ECB wants more ambitious mortgage code from Spain to protect homeowners

The European Central Bank has asked the Spanish government to come up with more ambitious measures to protect homeowners from foreclosures.

In a three-page opinion dated May 22, ECB President Mario Draghi said that “foreclosures should be regarded as the last resort.”

“Secured lenders should be interested in avoiding foreclosure proceedings, which are expensive and generally generate lower proceeds than voluntary sales, where the mortgagor continues to meet all or some agreed part of their repayment obligations,” Draghi wrote. The open letter comes after a request by the Spanish secretary of state for economic affairs and business support for the ECB’s advice on a draft law on mortgagor protection, debt restructuring and social housing.

The ECB’s view is widely seen as an important one because the European Central Bank — along with the International Monetary Fund (IMF) and the European Commission — forms part of the so-called “troika” that is closely monitoring Spain’s financial restructuring plan.

Of the 39,167 homes returned to lenders, 18,195 were through foreclosures

The ECB states that secured lenders should “adapt their current practices to deal with defaulting borrowers so as to avoid foreclosure proceedings,” and that the draft law should provide “incentives to all parties concerned to agree on a timely and reasonable debt restructuring in the event of a default.”

According to Bank of Spain data as of 2012, 39,167 homes have been returned to lenders — 18,195 of these through foreclosure proceedings.

“Only a comprehensive resolution strategy can address the challenges that arise in the face of changed economic circumstances of borrowers, significant changes in property values and the potential for resultant unviable mortgages, whilst maintaining appropriate incentives for both the debtor and creditor, and minimizing the potential for moral hazard,” the ECB said.

While the European Central Bank said it welcomed establishing a social housing fund, the initiative “should form part of a comprehensive and unified strategy for dealing with mortgage distress.”

“Such a strategy may ultimately result in fewer foreclosures and a reduced need for a social housing fund,” Draghi said.

Among the points addressed in the draft law are the introduction of a maximum 30-year repayment period for mortgage loans on principal residences and allowing proceedings only if the borrower is three months in arrears.

The courts or the parties can challenge the foreclosure proceedings based on unfair terms in the mortgage contract. This is in line with a recent European Court of Justice landmark judgment in the case of Mohamed Aziz, who took Catalunyacaixa to the court over the terms of his mortgage and the subsequent foreclosure.

“The ECB notes that the European Commission has adopted a proposal for a directive that aims to promote responsible lending and borrowing and ensure that borrowers are offered affordable loans, thus reducing the need for recourse to foreclosure of properties. The draft law appears to be compatible with this proposal.”