"Morally repellent" mortgages defied
In Spain homeowners have to take on all the risk of their house losing value while banks get off scot-free. But a recent ruling may mean it's payback time
Last December a court in Navarre ruled that the proceeds from the sale of a home repossessed by the BBVA bank were sufficient to clear the former owner's mortgage debt. This decision offers hope to thousands of people sitting on negative equity who are unable to meet their mortgage repayments. Soon they may have the option to hand over their keys to the bank, and walk away.
BBVA sued the borrower to recover 28,129 euros of debt outstanding on a 71,225-euro loan after selling the property for 42,895 euros at auction.
Under Spanish law, mortgage lenders have a claim on the totality of a borrower's assets?and not just their home. Banks can chase borrowers for up to 15 years. Traditionally, payment in kind in Spain is only possible with the lender's agreement. This is known in Spanish law as dación de pago , but can only be carried out if the property is not in negative equity, and the lender has not started repossession procedures.
Full recourse to current and future assets and income of the obligor is systematically used by Spanish banks to ensure full recovery on defaulted mortgages when the foreclosed property value at auction does not cover the outstanding debt.
The Navarre judge ruled that the house's fall in value was a direct result of the financial crisis that stems from financial malpractice and it was "morally repellent" that the bank should make additional claims on the borrower. BBVA has said that it will appeal against the ruling.
For the time being, however, the judge's decision is a huge relief for José Antonio Langarita, the 47-year-old man who bought the house at the center of the case. "I was so happy, it was the best news I could have received," he said.
"I never understood why, if I had already lost my house, and hardly had anything to eat, I had to carry on paying the bank," added Langarita, who is married, has an 18-year-old son and works for a cleaning company.
Following the collapse of the housing market in the United States, growing numbers of borrowers there are simply handing over the keys to the property to the bank and walking away. This has been made possible in some states that have passed non-recourse legislation, which makes it impossible for the bank to chase the borrower for the full amount of the loan.
In the United Kingdom, which has also experienced a sharp downturn of an inflated housing market, voluntary repossession, or "walking away," is not an option that lawyers advise. The UK's legislation is weighted against the borrower, as in Spain: The lender avoids the costs involved in forcing a repossession, and is allowed to dispose of the property more quickly, to recover its debt sooner.
What's more, not only are borrowers liable for the repayment of the mortgage until the house is sold, they may also be racking up penalty charges for missed payments in the interim. In addition, they are liable for the costs of sale.
Spain's banks will be awaiting the outcome of BBVA's appeal nervously. Last year alone, some 180,000 properties were seized for non-repayment of mortgage loans.
Catalonia's ruling CiU nationalist group has already put forward proposals that would prevent banks from pursuing borrowers for the full amount of the purchase price of a property; effectively allowing borrowers to walk away from their repayments if they get into difficulties. The move has been supported by other parties in the region.
Meanwhile, the Socialist central government has repeatedly said that it opposes any change to the law allowing people to settle their debts by handing over the keys to a property. Anxious to avoid rattling the international money markets, Economy Minister Elena Salgado says that Spain's banks would face "risks" if the courts rule that borrowers can walk away from mortgages where the property is in negative equity.
But as the Navarre ruling points out, Article Three of the Spanish Civil Law Code states that the rules must be applied in the context of the situation. That is why the court ruled that it was "morally repellant" for BBVA to argue that a fall in the property's value justified going after the borrower, knowing full well that it would not have lent the money on the basis of the real value of the property in the first place. In other words, the court has all but accused BBVA of deliberately conniving with estate agents to inflate the value of properties in order to lend larger amounts of money to homebuyers.
Stories have begun to appear in the Spanish media about the country's main banks providing sub-prime loans to immigrants who were clearly going to be unable to repay them, and under conditions and terms that at best might be described as complex, or opaque.
As Isabel Arias of law firm Garrigues points out, "some banks have engaged in inflated valuations." She says the most immediate impact of any change to the law imposing non-recourse legislation would mean that banks impose tougher criteria on borrowing money.
As José García Montalvo, a professor of economy at Barcelona's Pompeu Fabra University, sums up: "The key to the question is who takes the risk. In the United States, it is the bank; in Spain it is the borrower."
Langarita's economic problems are not over yet. Although he is free of his debt to the bank, his salary?the family's only income?is still embargoed to cover costs and interest. After some time living with his nephew, the family is now renting an apartment. "I only hope the Supreme Court confirms the sentence and that from now on, they rule on more cases like mine. That would make me very happy," he said.