Mortgages: turning over your property to the bank does not cancel the debt

SPAIN (Agencies) On November 3, 2010, in the small town of Bisbal de Penedés in Tarragona province, around 40 people gathered outside the house of Lluis Martí and his nine-year-old son. They were there to form a human shield to prevent an eviction order being served by Martí's bank because he could no longer meet the repayments on his 100,000-euro mortgage. The men and women, who successfully paralyzed the repossession of Martí's house, belong to the Plataforma de Afectados por la Hipoteca, a nationwide network set up in the months following the collapse of Spain's property market to draw attention to the plight of people who had lost their jobs and, unable to meet their mortgage repayments, now faced first the loss of their home, and then a legal requirement to pay back their bank loan. Under Spanish law, simply turning over your property to the bank does not cancel the debt.>>>

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An estimated 300,000 families and individuals have lost their homes through mortgage foreclosure in the present crisis. Since November the network has managed to prevent more than 42 evictions throughout Spain, in Catalonia, Murcia, Valencia and Madrid. On Friday they blocked a repossession in Málaga. The platform, now known simply as PAH, has been given a boost by the appearance of the 15-M movement and its allies in Real Democracy Now. The PAH also counts on the support of the OCU consumers' association, as well as the ADICAE bank, insurance, and savings bank consumers' association. Beyond obstructing evictions and foreclosures, their objective is to change Spain's mortgage laws.

Under Spanish law, if a foreclosed property is sold for less than the outstanding mortgage on the asset, the bank can claim the difference from the borrower. Lenders can make a claim against all of a borrower's present and future assets and earnings.

The housing boom that ended in 2008 left Spanish banks with 315.8 billion euros in loans related to real-estate activities in the fourth quarter of 2010, according to the Bank of Spain. That's after they were forced to take on properties and land in return for canceling debt to bankrupt developers.
The PAH has put forward three proposals: that Spain introduce legislation allowing borrowers unable to meet their repayments and facing homelessness to simply return the keys to their property to the lender, a model that exists in some areas of the United States, and which has become known as walking away from a mortgage; they also want the hundreds of thousands of empty homes throughout Spain owned by the banks to be taken over by the state and rented out at low rates; and that the banks give borrowers the option to return their property but allow them to continue living in it paying 30 percent of whatever their monthly income is
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But earlier this month, Congress rejected similar proposals by the left-wing Galician National Block. It had asked legislators to amend the law to allow mortgage holders to allow walk-away mortgages. It also would have permitted homeowners to delay mortgage payments beyond stipulated deadlines and to consent to partial debt write-offs.

The banking sector has kept largely silent on the issue, although the Association of Spanish Banks has issued a terse statement on PAH's policy of physically preventing eviction orders being issued: "The seizure of mortgaged assets is carried out via judicial resolutions, and our understanding is that in a democracy, judicial resolutions should be obeyed."

The PAH is aware that it is breaking the law, and some of its members now face sanctions. A month ago, around 50 neighbors and activists gathered to prevent the eviction of a Ghanaian couple with two children, and a third on the way, in the Catalan city of Vic (see facing page). Thirteen of them now face charges of disobedience and resisting authority and will face a fast-track, single hearing under a new system designed to deal with minor offenses, where they will face fines of up to €300.

The PAH says it will not back down in the face of legal action, and that it will continue preventing eviction orders from being issued as a way to draw attention to the issue: "The illegality here is making people homeless," says Adriá Alemany, an accountant and one of the founders of the movement. "By evicting somebody, the banks are breaking Article 25 of the Universal Declaration of Human Rights, Article 11 of the Economic, Social and Cultural International Pact, and of course the Spanish Constitution, which recognizes the right to a decent home."

The idea of walkaway mortgages has garnered widespread support as a common-sense solution. Even Esperanza Aguirre, the conservative Popular Party's head of the Madrid regional government, raised it during the campaign ahead of the May elections - although she immediately dropped the idea - and the banks are not happy. A report by financial risk consultants Oliver Wyman cited by the Spanish Banking Association says that a walkaway system would make mortgages more expensive (something like an additional 117,000 euros over 27 years, or 60 euros a month), as well as requiring borrowers to provide at least a 10-percent deposit on loans, which would restrict the number of families who could consider buying a property.

