When Borrowers Don't Pay, Should The Bank Take Everything?
Spain, like the U.S., is going through a huge real estate bust.
But only around 3.5 percent of Spaniards with mortgages stopped making payments last year. In the U.S., the rate was above 9 percent.
What's true for Spain is true for most of Europe: Homeowners are much more likely than Americans to keep paying their mortgage, even when the economy falls apart.
Maybe it's because European homeowners who stop making payments stand to lose a lot more than their American counterparts.
Consider what happened to Frédérique Létienne when the Spanish economy started to stall.
Frédérique translates technical documents from Spanish to French. She's French, lives in Madrid. Two years into the economic crisis, her work dried up. She couldn't pay the mortgage anymore.
"They called me every day," she says. "Telling me you have to put money. And if I had 100 euros, I used to put it in the mortgage. But it was never enough."
Frédérique panicked. She filled in for secretaries on maternity leave, temped at a restaurant, asked her ex-husband for money. She sold her grandmother's jewelry.
But if Frédérique had lived in the U.S., it's quite possible she never would have sold her family heirlooms or called her ex. She would have had another option: Give up.
If Frédérique walked away from her mortgage in the U.S., her credit score would be ruined, she'd lose her house. And then, most likely, the whole thing would be over.
In Spain, if Frédérique walked away from her mortgage, her credit score would be ruined, she'd lose her house — and then the bank could pursue her for everything else she owned. Her car, her investments. In a few years, if and when she does get a job, the bank could take part of her wages.
Most Spanish banks issue recourse loans. That means the bank can pursue and pursue until it gets its money back in full.
"That's it, I mean for the rest of my life" Frédérique says. "I can't do anything about it."
Javier Andrés, an economist at the University of Valencia, says this may not be a bad thing.
He says Spanish banks are suffering huge mortgage losses already. If people weren't afraid of the banks when asking to borrow money, things would have gotten even worse. "If you have this kind of regulation, then people would think twice before asking for a very high mortgage," he says.
In America, of course, the attitude is different — even among economists.
Atif Mian at the University of California at Berkeley says the problem with recourse loans is that people are afraid of their banks — which means they are also afraid of spending, of opening new businesses. In a recession, that's bad thing.
"If you force that person to sell their other assets as well, then that person may not have enough money to pay for their children's education," Mian says. "Or their health, or so on. So you need to be lenient toward such individuals."
No one has been lenient to Frédérique Létienne. Each month she comes up with a different short term solution. She's fearful. But she's not actually angry that things work this way.
"I knew if you take a loan and you don't pay it, the bank will go after you," she says. "It's normal. I mean, of course."
Someone gives you money, she says, you've got to pay it back.
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