Insight: In Spain, banks buck calls for mortgage law reform
MADRID (Reuters) - For more than a century, Spanish law has determined that if a person borrows money to buy a home, they can only be freed of the debt when it is repaid. Even in death, the debt is not canceled. As the country enters another year of recession, calls are mounting for the system to be relaxed. But the banks worry this would damage their access to funds.
Take Francisco Lema, an unemployed 36-year-old builder, who dropped off his 8-year-old daughter at school on February 8 and returned to the family's rented fourth-floor flat in the Andalusian city of Cordoba.
The house he built himself had been repossessed, leaving a debt of 22,000 euros ($29,000) on the mortgage he took out to cover building materials, said family friend Maria Jose Vadillo, an activist for Stop Evictions Cordoba, a pressure group. His parents had stood guarantor for part of the loan. Now he was struggling with the repayments, said Rafael Blazquez, another activist with the same group.
His wife, who was out, returned home to find his body on the street, covered with a sheet.
Everything pointed to suicide, a police spokeswoman said; a witness had called to say Lema had jumped off the balcony. His wife declined to be interviewed. Of the two banks involved in the case one, Kutxabank, confirmed Lema had a mortgage with a savings bank it owns. The other, Caja 3, did not respond to inquiries. Activists and police say Lema was one of four people who have killed themselves this month in Spain because of forced evictions and the consequent debt loads.
"The foreclosure process here is very tough," says Jose Garcia Montalvo, economics professor at Universitat Pompeu Fabra. "The law is brutally clear and it's not interpretable case by case."
Mariano Rajoy's conservative government has taken steps to ease the burden. In November, it said it would suspend evictions for two years for vulnerable homeowners who can no longer pay, including those with small children, the disabled and the long-term unemployed. Last month, the finance minister announced more measures including partial debt-forgiveness for some defaulted borrowers who pledge to repay a certain amount of the remaining debt within five years.
But lawyers, activists and opposition politicians want more. Thousands of Spaniards bearing placards and banners took to the streets in 50 cities around the country on February 16 to protest against forced evictions. Spain's three main judge associations have said the government has not done enough, and a petition with close to 1.5 million signatures this month persuaded parliament to debate the possibility of cancelling mortgage debt once a home is handed back to the bank. Spain's eviction law is in breach of European law on consumer protection by not offering homeowners a legal chance to argue against eviction until after they have been thrown out, Juliane Kokott, the Advocate General of the European Court of Justice, has said. The Court ensures the application of European Union law across the member states.
"The mortgage law is missing a social dimension," Fernando de Rosa, a conservative judge with strong links to the ruling People's Party (PP), told Reuters. "It's too strict in the relationship between the bank and the borrower."
Spain's banks, which have already been bailed out by Europe to the tune of 40 billion euros, are lobbying against any change.
Moody's said earlier this month that easing the legislation would diminish borrowers' incentive to keep up with mortgage payments. Any change in the law eroding investors' protections would undermine confidence, the agency said. That risked damaging Spain's already weak credit rating. As of January 10, two ratings agencies pegged Spanish debt just one notch above junk.
In the United States, if you default on your mortgage you can often cancel the debt by handing back the house to the bank, and hope the bank agrees to accept it in lieu of the outstanding sum. In Britain, you can write off the liability through personal bankruptcy: your credit will be damaged for a time but you can wipe the slate clean. In Ireland, which suffered a similar housing boom and crash to Spain, the government has made it easier for people to be declared bankrupt, and proposed new routes for mortgage holders to discharge their debt.
In Spain, homeowners remain liable even after the bank has repossessed the property. Banks have a claim on debtors' salaries, and can put a claim on the estate of the deceased. That's not unique, but experts say it is harsher than in many countries.
Spanish house prices are around a third below their peak. More than 80 percent of the population own their homes; the mortgage debt totals over 600 billion euros or around two-thirds of gross domestic product. So far, nearly 400,000 properties have been repossessed by banks since the 2008 housing crash, and the number is rising, although no statistics are available on how many of these are homes.
People who call for reform note that while individuals have no escape from their mortgage debts, real estate companies - which built up debts of 280 billion euros to the banks - have an easier get-out. Many have declared themselves bankrupt and their bad loans have ended up in Sareb, Spain's so-called 'bad bank.'
