Up to 80% of Spanish mortgages attach “floors”. They are clauses that do not allow consumers to take advantage of a possible Euribor index fall. For instance, if the mortgage credit is at an interest rate of 2% but has a floor of 3%, the client cannot benefit from any rate decrease under the limit of 1%.
There are not registers or official data about the number of mortgages affected by that requirement, but market sources point out it could be some 80%, which would represent around four million loans for house buying. According to the Bank of Spain’s latest data, published in 2009, one out of three mortgage contracts included floor clauses, so that real figures of affected people could be lower. The Spanish consumer association Ausbanc was the first to identify that abusive practice as well as to file a lawsuit against three entities: BBVA, Cajamar and NovacaixaGalicia (NCG).
The Spain’s Supreme court ruled in the clients’ favour on May 9 by declaring void these banks’ floor clauses. The banks’ reaction came on Thursday with the announcement by BBVA and Cajamar of their floor mortgages portfolios cancellation. Just BBVA had 426,000 affected clients. On Friday, NCG joined with 90.000 concerned mortgages. The three entities’ decision coincides with the court’s ratification: the clauses considered void will be only those that does not enable the consumer to know the real distribution of changing interests rates risks. Also, if the clause does not meet any of the transparent demands required by the the ruling, it will be immediately declared void.
Therefore, mortgages will be cancelled in the case they have the appearance of a variable interest loan; include simultaneously floor and ceiling references; do not specify that the floor is an essential item of the contract or cloud its nature under an overwhelming mass of data.
Now the doubt is to know if the contagion effect among the other banks holding mortgage floor clauses may be activated. “Santander and Bankinter do not have floor clauses, and the rest of the industry need to be sentenced first for lack of transparency in order to see their floor contracts cancelled,” Sabadell analysts explain.
As a consequence of these clause cancellation, BBVA expects its profit to be trimmed in €35 million in June. Beatriz Serrano at Santander said “the impact beyond this month will depend on the Euribor evolution in the next twelve months, which dropped to 0.484% in May vs. 5% in 2008.”
In the case of Banco Popular and Caixabank, the effect of floors cancellation in their retail business is higher than in their counterparts. According to Sabadell’s estimations both banks would suffer an annual net income cut by -22% y -8% respectively.
From ACF, Irma Garrido believes that, “the decision comes in a year still difficult and nuclear for the banking sector with provisions to be set ahead of possible new recapitalisations. It is also a proof of the high legal uncertainty within the sector due to the permanent change of rules. The news will bring revisions of estimations and of sustainable returns of equity.”