What Happened to Mortgage Debtors?

In my first post I advanced some basic ideas on the situation of Spanish mortgage debtors. The Spanish situation following the housing crisis may be familiar to readers because it shares many of the same characteristics of problems in European countries. The U.S. media has covered these stories, for example here.

For different reasons, seemingly sociological, the situation of these debtors was a center of the Spanish discussion about the effect of the crisis on households and individuals (leaving aside unemployment, of course). Therefore, different legislative measures were adopted during these years trying to offer specific solutions to mortgage debtors. In this post I will try to outline, in a more detailed way, the present situation. 

The Spanish Law has been adapting to a progressively increasing problem and to public opinion. In this process, the role played by the courts, including the ECJ, should not be underestimated. Although the legal framework for solutions for mortgage debtors in Spain has been changing since the beginning of the financial crisis, it has not been until 2011-12 that the situation of the debtors has been significantly improved. Earlier attempts in 2008 were not only timid, but their design made them hardly useful, as their clear failure showed afterwards. Thus, the evolution of Spanish law should be explained as the consequence of the increasing public pressure in favor of mortgage debtors that followed the worsening of the economic situation and not seen as the result of a systematic analysis. In fact, as I advanced in my first post, the solutions endeavored to modify the Spanish debt and mortgage system as little as possible. What is the situation at this moment? 

Right now, the legal framework of Spanish law regarding mortgage debtors is composed of three different regulations. The first is Royal Decree 6/2012, of March 9 (hereinafter RD 6/2012; Royal Decree = Government Decree); the second is Royal Decree Law 27/2012 of November 15 (hereinafter RDL 27/2012; Royal Decree Law = law approved by the executive using a Decree because of urgency; must be later confirmed by the parliament); the third is Law 1/2013 of May 14. The three laws cover different aspects of the situation of mortgage debtors in difficulty and therefore should be understood as different tools. The first one is aimed to solve the underlying problem, i.e., the difficulties to pay the mortgage. The second offers a moratorium against foreclosures. The third tries to give some relief against evictions. The three of them help mortgage debtor only for the purchase of the principal residence. 

I do not intend to go into details, but instead will provide some of my own ideas about the basic design of these rules. The three regulations are limited to a certain group of debtors. The definition initially varied among them, which caused serious problems of coordination and allowed strategic behavior. After Law 1/2013, they all now use a similar approach, limiting their application to a combination of social characteristics of the debtor (special vulnerability) and economic situation of the household (that usually includes a reference to a substantial change in the last years). These are not the only limitations. In particular, to access the tools provided by RD 6/2012 to solve the inability to pay back the mortgage, the law requires that the purchase value of the house used as a collateral does not exceed certain values. Although this condition is understandable to avoid an abusive use of this measures, the maximum values were initially set so low so as to leave out a significant number of purchases, thus compromising the effectiveness of RD 6/2012. These limitations motivated a significant increase in a later amendment by way of Law 1/2013.

Both the moratorium against foreclosures and the relief against evictions raises numerous practical problems that deserve special attention, but I will leave them aside to be able to explain the measures provided for the debtors to be relieved from the debt. The other two are only useful to save time, maybe a precious time to cope with, for instance, a temporal unemployment situation. But they will be more or less useless for the hardest cases: those where excessive indebtedness is structural. For these reasons, a different solution was needed.

RD 6/2012 offers precisely such a new solution in the form of a Voluntary Code of Practice that has been adopted by every mayor player in the Spanish financial sector—the latest list is here-. The Voluntary Code of Practice sets up a three-step procedure that, in its final stage might led to a deed in lieu of foreclosure. Depending on the financial situation of the debtor and his ability to pay, the bank must offer a restructuring scheme that (i) essentially provides a longer time payment with an interest-only payment time (with lower interest rate) or (ii) if the debtor is unable to use the interest-only option due to financial conditions a partial write-off of the remaining principal. If (i) or (ii) are either not feasible or not accepted by the credit institution, the debtor might give the collateral to the bank and be freed from the debt with a right to remain as a tenant for two years. In a country where no personal insolvency discharge was given until recently or where this discharge is clearly limited, this measure is of great importance providing a somewhat fresh start, especially  considering that mortgage debt for the purchase of the main residence is the biggest debt for Spanish households. The latest figures indicated only limited use, however. Up to May 2013 (I could not find more recent data) only 298 debtors –out of 3.322 applications- were able to use this deed in lieu of foreclosure. The 2013 amendments may increase the numbers of debtors who are eligible.

The protection of the main residence receives a special treatment in the case of entrepreneurs. As I noted in a previous post, the figure of entrepreneur with limited liability allows them to protect their main residence against creditors because of business activity (as long as they are registered as such in the mercantile register and the value of the property is not higher than 300.000 euros). Although the provision might seem useful, it is probable that most entrepreneurs will find a better protection with the general measures explained above. The reason is that the special “entrepreneurial” protection does not affect secured creditors, what will be the typical situation, and will not play any role in an insolvency proceeding.

This was going to be my last post in my initial planning. But another amendment of the Spanish Insolvency Law jumped in this process last Saturday. I hope that the blog’s administrators and readers will not mind if I stay a little bit longer to explain this amendment. It is not related to individual insolvency, but that I think that it is going to play a huge role in the future.