European Court of Justice rule Spanish mortgage law abusive.

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Article from El Pais.

http://elpais.com/elpais/2013/03/14/inenglish/1363264199_406548.html


The European Court of Justice on Thursday ruled that Spain's mortgage law is incompatible with a European directive on abusive practices in consumer contracts, opening the door to more legal protection for households facing eviction from their family home.

The ruling comes in response to a question posed by a Barcelona court in connection with the eviction of Moroccan immigrant Mohammed Aziz from his home in January 2011, after he failed to meet mortgage payments on a 138,000-euro loan granted to him by savings bank CatalunyaCaixa in July 2007.

The court wanted to know if the eviction breached Aziz's rights. The European Court ruled Thursday that the process of ousting him from his home infringed the European Union's 1993 Unfair Terms in Consumer Contracts (93/13EEC) directive on consumer protection.

The ruling will apply to all eviction cases currently being processed across Europe but will not apply retroactively, as pressure groups have been calling for. Amendments to the mortgage law, which is more than a century old, are currently going through parliament, and it appeared as if the government was waiting for the Luxembourg-based court's judgment before proceeding with the passage of the draft law.

One of the anomalies of the current law in Spain is that if a homeowner fails to meet a single monthly mortgage payment, the bank can initiate accelerated proceedings to evict the borrower and take possession of the property. Even if the borrower alleges the contract he has signed is abusive and a court agrees with him, if the eviction has already been carried out the homeowner has the right to compensation but not the right to recover the property. The bank can also ask for full repayment of the loan even after obtaining possession of the property in question.

"The Court [...] holds that the Spanish legislation does not comply with the principle of effectiveness, in so far as it makes it impossible, or excessively difficult, in mortgage enforcement proceedings initiated by sellers or suppliers against consumer defendants, to apply the protection that the (93/13EEC) directive confers on those consumers," the court's ruling said.

The court also questioned whether Aziz would have willingly signed on equal terms with the bank a contract that included a penalty clause for back payments with an annual default rate of 18.75 percent. "The national court must in particular compare that rate with the statutory interest rate and determine whether it is appropriate for securing the attainment of the objectives pursued in Spain and does not go beyond what is necessary to achieve them," the court determined.

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This article explains how quickly Spanish banks can currently begin procedures to repossess if you default on payments .


Extent of liability

Following article 1911 of the Spanish Civil Code on signing a mortgage deed you will be held liable with all your current and future assets. The mortgage is only a guarantee subject to the financial loan acting the property or underlying asset as collateral.

The above has huge legal implications which borrowers ought to understand fully on signing a Spanish mortgage deed. This would mean that if you default on servicing your Spanish mortgage, the bank can actually seize the property acting as collateral. If you fall into negative equity it, the bank is entitled to pursue you for the outstanding debt even in your home country. (Hopefully this new European Court of Justice ruling will stop this happening)

Unlike in the UK and the US, most of the time handing back the keys to the bank will not stop them chasing you for the outstanding debt.

The Six Stages of a Home Repossession

Not all properties end in a public auction, especially in those cases in which the borrower is not in negative equity. The bank may reach an out-of-court-settlement on the matter by means of the borrower basically signing over in a public deed to the bank the ownership of the property. The bank agrees in this deed not to pursue the debt any further in return of the ownership.

In those cases in which this agreement is not possible, the repossession procedure is approximately as follows:

    The borrower falls into arrears - The borrower fails to service their mortgage repayments. Delay interests rates ("intereses de mora") are applied. The bank contacts the borrower and may attempt to settle the matter out-of-court.
    In technical default - This happens 90 days as from the first arrear. The client file is passed onto the bank's debt collection department which tries in a last attempt to recover the debt. The bank is forced to set aside a provision to offset this potential loss. That is why many banks are open to negotiate before a default because these compulsory provisions that must be deposited before the Bank of Spain undermine the Lender's liquidity ratios something which banks with the ongoing current credit crunch will try to avoid.
    Foreclosure and notary intervention - Depending on the chances of a debt recovery, 15 or 20 days after the technical default. A registered communication is sent by a Notary Public with acknowledgement of receipt, informing them that the repossession procedure is imminent.
    Repossession order - The matter is brought forth to be trialled. The judge communicates the borrowers of the mortgage repossession. The value of the asset in the public auction can be either the one that is lodged at the Land Registry or else the bank may command an updated appraisal. This updated appraisal will also be useful for the bank to decide on whether it is worthwhile or not to proceed with the repossession as it has high associated expenses.   
    The Court sets a date for the Public Auction - Normally between 6 to 12 months after the start of the Executive Procedure. The judge decides on the date of the auction. If no one bids for the property the bank will keep it.  The bank tries to offset the outstanding loan debt with this auction. However, it may happen that after the property has been assigned to a winning bidder the amount raised is not enough to cover the debt plus all the associated repossession expenses (i.e. because the borrower had run into negative equity). The bank is entitled to pursue the rest of his assets even if abroad.  Should there be a guarantor in the mortgage deed the bank will chase their assets.  The property will now be lodged under the name of the new owner.
    Eviction - In the event the owner is still in the property, after a period that normally spans six months, the Police will arrive at their door step with a locksmith to evict them by force. There are a number of cases in which this may not possible for legal reasons.


What to do if you cannot pay your Mortgage?

If you are struggling to meet your monthly mortgage repayments, and selling your property in time to raise the money to cancel the mortgage seems an impossible task, do not wait until you have fallen into arrears to start negotiating with your bank. After 3 months of mortgage arrears Spanish banks start to take legal action, so even if you manage to reach a settlement with them after said time (something which is very unlikely, as the bank sees you now like a defaulter) you will still have to pay not only the owed amount albeit all the legal expenses borne due to said default.

Negotiations with the lending bank include extending the mortgage period, reducing the interest rate or moving on to an interest-only mortgage for a few years until your economic circumstances improve.  If after applying any of these options, you still cannot meet your monthly repayments, it is better to try to agree the handing over of the keys than to just let the bank unilaterally repossess the property.

Conclusion

Defaulting on a Spanish mortgage is a serious affair that may affect both your assets in your home country and your credit rating as the debt will be against you personally.  If everything else fails, the only option left is to try to negotiate with your bank. Banks are open to renegotiate the lending terms providing you are not in arrears with them.

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http://elpais.com/elpais/2013/03/15/inenglish/1363358637_926283.html