Against a back-drop of mounting mortgage delinquency in Spain the courts are seeing an increase in disputes where the owners of property are seeking to hand over their property to the bank to clear the mortgage they have taken out on the property. The operation known in Spanish as ‘Dación en pago’, involves ‘selling’ the property to the bank in return for extinguishing any existing mortgage.
While ‘dación en pago’ can provide a solution to the property owner, in an era of continuing falls in the value of property in Spain, Spanish banks are increasingly objecting to it’s use. Banks would much prefer to use other methods of reducing the debt which are far more beneficial to them. One possibility open to them is to place the property in a public auction and, upon failure to attract a purchaser (as if often the case), take advantage of typical mortgage contract terms that allow the bank to value such a property at 50% of it’s nominal value while continuing to pursue the (ex-)owner for the remaining 50%.
Mortgage debt and the law in Spain
The Spanish courts in Navarra and Barcelona have made the headlines recently by retroactively enforcing a ‘dación en pago’ by deciding in the cases before them that the value of 50% placed by the banks on the relevant properties while not enough to repay the debt was sufficient to extinguish the mortgage. The banks are appealing both decisions.
As against those decisions Article 671 of the Rules of Civil Procedure stipulate that the bank may retain the property for 50% of it’s value in the event of a failure to attract a purchaser at a public auction. Article 597 of the same law permits the bank to pursue the mortgagee for the remainder of any debt due should the auctioned property fail to realise sufficient funds to extinguish the debt. While both of these articles are bad news for anyone having difficulties paying their mortgage in Spain, Article 1911 of the Spanish civil code makes things worse by providing that all personal assets – both current and future – may be used to pay-off a debt. For this reason Spanish banks have been successful in seizing a portion of their debtors’ incomes at source.
Is ‘Dación en pago’ a workable solution?
At the beginning of the current financial crisis the banks accepted many thousands of properties as adequate payment to erase a mortgage debt. However as time has gone on and property values have continued to fall while bank inventories of property continue to increase, banks are increasingly resistant to accepting title to a property as an acceptable form of extinguishing the mortgage.
While strictly speaking a bank is not obliged to accept a property in lieu of repayment of a mortgage debt it may be in it’s financial interests to do so. Upon failure to make a specified number of mortgage payments a bank is entitled to seek enforcement of the mortgage. This includes repossession and public auction of the property as well as a maximum 50% reduction of the outstanding mortgage plus recourse to the courts for the remaining 50% or the remainder should the property sell but the sale proceeds fail to cover the mortgage.As stated the bank can embargo a persons income at source to enforce repayment.
Banks have even shown themselves to be willing to pursue foreign debtors who have decided to return to their country of origin, mistakenly believing that by leaving Spain they were in the clear. Recent action by Banco Sabadell to pursue an English couple who left a debt of more than €200, 000 using a European Enforcement Order (allows a successful suitor to enforce a court decision in another EU country) has demonstrated that this may not be a solution.
However, banks are pragmatic and will evaluate each situation on it’s merits. So it appears that if the property value is greater than the outstanding mortgage debt the likelihood is that faced with an alternative of expensive court actions both in Spain and in other European countries the bank may accept the property to extinguish the mortgage debt.
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