Spain faces up to social cost of forced evictions
* Government to change law to protect most needy
* Any law change will not let homeowners off hook
* Many left homeless and with huge debts
By Sonya Dowsett
MADRID, Nov 15 (Reuters) - Sixto Segura and Susana Reyes sit in their modest flat in a Madrid suburb waiting for the police to evict them from their home.
Reyes, 57, can barely move and has difficulty talking because of a stroke. "I don't know what I'll do when the police come," she says. "I can't move."
The couple have nowhere to go. Their two adult daughters each live in a rented room with their husbands and children and cannot accommodate their parents.
Segura and Reyes bought their flat for 200,000 euros ($254,200) in 2006 with a loan from Santander that practically covered the price, Segura says. But then he lost his job in construction and Reyes's restaurant work dried up.
Rising interest rates pushed their monthly mortgage payments to 1,200 euros from 900 euros. They stopped making them in 2009, and now face life on the streets.
Cases like this have become increasingly common in recession-bound Spain, where a 25 percent unemployment rate coupled with drastic government spending cuts has pushed society's most vulnerable further into crisis.
Spanish banks that gave out cheap home loans at the height of a property boom which collapsed in 2008 are facing public anger as more homeowners are evicted for failing to keep up with mortgage payments in a country with a glut of 1 million empty homes.
After protesters took up their case, Segura and Reyes won a court order delaying their eviction, but that extension expires next month.
Banks, many of which are about to receive the first funds from a 100 billion euro credit line from a European bail-out, have repossessed close to 400,000 properties since 2008 although not all of these are residential.
The suicide last Friday of a 53-year-old woman facing eviction, the second in as many months, grabbed headlines and pushed the issue to the top of the political agenda.
The government has created a working group with the opposition Socialists which has met over three days to discuss ways of helping the most needy. It hopes to pass measures into law by decree on Thursday.
These measures will most likely take the form of a two-year moratorium on mortgage payments for homeowners in extreme financial need, political and legal sources said.
The government is wary of creating the image that Spain is relaxing rules on the payment of mortgage debt. Any change in the law will not let homeowners off the hook and will not be retroactive in nature, a source close to the government said.
"We cannot project the image that in Spain you don't pay your mortgage and you end up keeping your flat," the source said.
Banks are working with the government to prevent the eviction of vulnerable people. The Spanish Banking Association (AEB) said its members had agreed with the government to suspend eviction cases for two years for those most in need.
The leaders of Spain's top four listed banks - Santander, BBVA, Popular and Sabadell - met at the association's headquarters on Tuesday to discuss the matter, banking sources said.
"Banks haven't been very popular, so they are willing to make some effort here, but there's unlikely to be a dramatic change in the law. It will be for the most desperate cases," said Carles Vergara, economics professor at IESE business school.
Mortgage law in Spain is amongst the toughest in Europe. Homeowners remain liable for what they owe on their loan, even after returning the house to the bank, if the value of the house does not cancel out the entire mortgage debt.
In a country where home ownership is over 80 percent, residential mortgages classified as doubtful at end-June stood at 3 percent of the total, a fraction of the 27 percent classed as doubtful on loans to real estate developers, Bank of Spain data shows.
By contrast, 11 percent of residential mortgages in Ireland - also suffering the aftermath of a housing crash - were in default at end-June.
A point of concern for investors is that any change in the mortgage law could affect mortgage-backed bonds, a major source of financing for Spanish banks.
Spanish banks have 426 billion euros of these securities in circulation, according to the Spanish Mortgage Association, with a large part parked in the European Central Bank as collateral for funding.
If rules were relaxed on paying back mortgages, defaults could shoot up, weakening the loans backing these securities. But bond analysts said there was little chance of this.
"ON THE STREET WITH A HUGE DEBT"
A moratorium on the mortgage payments for the most needy would not affect covered bonds, analysts said, as these loans would probably already have been written off by banks.
"What would concern investors is if a change in law reduces collateral to issue mortgage-backed bonds in the market or access the European Central Bank," said Bernd Volk, covered bond analyst at Deutsche Bank. "But I can't see this happening because of a freeze in foreclosures."
Lawyers and government sources agree a change in the law to allow homeowners to hand over their keys and walk away from their house with no debt when they can no longer pay the mortgage is highly unlikely.
But with house prices down around 30 percent and predicted to fall further, many of those evicted from their homes are left owing the bank tens of thousands of euros.
"In Spain, the bubble was so big, that the debt people are left with is sheer madness," says Mauricio Valiente, a lawyer who helps evicted people.
Rosa Quituizaca, sitting in protest outside a central Madrid branch of Bankia wrapped in a blanket, is expecting to be evicted from her home in a matter of days.
Bankia, who gave a loan for practically the entire 300,000 euro cost of the house in 2006, repossessed the property in February, and she will be turned out on to the street with an outstanding debt of 110,000 euros, she says.
"We're without a house, on the street and with a huge debt," says the former cleaner, who made a living looking after old people in their homes until an accident made her unable to work.