Mortgage and the foreclosure process in Spain: anomaly or perversion?
In Spain, mortgage debt does not disappear with the forfeiture of one’s property. This is something that very few knew about but soon traumatically discovered. Loan contracts signed by individuals are personal ones in which the home acts as a guarantee. In the case that one is unable to pay off the loan, the creditor can break the guarantee and auction off the mortgaged home. This, however, does not mean that the result will be sufficient enough to liquidate the debt. The loan is the homeowner’s primary obligation and the mortgage is the right in which the creditor has over the home.
To stop making loan payments is to break the contract we have with the financial institution, which can lead them to reclaim payment from us. As we will see later, they can do so through the courts or through extrajudicial means, before a notary. In both cases the procedure is one (in legal language) of "imbalance": initially the bank is already is in the right, and the law turns the judge or notary into nothing more than an automated executor. Both, by law, must be on behalf of the bank and, given that the mortgage constitutes a public document before the notary, it is approved with the assumption that the agreement was freely negotiated. For this reason, the procedure is not "deliberative", which is to say that it does not allow the judge to listen to the debtor: even if he wants to or considers it relevant, he cannot know if the individual is unemployed, sick, has children or has been scammed. Nothing outside of the payment of the debt can fall under his evaluation. Even more problematic is that the majority of the paperwork related to foreclosure is routinely managed by computer programs and judicial secretaries, without any intervention by the judge.
Although this already sounds pretty tough, the procedure becomes even more ruthless when we factor in other examples, such as what is known as “early termination”. Although we speak of very long-term mortgages (up to 30 or 40 years) Spanish law doesn't differentiate systemic non-payment from specific difficulty. Thus, when one suspends payment, not only do the unpaid bills plus the interest for late payments accumulate, but also the creditor can reclaim the entire debt at once.
At the auction, we encounter one of the most controversial steps: the possibility that the bank may be awarded the home at 60% of its original appraisal value if the auction is unsuccessful. We must note that this percentage is arbitrary: the law says 60%, whereas a few months ago it said 50%, as it could also say 10% or 80%. There is no objective justification. It depends solely and exclusively on the will of Parliament that passes laws and reforms these laws. Lastly, the debt not covered by the adjusted value is an active debt that the individual must attend to for the rest of his or her life. As Article 1.911 of the Civil Code states: “The debtor responds to the fulfillment of obligations with all of his present and future assets”. These obligations also extend to the loan guarantors, who can also lose everything.
The ignorance of the law is no excuse and everything we have described until now is enforced with merciless rigor, without exceptions. It is surprising that laws, regulations and control mechanisms are not equally rigorous for other practices and actors within the same contracts and procedures.
Much of harsh manner in which impoverished people, unable to pay their mortgage, are treated is based on the fact that they freely signed their contracts. But remember how they signed these contracts: with disinformation, lies, and even false documents made by the institutions themselves, with an indisputable imbalance between the parties. Think, for example, of the role of the appraisers who inflate prices at the request of the institutions but are never investigated nor held responsible. Or of the notary, who is forced to meet with the debtor to sign mortgage and conditioned to see it through. This is systemic failure. While in theory they are responsible for bearing witness that the signing parties were fully knowledgeable of the implications, appraisers and notaries earned huge profits during the years of the real-estate bubble at the cost of a systematic malpractice that, up to now, has avoided any punishment.
In summary, we highlight the following as key elements that would question the proportionality and appropriateness that would be required within a mortgage procedure:
- Disinformation and deception in the recruitment of mortgages.
- Disproportionate punishment of the debtor.
- Absolute helplessness of the person liable for payment, who cannot claim anything.
- Arbitrariness of the adjustment value after an unsuccessful auction
- Anti-social results (human rights are violated and it breaks the social cohesion)
- Anti-economic results (it promotes an underground economy and constrains consumption
The Bankruptcy Procedure
The insolvency procedure is what is popularly known as “declaring bankruptcy”. When a debtor finds himself unable to pay his creditors, he can ask to declare himself bankrupt before a commercial court. The court designates a trustee who makes a report on the causes of insolvency and a summary all assets and debts. An agreement is then reached with the creditors in the form of payment of debt or liquidation of the estate. Whatever is obtained is used to pay off the creditors and even possible partial debt forgiveness for those debts not covered by the liquidation. Another advantage is that, during the entire examination process, interest rates and foreclosure procedures are suspended.
At the beginning of the crisis, a rumor spread that, in order to avoid debt and eviction, families could declare bankruptcy just as businesses could. While it's true that, officially, bankruptcy law is aimed at both companies and individuals, in practice this is not the case. The law makes no reference to the consumer and mortgage, the main problem of families, is excluded from the procedure. It does not serve to save housing. Individual bankruptcy only suspends a mortgage foreclosure if the home is used for professional activity. We encounter a paradox within this procedure. It does not work for the main problem of citizens but at the same time allows the suspension of foreclosures for real-estate businesses, themselves more irresponsible in their operations than families and who, moreover, signed a mortgage not to acquire a home, but to speculate on one.
The bankruptcy procedure for individuals is only recommended when over indebtedness extends beyond the mortgage, such personal loans and credit cards: even then, it is a difficult process. Even if the bankruptcy extends to the mortgage on the primary residence, the procedure would still not be recommended for individuals: it submerges them in a complex procedure that lasts a long time, is very expensive (whether paid by the claimant or the State) and involves day-to-day monitoring of the bankrupt family (in which the administrator has to authorize all expenses). Given the volume of people currently facing foreclosure proceedings, if these were to declare bankruptcy en masse, the court system would collapse in a few years. Most importantly: we don't need to penalize a social and economic problem even more, but to resolve it.
The law only reforms to make it harder
In 2009, already two years into the crisis, the devastating effects of the Spanish mortgage process started to become evident. Nevertheless, the Spanish government not only failed to apply reforms to protect the rights of affected citizens, but reformed the mortgage law to make it even harder.
The Royal Decree 716/2009 on mortgage market regulation and other rules of the mortgage and financial system gave even greater coverage to the interests of financial institutions. Among others, it considered the possibility that financial institutions could unilaterally extend the mortgage, demanding new guarantees if the house suffered depreciation in the initial appraisal value. Thus, for individuals, if the value of the home was, during one year, 20% less than the mortgage loan, the bank could require an extension of the mortgage to other assets (salaries, new properties, new guarantors). In the case that the individual refused or did not have the capacity to offer new guarantees, the reform allowed the financial institution to settle the contract: to reclaim the entire debt and proceed with the mortgage foreclosure, even if the debtor was on time with his or her payments.
While this was happening, the government (first the Socialist Party, then the Popular Party) steadfastly refused to listen: despite numerous voices calling for urgent reform to provide a solution to the most vulnerable victims of the crisis. Neither for dación en pago nor a mechanism for a second chance that legal experts consulted by the government itself recommended implementing: with the excuse of the complexity that modifying such basic laws would entail, that could affect the legal security of those contracts. The inevitable question is: where is the rule of law and legal security for hundreds of thousands of families affected by foreclosure that sentence them for life?
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