This content is from: Local Insights

Incomplete mortgage foreclosure reform

Yolanda Berenguer

Spanish news reports almost daily feature stories of families being evicted for not meeting their mortgage payments; undoubtedly, this is due to the recession affecting all of Europe, particularly Spain. The figures speak for themselves. Between 2007 and 2010, the number of judicial mortgage foreclosures in Spain increased by 531%. In addition, the overwhelmed state of the courts has resulted in delayed foreclosure proceedings (between 18 and 24 months, in the courts of first instance).

This has led to a search for alternative solutions. Spain's 15-M movement claims that dation (conferment) in payment is the panacea and, in the recent elections, several political parties included this alternative in their programmes. Determined to save costs and time, banks are negotiating dation in payment on mortgaged properties with delinquent clients. However, this can only be a short-term remedy, as the banks' real estate portfolios cannot continue to grow at the same pace as in recent months.

This situation recently forced Spanish lawmakers to reform the judicial foreclosure proceedings (through Royal Decree-Law 8/2011, which came into force on July 7 2011, and the Act to Accelerate Procedures (Ley de Agilización Procesal), in force since October 31 2011); these reforms mainly protect individual debtors who are homeowners.

The measure that worries creditors the most is the increase in the minimum value for the transfer of mortgaged properties, whether through an auction or through a direct adjudication to the creditor if there are no bidders at the auction.

Before these reforms, mortgage creditors could acquire mortgaged properties for up to 50% of their value in the mortgage deed; when the total amount of the debt claimed in the mortgage foreclosure proceedings (including the interest accrued during the foreclosure, and the costs of the proceedings) was lower, they could acquire them for this amount.

However, in foreclosure proceedings where the mortgaged property is the debtor's principal residence, Spanish lawmakers have repealed the option to acquire mortgaged properties for 50% of their value or for the amount of the debt. In these cases, the mortgage creditor can acquire the mortgaged property for a minimum of 60% of the value in the mortgage deed.

Mortgage creditors are sceptical of this legislative change: if the total debt outstanding is less than 60% of the value of the mortgaged property in the deed, the mortgage creditors could end up having to pay the difference, to be able to acquire the property given as security and collect their debts.

Furthermore, Royal Decree-Law 8/2011 increases the minimum threshold needed to garnish the salaries of mortgage debtors who have lost their principal residence (should the mortgage foreclosure proceedings continue later through an ordinary foreclosure against the debtors' assets and rights) and reduces the deposit that bidders interested in participating in the auction must provide before the auction to 20% of the value of the mortgaged property.

The measures adopted seem insufficient to mitigate: (i) the delays in the mortgage foreclosure proceedings; (ii) the little, or even non-existent, participation of third-party bidders in the auctions of mortgaged properties; and (iii) the increase in the so-called second-round foreclosures (against the mortgage debtors' other assets and rights).

Particularly for the interest of those funds holding non-performing loan portfolios in Spain or looking for loans with a Spanish real estate collateral, it could therefore be worth encouraging the prior careful examination of the mortgaged properties to be auctioned.

It may also be worth requiring prior filing of an updated valuation of the mortgaged property (in line with which the auction will take place or the property will be adjudicated if there are no bidders at the auction), encouraging alternative measures for selling the mortgaged property (alternative sales arrangements and sales by experts, for example) or postponing temporarily the second-round foreclosure to enable recovery of the debt not collected in the mortgage foreclosure proceedings through an out-of-court sale of the property.

Now all Spanish practitioners can do is wait and see …

Yolanda Berenguer

© 2021 Euromoney Institutional Investor PLC. For help please see our FAQs.

Instant access to all of our content. Membership Options | 30 Day Trial