Francisco Torralba has a fascinating look this week at the differences between the mortgage securitization markets in the USA and in Spain. Spain has experienced a much bigger housing bubble than the US, but the problems there are tiny compared to the crisis over here.
A lot of Spain’s best practices would indeed be welcome in the US – not least the fact that the central bank requires banks to post an 8% capital charge against SIVs and other off-balance-sheet entities. That said, there’s one big reason there hasn’t been a financial crisis in Spain to match that in the US, and it has nothing to do with regulatory oversight. Rather, it’s the simple fact that the mortgage default rate in Spain remains very low.
Yes, that’s partly because the regulatory structure encourages banks to be more careful with their underwriting. And it’s also because mortgages are recourse to the homeowner in Spain, which makes the cost of default much greater. But it’s mainly because – so far – there are relatively few Spanish homeowners suffering from negative equity. If the Spanish property bubble bursts and people end up with mortgages far bigger than their houses are worth, there might yet be systemic financial repercussions in the country.
Update: Alea points out that Spain’s housing sector is in a recession, even if the country isn’t; and Torralba himself, in the comments, says he thinks a full-blown recession in Spain is "likely". So, not the best headline I’ve ever written. (Personally, I’m quite fond of this one.)