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Aug 21, 2013 | 10:17 GMT

6 mins read

The Political Risks of Europe's Worsening Mortgage Crisis

(RAFA RIVAS/AFP/Getty Images)
Summary

With joblessness rising and incomes declining, homeowners across Europe are increasingly falling behind on mortgage payments, among other debts. Such delinquencies are threatening European banks, which in many countries are constrained by tight foreclosure restrictions and other factors that have made it difficult to enforce repayments or recoup losses. The problem has been made worse by homeowners exploiting foreclosure freezes by prioritizing other payments over their mortgages. Home ownership is a tricky political issue, however, and loosened foreclosure regulations could spark severe unrest. As a result, EU governments are struggling to strike a careful balance between the needs of their people and those of their troubled banks.

In Greece, the ruling coalition of Prime Minister Antonis Samaras' center-right New Democracy party and the center-left Panhellenic Socialist Movement is attempting to navigate a complex situation. Greece is going through its deepest economic crisis in recent history, and unemployment in the country reached 27.6 percent in May — the highest in the European Union. As a result, around a third of Greek homeowners are not making their loan payments, leaving banks in Greece with an estimated 17 billion euros worth of delinquent mortgages on their books.

On Aug. 17, Greek Finance Minister Yannis Stournaras announced that Athens is planning to lift temporary restrictions on foreclosures to make it easier for banks to recover some of their losses. The regulations were implemented early in the Greek crisis to prevent widespread social upheaval. Since then, the government has come under pressure from the European Union, the International Monetary Fund and Greek banks not to renew the restrictions when they expire in December. However, if the restrictions were indeed lifted, some 200,000 households could be affected, possibly sparking a substantial rise in social unrest.

The ruling coalition is already under considerable strain due to the departure of the left-wing Democratic Left party after Samaras decided to temporarily close public broadcaster ERT in June. The government's recent announcement that it plans to take a tougher stance on tax evasion has also been received with a mix of skepticism and anger by Greeks. Lawmakers from both parties have suggested that they might vote against lifting the foreclosure restrictions, casting further doubt on the future of the coalition.

Thus, the government will likely seek a compromise solution: Some homeowners, particularly those who have large incomes and other assets but who are exploiting the current regulations by not paying their mortgages, will be pushed to pay their debts. Others, particularly poor families with children or health problems, will be protected. In either case, the government will have difficulty enforcing the changes.

Hungary's Dilemma

The Hungarian government is dealing with similar issues. In the decade prior to the European crisis, most Hungarian homebuyers acquired mortgages denominated in foreign currencies, usually Swiss francs or euros. As Europe's economic crisis engulfed Hungary and the country's currency, the forint, lost value, it became more difficult for Hungarians to pay off mortgages. In 2011, the government of Prime Minister Viktor Orban attempted to ease the situation by forcing banks to accept a low, fixed exchange rate for foreign-denominated mortgages. But as Hungary's economic woes persist, the number of delinquent home loans in the country is rising.

Currently, around one-fifth of foreign-denominated mortgages in Hungary are overdue by more than 90 days, forcing Budapest to intervene once again. In late July, the Hungarian government announced plans to discuss with banks measures to address the problem of foreign-denominated mortgages. A formal proposal will be unveiled in September, when the Hungarian parliament resumes activity after the summer break. Though few details have been released, the plan will most likely include some new form of fixed exchange rate. The main issue under negotiation is who will pay for the difference between the fixed rate and spot rates. If the banks are forced to absorb most of the costs, their financial situation will be weakened substantially — as would the country's fiscal balance if Budapest takes on most of the burden.

Orban's political situation is similar to that of his Greek counterpart. While the Hungarian government is considerably stronger than the Greek government, the ruling Fidesz party's absolute control over the parliament will be vulnerable in elections in early 2014. Naturally, the Orban administration is eager to resolve the issue of foreign-denominated mortgages before then.

Moral Hazard and Tough Policy Choices

Home loan delinquency is forcing governments to balance the needs of banks with those of voters elsewhere in Europe as well. In Ireland, for example, where unemployment peaked at 15 percent between 2011 and 2012 and house prices have dropped 50 percent over the past five years, nearly one-fifth of all mortgages have fallen into arrears since the country's real estate bubble burst. However, a combination of legal obstacles, court rulings and Irish Central Bank policies has made it difficulty for banks to repossess homes. According to the banks, this situation has led "strategic defaulters" to prioritize paying down other debts before their mortgages, since there has been little risk of foreclosure.

Dublin received $87 billion from the European Union and the International Monetary Fund in November 2011 to assist Irish banks. Under pressure from its international lenders and domestic banks, the government recently reformed foreclosure regulations in favor of the banks. More than 50,000 homeowners are now facing foreclosure, though most probably will not be evicted because the new legal environment is likely to favor long-term restructuring of mortgages instead.

Europe's Youth Unemployment Problem

Europe's Youth Unemployment Problem

Spain, meanwhile, is dealing with the opposite problem, since the country's mortgage laws have been much less lenient on households. According to the Spanish Mortgage Association, nearly 400,000 families who fell behind on their mortgages were evicted between 2007 and 2012. This reportedly led to a spike in suicides among those who lost their homes. The issue received heavy coverage from the Spanish media and prompted the creation of anti-eviction activist groups.

Under social pressure, the government of Mariano Rajoy reformed the mortgage laws in early 2013, raising the minimum number of missed payments required before a bank can seek foreclosure from one to three. The changes also empowered Spanish judges to stop an eviction if the mortgage terms are considered to be abusive. But with the unemployment crisis worsening in Spain, so too is the problem of credit defaults. According to the Bank of Spain, nonperforming loans have become more common, accounting for a record 11.6 percent of total lending in June, compared to 9.7 percent a year earlier. Meanwhile, 4 percent of mortgages are nonperforming, up from 3 percent in 2012. Moreover, two-thirds of Spaniards who are struggling to pay their mortgages purchased their homes between 2005 and 2007, the height of the real estate bubble, meaning that most such homeowners still need to pay the majority of their loans.

Since the end of 2012, the promise of intervention by the European Central Bank brought some relief to eurozone countries, since borrowing costs have fallen. However, the EU crisis has long since become less a financial emergency and more one about unemployment. Joblessness is substantially weakening the banks and forcing governments to find ways to strengthen their financial sectors without abandoning households in distress and risking social unrest. Since high unemployment will remain a fact of life in most European countries for the foreseeable future, this balancing act too will continue.

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