Unlike Spanish mortgage advice, which is unregulated and could be given to clients by someone with no experience or knowledge, the repossession process in Spain is highly regulated.
The Spanish Repossession Process
The repossession process in Spain is very different to that of the UK. The rules applied by the Bank of Spain on banks make it far more difficult for banks to provide flexibility to clients experiencing problems and means clients who approach their lender when experiencing problems often find the bank unhelpful and unable to provide a solution.
In Spain, the banks after 3 months of any mortgage with late on non-payments, are required to move a significant amount of that loan to their balance sheets to cover the fiscal risk. After 6 months, this percentage rises steeply again and before a year is up the full amount must be moved to the balance sheet. This is despite the fact that technically the bank will acquire an asset should they be forced to take legal action. Once the property asset is on their balance sheet, the cash can be released.
Because the mortgage terms are written into a legal deed signed at Notary, any personal agreements the bank may make with the client do not fundamentally change the banks legal requirement under bank of Spain rules. The only way to change the terms and avoid this issue is for a “novacion” or note to be applied to the deed incurring significant Notary and land registry costs.
Tying up precious funds and decreasing liquidity is difficult at best of times for Spanish banks and in current environment is crippling. The whole process drives banks to repossess and take action as quickly as possible as the court process is long and costly and the sooner the property is on their books the sooner they can release liquid cash. Because the same balance sheet rules apply whether they come to an outside agreement with client for a payment holiday, to take interest only payments or reduce monthly amounts the banks see it in their best interest to just get the property as an asset as quickly as possible rather than take a longer-term view.
This is of course very short sighted because the more housing stock they have to take over the slower the recovery of the overall property market. The Spanish banks end up being the largest selling agents in Spain rather than focusing on banking and Spanish mortgages. The whole securitisation process and its implications should in fact make Spanish Banks more likely to negotiate but the balance sheet issue is seen as insurmountable.
In the UK when a bank has to take court action on a defaulted property, they go to the courts to get the right to force a sale of the property. In Spain, the banks have to go to court to take full ownership of the property. Taking ownership includes covering any other outstanding debts against the property, taxes including transfer tax at 7%, community charges and IBI town hall taxes whilst the property is held and any capital gains tax if it is sold for more than debt owed. Whilst after the first year the property can be shown, as an asset on the balance sheet the bank acquiring the property does not come without it issues.
Rather perversely, each mortgage deed has an auction price recorded in it and the minimum the property can be sold at auction is 70% of this price. Under current legislation the bank, if they have no buyer at this level have to offer it to the current owner at this 70% level. The level recorded is usually 100% of the valuation level and more than covers the mortgage but where banks lent a much higher percentage or recorded actual purchase price rather than valuation level they can often be left having to accept well below the actual debt level or have to give the property to the current owner at a level lower than the debt that person owes. These cases will be very few and far between but are another example of the complex and rather bureaucratic regulation that covers re-possessions in Spain.
The more forward thinking banks who have anticipated some of the current problems, the credit crunch and the poor exchange rates etc are and will come up with innovative ways to manage their default book. These banks will focus on differentiating between those clients that just will not pay, those that can have no real financial difficulties but would prefer to lower outgoings and those that have serious short to medium term difficulties that should resolve themselves in time. Most of these bank will have UK roots and or experience that is more international. Traditional Spanish banks have been caught with their pants down and the speed and severity of the default situation has left them with no clear policies or strategy for managing the current situation whilst keeping an eye on long-term issues that could be building.
The Spanish government for residents of Spain have introduced ECO funds, which are supposed to underwrite the risk a bank takes by allowing a client a payment holiday or deference of capital payments during periods of unemployment, which currently runs at a staggering 16% of the working population. However, lack of clarity over how these funds will be paid to banks, what will happen if client never makes up difference means, most banks are not yet implementing it. The government policy has received positive media feedback but the reality is without clarity the banks are still not using these funds to overcome the issue. Great headlines and PR but no real practical help to an unemployed Spaniard with a Spanish mortgage.
For non-residents no such policy is in place whether the policy is effective or not makes no difference to them.
Can I Walk Away From My Spanish Mortgage?
It has long been believed that as a mortgagee and a non-resident of Spain you can just walk away from your Spanish Mortgage responsibilities with little or no impact.
Whilst it is possible to negotiate with a bank to take back the property, it is not a God given right. If a bank agrees to take property over without the requirement for court action costs of court action are saved and interest stops being added. Where a property has plenty of equity this often becomes a good way forward for both parties and perhaps ensures some value is still available to the owner and payable on sale rather than nothing at all. Most banks however will only go this route if they believe the client genuinely cannot pay for reasons outside their control and therefore to take back keys prevents court action and means they get asset quicker. This might apply for instance where a death has occurred and the now owner cannot maintain payments on the mortgage as income streams have also disappeared. If you just drop keys off at a bank without agreement the bank will continue to add charges, have to go to court and will continue adding interest. This will eat into any equity left and could leave the mortagge holder with an outstanding debt after sale of property still owing.
It is also a widely held belief that banks in Spain cannot touch UK assets this is also no longer the case. Legally a bank in Spain can pursue a debtor in their country of residency and take control of other assets owned via UK courts. In most instances, it is highly unlikely a bank will take such action as the cost of doing so outweighs the benefit they may secure but large property portfolio holders in UK who have many other assets and think they can just walk away from Spain may have a nasty shock in few years time. Those mortgage applicants who used the loophole of Spanish banks lending against valuation not purchase price as was the norm a couple of years ago and have no personal money embedded in the property in Spain may see walking away as an easy option but should be aware of the Pandora’s box they could be opening. The more the bank is owed after sale of the property the bigger the incentive for the bank to pursue them in the longer term.
It is hoped that as the default level continues to rise some changes to the whole securitisation process and Bank of Spain rules relax to allow common sense flexibility to prevail. The real concern is the Notary legal system; which has not changed much for hundreds of years; and the fact that instead of a consumer credit act mortgages are covered by and written into legal deeds will prevent real innovative change and flexibility in the Spanish mortgage market. At the very least the current legal system makes any changes so costly no one; banks or client want to endorse them. This is exactly what happened to the subrogation law change which sounded good on paper but is in fact costly, time consuming, difficult to understand and only ensures Notaries continue to have a licence to print money rather than affecting a people friendly change which benefits consumers and opens up competition.
On balance whilst a mortgagee with a mortgage in Spain may not get much joy when trying to negotiate with a bank to overcome payment issues it still remains better to keep up communication than to ignore the situation. At the very least taking some pro-active positive action may make the bank less likely to pursue you in the longer term and cause problems in your own country of residency; ignoring the situation is not really an option.