Foreclosures initiated by mortgage lenders were the lowest on record in 2022, suggesting that rising borrowing costs have not yet translated into a wave of mortgage defaults.

There were just 16,851 mortgage foreclosures initiated by lenders in 2022, down 19%, and the lowest level since 2014, when the National Institute of Statistics started publishing these figures.

Foreclosure initiations fell much more than the national average in the Canaries, with a 39% decline in Tenerife and 28% decline in Las Palmas, but in the Balearics, which also attract many foreign buyers, foreclosures actually rose by 47%, completely bucking the national trend. 

The overall decline got bigger as the year went on, with a 1% increase in Q1 turning into a 30% decrease in Q3, before falling back to -23% in Q4. The last quarter of the year was also the lowest quarter on record compared to Q4 going back back to 214, as illustrated in the next chart.

At the same time as mortgage foreclosures were declining, borrowing costs were rising fast with 12-month Euribor, the base-rate to which most Spanish mortgages are tied. It went from -0.478 in January 2022 to 3.018% in December, driving up monthly repayments for borrowers with annually resetting mortgages.

For reasons that are not clear, rising borrowing costs have not yet led to an increase in delinquent mortgages, as you might expect. The majority of new mortgages signed in 2022 were fixed-rate, which helps, but the majority of outstanding mortgages will be variable, so most borrowers in Spain will be feeling the pain of higher interest rates.

The Spanish government has put pressure on banks with a “code of good practises” to give borrowers in distress more breathing room, though there is no public data to quantify the impact of that measure. 

Yolanda Díaz, Vice President in the government from the hard-left Podemos party, proposed in February freezing all mortgages, effectively making them fixed rate, pointing to record banking profits whilst many families “are having problems paying the mortgage.” Apparently she hasn’t seen the latest mortgage foreclosure figures published by the National Institute of Statistics, which suggest that mortgage distress is at record lows. “It’s time to freeze mortgages and moderate the extreme profits of big banks so we all win,” she said.

Podemos argue that freezing mortgage rates is necessary to “restore social justice” but it also punishes fixed-rate borrowers whilst rewarding variable-rate borrowers who were happy to take on more risk in return for lower payments whilst rates were low. Nadia Calviño, the Vice President for the Economy, from the Socialist Party, says the government has already taken “the most adequate measures” whilst avoiding “negative collateral impact” and creating distortions between variable and fixed-rate mortgages.

The low level of mortgage foreclosures is a healthy sign that the homeowners are not in financial distress, despite rising inflation and borrowing costs. At least not yet. On the other hand borrowers are probably cutting back on discretionary spending whilst keeping up with mortgage payments, which is bad news for the economy.