The financial crisis—the one that seemed like old news a long time ago but is still here, at least in Spain, has triggered a social tragedy that no-one seems to have an answer to. More and more people are having their homes repossessed, and many of these ex-homeowners are also being left with huge debts to pay off.
In the first six months of 2011, 33,918 evictions orders (presumably mostly for repossession) were requested, which is around the same amount for the whole of 2009 (32,010) (source). Although according to this article, the real figure is actually a lot higher because apparently when families find themselves in the situation of having their home repossessed, they leave voluntarily.
These repossessed properties aren’t selling in the public auctions (90% of the time, no potential bidders even turn up), and the lending institutions are keeping them for 50% of their value. In most cases, this doesn’t cover the mortgage loan, which remains the ex-homeowner’s responsibility.
This problem is mainly owing to the fall in the inflated property prices of four or five years ago. Among other factors, the quite widespread practice during the housing boom of overvaluing properties to get bigger loans has not helped.
So now, in a depressed market in which no-one is lending anyway, neither you nor the bank have Buckley’s of selling your property that’s not worth the loan you took out to pay for it.
End result: you lose your home but not your mortgage.
TV3, Catalonia’s main public TV station, aired a highly-recommendable episode of its 30 Minuts documentary show back in April that gave a good insight into the problem and its causes and effects, which are pretty shocking in some cases. The episode was called Escanyats per la hipoteca and is still available here.
It’s enough to make you cry, or a lot worst, and people are, in fact, being driven to desperate measures.
Groups have mobilised on occasions—more or less spontaneously—to resist evictions. And they have had some success, at least on the times they’ve made the TV news.
These actions are probably the exception to the rule though, and, in any case, are just a band-aid, and an illegal one at that. They don’t make the eviction order go away, and police are now even sometimes being sent out to evictions when resistance is expected.
Dación en pago to the rescue
Until now, the only real solution to this problem was what’s known as dación en pago, which involves handing back the keys to the lender who, in exchange, fully discharges the debt, as explained here. It is based on Art 1175 of the Spanish Civil Code.
Very literally, it is “to give” (dar > dación) “as payment” (en pago).
The problem is that you can only request dación en pago if a repossession procedure has not been started and there is no negative equity. It is this negative-equity bit (i.e., the property being worth less than the amount owed on the loan) that is the stumbling block in the current climate.
So, basically, the mechanism that’s in place is not very useful at this time.
It’s probably not practical or even desirable to have banks write off debts left, right and centre (although some have called for this), but large numbers of families can’t be left both homeless and indebted either.
It’s devastating for them and not very helpful to the rest of the economy, or for getting Spain back on its feet. Even if you have a job—or get one tomorrow—you’re in a difficult situation, but if you’re out of work at a time when there’s 22% unemployment, things are looking anything but rosy.
What happens in other countries?
From what I understand, the law is similar in other countries (the UK and the US at least) in that when there is significant negative equity, the banks are unlikely to cancel your debt, and that similar problems are occurring in other places as a result of the financial crisis (although I don’t know if to the same extent as in Spain).
I would be interested if anyone could confirm this as I read here that you are not pursued for the outstanding debt in these circumstances in the US, England and Ireland, which I find hard to believe, and is probably just a mistake leaning toward sensationalism on the part of the article’s author to include the quote in question, but anyway, you never know.
* Image courtesy of Daquella manera at http://www.flickr.com/photos/daquellamanera/
In part 2… Landmark case, election promises and how to translate dación en pago…
Found your blog! An interesting post, and one that brings to mind this article from the NY Times: http://www.nytimes.com/2011/11/09/business/how-a-financial-pro-lost-his-house.html?pagewanted=all ‘Short sales’ sound like a sensible solution, but I have a funny feeling we won’t be seeing too many of them here…
Cheers David and thanks for that link. I didn’t know about short sales. It would be interesting to know if the bank in the story would still offer the option to short sell today in a similar case. And no, it’s unlikely to happen here in the current climate if it’s left to the banks’ initiative, as they’re not doing it now and they could, in theory. Someone’s going to have to come up with a new solution I think.
I did hear some time ago about a bank or caja in Catalonia that was letting people postpone their mortgages and pay rent to the bank in the meantime to continue living in their homes. I don’t think the practice become very widespread, but it seemed like a useful solution.
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Hi, Rob, this is the last post from me tonight to try and answer your query.
The article in Público for what are known n the UK as ‘mortgage repossession’ (mortgage is usually called standard security in Scotland) is right in broad practice. The mortgage lenders will not normally pursue the mortgagor/ mortgage borrower for the shortfall debt, but can do so in theory (I know not of a single case where this has happened, but that doesn’t mean it hasn’t).
By the same token, the mortgagee/ mortgage lender is obliged to obtain the best price e.g. by ‘sale by order of the court’ (cf. in Spain: por subasta pública > by court-ordered auction sale). Per contra or conversely, it would have to return to the borrower any surplus on sale, whilst could keep quiet about such a profit.
Just as vexed is the question whether a Company Scheme or Personal Deed of Arrangement creditor would need to return any surplus to the scheme debtor. One UK textbook says yes. A London High Court Bankruptcy Registrar (Judge) I am acquainted with says no.
Hi Rob, I have just come across your very interesting article albeit ten years after it was written. Here we are in August 2021 and I’m not sure things have changed much with the COVID crisis precipitating people onto the street. I retired over here from the UK five years ago and have always rented. What interests me is the bank repossession rented sector with companies like Silvia popping up. They rent repossessed properties making in my view rather silly demands about income to rent ratios and being totally inflexible on price. I won’t touch a bank repossession, on the basis that it is profiting from others misery. The question I’d like to know the answer too is whether, when a bank rents a repossessed property any of that money goes towards paying off the debt owed by the mortgagee or does the bank accrue the money as profit in addition to any money paid by the debtor. Do you know?? Great blog btw.
Hi John! I have no idea, but I doubt very much they would do that. Since I wrote this blog, individuals do now have more options for cancelling and restructuring debts and starting over with legislation passed in 2015. Thanks!