Entrepreneurs who refinanced home loans to support businesses at the beginning of the crisis in 2008 have gone bust or failed to keep up with payments and now make up 15 percent of Madrid home foreclosures. Once-affluent families, who until recently had been able to buy time by selling assets other than their homes, represent another 25 percent, according to the AFES study carried out last month.

‘Easily Extrapolated’

“The study can be easily extrapolated to the rest of the country,” said Banos, who estimates as many as 400,000 foreclosures have occurred in Spain since the beginning of the housing market’s collapse.

Rajoy’s nine-month-old government on Sept. 27 announced its fifth package of budget cuts and tax increases, bringing planned savings to about 150 billion euros ($195 billion), or 15 percent of annual gross domestic product, by the end of 2014.

Those austerity measures have failed to contain the deficit, which may still approach last year’s 9.4 percent of gross domestic product, said Ignacio Conde-Ruiz, an economist at the independent Applied Economic Research Foundation in Madrid.

“The mix of tax increases, disappearing wage growth and rising energy and food prices continues to chip away at families’ disposable income, and represents a growing risk to mortgage affordability,” Raj Badiani, an economist at IHS Global Insight in London, said in a phone interview.

Garnered Wages

“Meanwhile, recent austerity measures including two labor market reforms to make it cheaper to lay off traditionally secure workers are expected to accelerate the rate of defaults on retail mortgages,” he said.

Under Spanish law, a bank can pursue a borrower for the difference if a foreclosed property is sold for less than the outstanding mortgage. Lenders can also garner present and future assets and earnings of borrowers and their guarantors, including pay checks and pensions.

“These people completely lose their purpose in life,” Banos said. “Everything they had or will ever have in the future will go to the bank.”

Falling interest rates, which have led to the European mortgage index dropping to its lowest level since it began in 1999, are helping to delay foreclosures Spain will face when a recovery starts in the rest of Europe, according to Juan Villen, head of the mortgage advisory service at Idealista.com, Spain’s biggest property website.

The Euro interbank offered rate “at record lows has allowed families where one member has lost their job to hang on to their homes because their mortgage payments have fallen,” he said in an interview in Madrid.

‘Time Bomb’

“When the rest of Europe recovers before Spain, interest rates will rise,” Villen said. “It’s a ticking time bomb.”

In 1994, the unemployment rate in Spain was 24.5 percent and the mortgage-default rate peaked at 5.5 percent. Today, with a similar jobless rate, about 3.2 percent of outstanding home loans are in default, according to the Bank of Spain.

“Many investors ask me why mortgage delinquency hasn’t grown here,” said Fernando Acuna Ruiz, managing partner of Madrid-based Taurus Iberica Asset Management, which oversees 60,000 foreclosed properties on behalf of 25 banks.

Acuna estimates that because more than 90 percent of mortgages in Spain are variable, low interest rates have shaved an average of 400 euros a month from mortgage payments since 2009 and that’s helped keep delinquencies low.

Foreclosed Homes

When a bank decides to start foreclosure proceedings on a homeowner who’s more than 90 days in arrears, it can take 18 months or more to dislodge them and seek to sell the home, according to Acuna. He estimates repossessed assets on lenders’ books will swell to more than 500,000 units sometime in the next two years.

Spanish banks have said mortgage defaults aren’t a problem for them even as some analysts say the official default rates for mortgages may be obscuring future losses. In April, Banco Santander SA (SAN) Chief Executive Officer Alfredo Saenz said that anyone raising this as an issue for mortgage lenders was “saying something stupid.”

At the Bankia group, the Spanish lender that was nationalized in June, mortgage defaults as a proportion of 84 billion euros of lending for home purchases was 4.7 percent in June, up from 4.1 percent in December, according to a company report. Bankia, Spain’s third-largest bank, set aside 6.8 billion euros in the first half to provision for bad loans and real estate. A further 6.9 billion euros of charges are expected this year.