The Spanish housing anomaly is not just confined to mortgage. We are also the European leaders in empty homes (six million, according to a 2012 estimate by the Spanish Statistical Office), corruption in urban development, in the percentage of owners and over-indebtedness. Conversely, we are the country in Europe with the least amount of rentals (10% of the housing stock against 30% of the European average), and we almost don't appear as a statistic for social rent (below 1%, just ahead of Greece and light years from 35% of the Netherlands or 20% of Austria, United Kingdom, France and Finland). Evidently, as already explained in the first part of the book, there is direct relation between the lack of policies that encourage renting or other alternative forms of property ownership, the absence of public housing and the over-indebtedness of the population.

Regarding mortgage, the Spanish anomaly stands out once again. In neighboring countries, which our government has as a reference and model on many issues, especially economic ones, debt settlement in certain circumstances and the right to a second chance is the rule, not the exception. Although it's true that dación en pago, as it is implemented in the United States, does not exist in Europe, it is also true that in almost all European countries, there exists some procedure to overcome the insolvency of the individual.

Basically there are two models. On the one hand, there is the Anglo-Saxon model, which allows for a fresh start and would be the one closest to dación en pago. It proposes a bankruptcy procedure that, in cases of debtors in good faith, uses available assets in order to pay off the debts, including the mortgage of the primary residence, and the judge condones what cannot be covered, even if the creditor disagrees. This permits individuals to start from scratch and generate new income without fear of it being seized. The idea is that, for humanitarian reasons, people should have the right to a second chance, but that there is a responsibility of the creditor who granted the loan. It is good for society at large for the debtor in good faith to reenter as soon as possible to economic activity and consumption.

The other model, more common in Europe, is that of rehabilitation. This is more focused on finding a viable plan for debt repayment through renegotiation, which can be done through the courts or out of court, but always using mandatory mediation. Here there is no automatic remission of debt but neither does it carry a life sentence: after a certain time, and if the debtor of good faith has done everything possible to settle the debt, he or she will earn the benefit of a partial debt write-off. 

 

Germany, for example, schedules a negotiation phase prior to court. If no agreement is reached, the debtor can resort to the bankruptcy route, providing a feasible payment plan. The judge may approve this plan even if the creditors disagree. If this is not feasible, then all available assets are liquidated and debts not covered expire after six years. In France, there is also pre-trial stage: in this case an “administrative indebtedness route” in which all executions are halted, including the mortgage, and one studies a payment plan. If no agreement is reached, there is a “law of second chance” from 2003 that, only in cases of debtors of good faith and severe insolvency, which allows for the termination of all debt. In the worst cases, it is designed that the payment plan is prolonged for a maximum of ten years.

In short: the fact that there exist routes such as the obligatory mediation for the financial institution, bankruptcy procedures which allow for substantial debt forgiveness and debt requirements that allow a reasonable time for people to start over, means that, in practice, many institutions apply de facto dación en pago. If banks know that individuals can resort to mechanisms that ultimately release them from debt, then they prefer to save time and money by accepting dación en pago. The result: Europe continues lending but in a much more responsible way and with less inflated appraisals than in Spain, denying the threats made by Spanish banks about the risks of legislating dación en pago or any kind of formula that allows for a second chance.

European Directive
In 2008, the European Economic and Social Committee published a report, Credit and social exclusion in a society of abundance, in which it warned that the differences between mortgage regulation systems within different European countries “favors a situation of unequal opportunities creating social injustice, on one hand, and distorting and obstructing the completion of the internal market, on the other”. The logical conclusion was to point out a need for appropriate intervention by the European Union, in order to rebalance the situation.

Although for years in Europe one talked about the need to harmonize aspects as important as the mortgage market, the interests at play delayed any intervention. At least until, with the crisis, the malfunctioning of financial institutions and, in particular, the subprime mortgage crisis (high-risk or junk mortgages) put the system in question and caused mistrust among consumers. This lack of trust is what made possible the idea that common rules could be achieved. European Parliament proposed to approve before the end of 2012 a directive on mortgage credit to access the residential property market.

In early 2012, the same Members of European Parliament responsible for putting forward the directive text and negotiations for approval recognized that in order to guarantee consensus, the text could not be tooambitious. If the financial lobby is powerful in Spain, it is equally so in Europe. In addition, the directive had to be approved by Parliament, the Commission, and the Counsel, where those who end up being in charge are the governments of countries that make up the European Union.

The formal objectives of the directive are threefold: to improve the integration of European markets, promote consumer protection and optimize financial inclusion. But, predictably, the final text will not say anything about how current issues distress the population, such as the execution of the debt in event of default. It will limit itself to improving on pre-contract information, to promote transparency in the sector, to improve appraisals and studies of creditworthiness prior to the contract, and so on. Issues that, without doubt, would be better regulated but do not address the main concerns of the citizenry: regulation of a second chance or mortgage market regulation to prevent over-indebtedness. When you read the text in detail, it is clear that the main objective is to return confidence to the financial market to continue feeding the big business of mortgage, more than the need to guarantee fundamental rights to people and encourage other more sustainable forms of accessing housing. 

In late January 2012, at a public seminar in Brussels on the presentation of the draft directive to the press, numerous Spanish state media were interested in the proposals of the new directive in a critical situation such as the Spanish one. The speakers simply responded that the Spanish problem was unique, but an anomaly in the European context. They therefore could not drive regulation across Europe for a problem that was only in one of the countries and that “excessive regulation would be negative.” Negative for whom?  For the financial institutions, of course. In any case, it became clear that Europe would not arrive at the solution to the Spanish “anomaly.”