"There will be fewer loans, they will cost more, and be for smaller amounts, and repayment periods will be shorter," says the Spanish Banking Association. "And most importantly, 97 percent of families, who don't have any problems meeting their repayments, will pay the price," it adds. "In other words, prompt and punctual repayers will lose out on any change to the law." What's more, says the association, "this would weaken the economy, and hit an already depressed sector hard. At times of crisis, economic growth depends on laws being clear."

Joaquín Maudos, of the Valencian Institute for Economic Research, and a professor of economic analysis at the University of Valencia, is against walk-away mortgages. "For one simple reason: when house prices rise sharply, as they have done here, and the borrower sells, only that person benefits from the price rise. To see things in terms of the bank taking a hit if prices fall is unfair. If in the future, people want to ask for walkaway mortgages then that is fine, but the conditions need to be clear from the start. Changing the rules halfway through could have major repercussions in the future," he says.

But many experts accept that some kind of change to the rules will be necessary to protect the hardest-hit by the crisis. Even the banks accept the need for "solutions for families living through serious situations," and make the following suggestion: "In cases of severe need, the authorities could consider reducing the part of a salary likely to be embargoed, bearing in mind the serious repercussions that the crisis is having on the least well-off."

In May, the Congressional housing committee suggested setting up a special sub-committee to look at "what can be improved" in the Spanish mortgage system, "and in particular," regarding conditions that might be considered abusive." The sub-committee's members, Pere Macías of conservative CiU Catalan nationalist bloc, Pablo Matos of the Popular Party, and Socialist Ana María Fuentes, met last week for the first time.

"Our mortgage laws are 150 years old, and had worked well, until the crisis, which has created disproportionate and unjust situations within the system," says Matos. "Up until 2004, some 14,000 properties were being embargoed each year. That means that the property is put up for sale by public auction. Normally that meant that the problem was solved, because the buyer would pay a similar price to the debt. The problem now is that up to 100,000 properties are being put up for auction each year, and there are no takers: the banks are not lending. And when nobody puts in a reasonable bid, the law allows the banks to sell a property for half its estimated value, which means that the buyer still owes half the loan. We consider that to be disproportionate, particularly in the case of family homes," the PP lawmaker says.

So what are the sub-committee's proposals? "On the one hand, we think that applying up to 29 percent interest on delayed repayments is disproportionate," says Matos. "That needs to be corrected, as do a number of small-print clauses. I would like to see the whole system of valuing properties looked into, and that valuations be carried out by bodies that are totally independent of banks. But the whole thing needs to be looked into carefully."

Fuentes says that the sub-committee will send a detailed questionnaire to valuation companies, notaries, lawyers, economists, borrowers in trouble and specialist journalists in order to gain a broad picture of the situation.
José García Montalvo, professor of economics at the Pompeu Fabra University in Barcelona, is against walkaway mortgages. Instead, he agrees with other proposals being put forward by the sub-committee. "Modifying the law on selling off properties so that in the case of a property not meeting its valued price, it must still be sold for between 75 percent and 80 percent of its original sale price, rather than the current 50 percent. Banks might be more inclined to accept walkaway mortgages if they didn't have to pay tax on property they recovered from debtors," he says, adding that interest on delayed payments should also be reduced.

José Ignacio Navas Olóriz, a notary and expert in property law, agrees with proposals for a hike in the minimum value of properties that do not meet their sale price in auction. "It is outrageous that a bank values a house for a certain amount, and then accepts half that amount at auction. The bottom price should be at least 70 percent. But the whole procedure really needs to be looked into in detail," he says.

Navas also defends the banks. "They are being blamed for much of the mess we are in, but it should also be remembered that our high standards of living are in large part due to easy access to credit and mortgages. Nobody forces anybody to buy," he points out. "And if somebody can't meet their repayment obligations, the law has to act, in this case in favor of the bank, rather than the creditor. By taking direct action to prevent eviction notices being served, the 15-M movement and the PAH are effectively carrying out coercion, but at the same time, they are drawing attention to a severe dysfunction in the system."

The number of foreclosed properties in Spain has climbed tenfold in three years as unemployment has spiraled to reach 21 percent of the working population, the highest in the European Union, according to Idealista.com, the country's largest property website. Home prices fell for the 12th straight quarter in the three months through March and have dropped 15 percent from the peak three years earlier, the National Statistics Institute said this month.