CONCERNS WITH YOUR MORTGAGE? …….

A GUIDE TO BANK MORTGAGE ARREARS AND REPOSSESSIONS

Spanish bank mortgage and loan delinquencies have soared over the last 12 months; these are at levels unseen for many years according to the latest figures of the Bank of Spain. And the rate is accelerating!

The underlying causes are rather obvious: high levels of unemployment, the high Review Rates for mortgages set in the Autumn and Winter 08 having reached an all-time high. Also, the strengthening of the Euro against other currencies such as the £ Sterling or the US Dollar makes it harder for these currency holders to meet their monthly mortgage repayments in Euros. Falling property prices have also discouraged many potential purchasers as well as making it difficult for people to borrow against their properties through equity releases or life-time loans.

This fall in value means some people are not interested in continuing to service their mortgages as they have run into Negative Equity (meaning they owe the bank more than what their property is worth).

It is a common misconception to believe that handing over the keys for the property will settle the matter with the lending bank. Although some Spanish banks have accepted this in the past (dependant on the circumstances of each particular case and providing the borrower is not in negative equity), most do not any longer. In many instances, on taking the property in possession, banks will be losing money as the property value at auction will not clear the outstanding mortgage loan.

Foreign home owners are concerned with what will happen to their assets back in their home countries if the bank refuses to accept the keys in exchange for the cancellation of the mortgage. While it used to be uncommon for Spanish banks to pursue debts abroad, today they are being forced to do so due to the alarming surge in delinquencies.

Some banks will still accept the return of keys and keep the property as repayment BUT this will only happen if there is no significant negative equity on the property. The process is to sign before a Notary a deed by which the mortgage is terminated. It’s much more cost efficient for banks to simply repossess in this way without having to go through the hassle and cost of a public auction which could take a couple of years. Avoiding a public auction also allows banks to by pass the financial provisions they have to make for potential losses.

Falling Property Prices

The bank, on deciding if they will advance a mortgage, will instruct a valuation of the property. The property will act as collateral for the loan. If this historic valuation is now unrealistic and above the actual market value of the property should there be a fall in house prices, such as now, then the property can be worth less than the loan it is guaranteeing.

All mortgage contracts in Spain have a clause by which, if the value of the property falls below 20% of the appraisal value, the bank may request at their own discretion additional collateral to offset the financial shortfall. In practice banks seldom opt to enforce this but they could legally.

Public Auctions Mean a Further Drop in Property Prices

In the event the bank seizes the property, it can auction it in a Public Auction.

As the influx of repossessed properties increases in the near future banks will eventually be forced to go to Public Auction as they will need liquidity. In these auctions the value obtained by such properties can easily fall below 50% of the market value which would mean that the mortgage borrower will still owe the bank any balance. To this debt add the legal fees of the bank’s lawyer and the associated costs of the seizure process!

Extent of liability

Following article 1911 of the Spanish Civil Code (which is part of any standard mortgage deed) you will be held liable for the debt and at risk are all your current and future assets. Whilst the surety of the property is the primary asset to be used to secure repayment of the debt, it does not stop there!

The above has legal implications which borrowers need to understand fully on signing a Spanish mortgage deed but also, today, when contemplating problems around mortgage payments and the options open for resolving the crisis. It means 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 courtesy of an eventual auction not meeting the balance of the debt, the bank is entitled to pursue you for any outstanding shortfall, even in your home country.

The Six Stages of a Property Repossession

Not all properties end up at 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 for ownership.

In the cases where such an agreement is not possible (the mortgage percentage is high), the repossession procedure is as follows:

i) The borrower falls into arrears - The borrower fails to service their mortgage repayments. Late payment interest charges (“intereses de mora”) are applied.

ii) Technical default - This normally happens 90 days from the first arrears. The client file is passed onto the bank’s debt collection department. The bank is forced to set aside a provision to offset this potential loss. This is why many banks are open to negotiate before a default because these compulsory provisions that must be deposited with the Bank of Spain and undermine the lender’s liquidity ratios (something which banks will try to avoid.

iii) Foreclosure and notary intervention – Subject to the success or failure of debt recovery negotiations between lender and borrower, 15 or 20 days after the technical default. A registered communication is sent via a Notary Public informing the client that the repossession procedure is imminent.

iv) Repossession order - The matter is brought to court. The value of the asset is important and the bank will likely refresh such. This updated valuation will also be useful for the bank to decide whether it is worthwhile or not to proceed with the repossession as such has high costs associated with it.

v) The Court sets a date for the Public Auction - Normally between 6 to 12 months after the court has found in favour of the lender. The judge determines the date of the auction. If no one bids for the property then 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 transferred to the would-be purchaser that the sale price is not enough to cover the debt plus all the associated repossession costs. Remember that the bank is entitled to pursue the previous owner! Should there be a guarantor for the mortgage deed then the bank will chase them and their assets too.

vi) Eviction - In the event that the owner is still living in the property, after a period that normally spans six months, the Police will call with a locksmith to evict them by force.

IMPORTANT - What to do if you cannot pay your Mortgage?

If you are struggling to meet your monthly mortgage repayments, and selling your property speedily seems an impossible task, do not wait until you have fallen into arrears to start negotiating with your bank. Communication with the lender is CRITICAL! Making a payment monthly is also CRITICAL no matter how small; keep the mortgage account moving at all costs!

After just 3 months of mortgage arrears Spanish banks normally start to take legal action so, even if you manage to reach a settlement with them after such a period - the bank sees you now as a high risk defaulter - you will still have to pay the balance of the debt and charges.

Negotiations with the lending bank should include;

i) extending the mortgage term to stretch repayments

ii) switching to ‘Interest Only’

iii) reducing the interest rate

iv) making a partial (reduced) payment for a period (normally until the next interest review date)

If all this fails and you cannot reach a comfortable agreement re your monthly repayments, it is far better to try to negotiate for the handing over of the keys rather than to just let the bank unilaterally repossess the property.

Conclusion

Defaulting on a Spanish mortgage is a serious issue that may compromise both your other assets (where ever they are) and your credit rating both here in Spain and within the EU (a recent change within the EU on exchange of information).

SEEK GUIDANCE FROM A PROFESSIONAL ADVISOR EARLY!

Mark Mountney, the proprietor of Rose Financial Planning, is a specialist mortgage brokerage and Independent Financial Advisor. He is a fully qualified mortgage and financial adviser in the UK with some 10 years experience in managing his own firm. Mark was also a founder of The Association of Mortgage Intermediaries, the trade association for mortgage advisors in the UK with 28,000 members. See www.rosefp.com or call 0034 677 874 948.