Others say huge, lifelong debt burdens will deter even the able-bodied from seeking work or starting a business, so are not profitable for the banks to hold onto.
"It encourages these people to work in the black market or live on subsidies and it doesn't benefit banks other than acting as a threat for others to keep up with their payments," said Mikel Echavarren, chairman at Irea, a Madrid-based finance company specializing in real estate.
Pressure is mounting internationally. Warming himself by a tin bucket filled with smoldering coals outside a central Madrid branch of Bankia, 38-year-old unemployed Ecuadorian Emilio Azuero is one of many who came to Spain during the boom years, bought property at the height of the market, and now face eviction and debt. He joined a spontaneous protest at the site for three months until police cleared the site at the beginning of February.
In his home country, mortgage debt is canceled with the return of the property to the bank. In Spain, his debts would exceed 100,000 euros if he lost his home.
Ecuador said in January it had presented a case to the European Court of Human Rights that argues Spanish law abuses fundamental rights by not allowing homeowners to explain their situation in court during the eviction process. The Latin American country estimates that as many as 15,000 Ecuadorian families in Spain are affected by eviction processes or mortgage repayment problems.
LOW DEFAULT RATES
But one important reason the banks oppose reform is that, as the euro zone debt crisis runs into its fourth year, they have struggled to borrow on the money markets. Instead, to a limited extent, they turn to the mortgage-backed bond market where they can use their home loans as collateral.
Spain is the biggest issuer of mortgage-backed bonds in Europe, with 578 billion euros of bonds linked to mortgage assets outstanding as of November 2012, according to Moody's. That is equivalent to 15 percent of the banks' total funding.
Making it easier for bad debtors to cancel debt would push up the rate of default, which for Spanish banks is at 3.5 percent - around a third the rate of the home loan defaults in Ireland.
"We have managed to maintain one of the lowest mortgage default rates in Europe despite the recession," said Santos Gonzalez, chairman of the Spanish Mortgage Association, which represents banks accounting for most of the mortgage market, including Santander, BBVA and Bankia. "Do we want a knee-jerk reaction to a crisis that has affected a small percentage of people by changing the structure of our whole mortgage market, weakening its guarantees?"
Laws governing the repayment of mortgages ensure that homeowners keep up with payments, says economist Montalvo of Universitat Pompeu Fabra. "If you don't pay, the bank will get it back somehow and with interest," he adds.
One way banks have kept the default rate low is by renegotiating mortgages with borrowers. Official data is not available but according to an independent audit carried out by consultant Oliver Wyman in September, banks have renegotiated almost one in 10 residential mortgages. By comparison, 11 percent of large companies' borrowing has been restructured.
A POSSIBLE EXIT
Marcheline Rosero has reached an agreement with her bank which reformers say could serve as a partial model. She and her family escaped eviction from their small Madrid flat when she fell behind on mortgage payments two years ago, and lender Bankia repossessed it.
The unemployed 45-year-old, confined to a wheelchair by childhood polio, reached an agreement to stay by paying the bank a nominal rent of 240 euros per month.
But under the existing law she still owes most of a 222,000 euro home loan even after handing the property - now valued at 60,000 euros - back to Bankia. "I've got a debt there that I haven't paid back that is accumulating interest," says the former office clerk, greeting her three children as they return from school.
Bankia said the bank does everything possible to find alternatives before eviction. It has renegotiated around 80,000 mortgages since 2009, a spokeswoman said: she could not say how big a share of the total that was. The bank declined to comment on proposed changes to law until they materialized.
Chema Ruiz, a Madrid-based activist for 'Support for those Affected by Mortgages,' a not-for-profit group which advises those struggling with repayments, says banks delayed many evictions in November, but courts have started to send out eviction notices again.
More homeowners are attending weekly support meetings, he said; he sees 80 to 100 new cases a week. "Every week there are more people and of higher social standing."
($1 = 0.7598 euros)
(Additional reporting by Aimee Donnellan and Shadia Nasrallah in London; Edited by Sara Ledwith and Will Waterman)
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