with second mortgages, you could buy a 2nd or 3rd or 4th property with very little deposit. But when the market values slipped and the appreciation never came, people lost money on the rentals and it resulted in losing on their personal residences also, because of the home equity loans we talked about above. The only ones still guaranteed to make money ? The banks.
Now, that people have spent all of their savings in their homes and they owe more than the home could be sold for, many homeowners are letting the house go back to the bank…in repossessions. As many repossessions as there are, it’s still a small percentage of the total market. Because it is such a small percentage, the banks can “dump” the houses for half of what would be the real value. This further devalues the market price of the other homes that are for sale. It’s peanuts to the banks, but to the other homeowners out there that have to sell for one reason or another – it’s devastating.
Worst part, when the crisis hit, the government instituted programs to bail out whom ? The banks !