Newly built housing transferred to the bad bank will be valued at an average 52.2 percent discount to original book value, while second-hand housing will be discounted 47.5 percent, the source said on Tuesday.

"The agreement on asset discounts has practically been closed," the source said.

The government has been setting up an asset management company, or bad bank, to take on up to 90 billion euros ($118 billion) of sour real estate assets sitting on lenders' books since a property bubble crashed in 2008.

The bad bank is a condition for Spain to receive up to 100 billion euros European Union aid for crippled lenders.

Banks will receive capital or government bonds in exchange for property they put into the vehicle.

"The lenders will have to take additional haircuts of 7 percent compared with the base scenario used in Oliver Wyman's stress test, bringing discounts very close to the assumptions used in the adverse scenario," the source told Reuters.

In its stress tests of Spanish banks, Oliver Wyman applied writedowns of 45.2 percent on new housing under a base scenario for the economy, and 52.4 percent in a worst-case scenario envisioning 6.5 percent economic contraction over three years.

For older housing, the consultancy projected losses of 40.5 percent in the base scenario — an economic downturn of 2 percent over two years, followed by a slight recovery — and discounts of 50 percent in the worst case.

Bank have already made massive writedowns on property investments under two laws passed this year — provisioning 137 billion euros against losses on 307 billion euros of real estate exposure.

The transfer price to the bad bank goes even further.

The source also said lenders would be obliged to transfer undeveloped lots with average discounts of 85 percent of their original book value.

Since peaking in 2007, housing prices have fallen around 30 percent, on average. The bottom of the market may still be two years off, analysts said, adding prices could fall a further 20-30 percent.

The property crash left banks with 184 billion euros bad debt from real estate developers on their balance sheets, and the problems have spread to small businesses and other sectors.

So, the bad bank's remit could be widened to include non-performing consumer loans, the economy ministry has said, as a deep-rooted recession causes more people to default.

The European Central Bank, European Commission, International Monetary Fund and Spain's central bank have been discussing the design of the asset management company.

The prices at which assets will be transferred must be low enough to attract private investors but not so low as to precipitate bigger losses for banks.

While the bad bank has been designed to hold 90 billion euros of assets, the government expects the final size to be smaller.

Antonio Carrascosa, managing director of Spain's bank restructuring fund (FROB), said last week the final size of the bad bank would be around 60-70 billion euros, implying average discounts on asset prices of more than 50 percent.

NATIONALIZED BANKS FORCED TO TRANSFER ASSETS

The government expects four nationalized lenders — Banco de Valencia, Bankia, Catalunya Caixa (CX), and NovaGalicia Banco (NCG) — to contribute the bulk of the assets to the bad bank.

Oliver Wyman found banks needed an extra 59.3 billion euros to ride out the worst case scenario though the government estimates it needs only 40 billion euros from the European credit line, because some banks can raise their own capital.

Spain wants to keep its stake in the bad bank below 50 percent to avoid an impact on public debt, and expects private investors to own at least 55 percent.

Banking sources told Reuters that Spain's healthy listed banks — BBVA, Caixabank and Santander — would likely be the biggest investors in the bad bank, with foreign investors steering clear.

The equity tranche of the asset management company will make up about 10 percent of the bad bank. The rest will be financed by state-backed bonds given to lenders forced to transfer assets. These can be used as collateral with the European Central Bank to get liquidity.

Economy ministry sources said private investors in the equity of the bad bank will have to sign up by Nov. 30.