Spanish Savings Banks Hiding Bad Mortgages To Avoid Downgrades

When we thought we had heard it all, Bloomberg reports today that according to independent CreditSights Inc., Spanish savings banks could be hiding their losses on home loans by taking non-performing mortgages out of securitized transactions. By using creative accounting, it rurns out that by carrying bad loans on their own books the banks can avoid downgrades to their MBSs.

The CreditSights reports shows that while the savings banks give little information about the state of their loan books, investor reports on the performance of the securitized debt suggest asset quality is weaker than at commercial lenders.

“Caja-originated mortgages are performing much worse than those extended by Spain’s commercial banks,”. By buying mortgages out of the pools “they could have been artificially reducing the level of bad loans in RMBS while simultaneously undermining the quality of the cajas’ own assets,”.

"A comparison of loans originated by commercial banks and cajas shows that delinquencies in the savings banks’ mortgages have been higher than those of the commercial banks for at least four years, the report said. Falling incomes caused by government austerity packages “would no doubt precipitate further rises in delinquencies,” CreditSights said".

“By buying the loans out of the mortgage pool, the cajas would be taking those weaker loans onto their own books,” “The current 3.7 percent serious delinquency rate may flatter the performance of the cajas mortgage books and underestimate their potential losses.”