My name is Heather Chambers of International Mortgage Solutions and Sundream Estate have kindly asked me to write the following article on Spanish bank repossessions and mortgages.

In the UK a bank has certain obligations to try to resolve the situation by offering counselling and agreeing short term measure to assist customers in difficulties. If all this fails the bank goes to court to obtain the right to force a sale.

The sale process in UK has laid down guidelines that helps ensure the bank takes all steps to obtain the highest price possible which ends at auction after a certain time period before which the property is marketed by appointed agents.

The amount owed to the bank is the difference between the final price obtained and the mortgage left outstanding including all costs. The banks in UK can then pursue and individual for any amounts not covered by the sale.

In Spain the banks have no obligation to try to agree with the customer short term changes to assist them and have no appetite in general to agree to changes that might help a customer. This is partly because of the rules implemented by the bank of Spain on provisioning which does not allow for the Spanish Bank to maintain a loan in arrears; and restrictions within what constitutes a change to a mortgage deed and the fact that changes to a mortgage can instigate it being deemed as a new mortgage which in turn causes tax known as AJD and Notary and Land registry costs to be incurred.

If there is a desire by the Spanish Bank to find solutions it is however still possible. Lloyds International es and Unicaja found legal ways round offering temporary interest only facilities and few other Banks have allowed extension of term to reduce monthly payments without affecting the mortgage deed.

In all instances however this has to be for customers who have dealt with an issue before arrears or have been able to clear any arrears. Once in arrears negotiation to maintain the mortgage and agree changes to assist customer to pay are more or less zero.

Agreed payment holidays for Spanish loans in arrears is not possible and will not stop the legal process.

The process of bank repossessions in Spain is long winded and costly, these costs are added to the loan outstanding. Each loan has a penal rate written into the deed. This penal rate is applied on top of interest and capital due from the minute a loan is late or fully in arrears. Normal Penal Rates are between 3% to 4% but can be higher and are recorded at signing on the mortgage deed.

Because the process is long winded in general Banks take action early. If a Spanish Mortgage is 3 months in arrears almost certainly the legal process will begin. The 3 months in arrears does not mean the loan has to have a full 3 months unpaid as with the UK. 3 months in arrears can mean that 1 month payment was missed and the loan has not then been brought back up to date for a period of 3 months. Even if subsequently the next month was paid in full and so on the mortgage is still deemed to be in arrears.

First part of the legal process is that the Spanish Banks lawyers must take all steps to ensure they have communicated, to the mortgagee, the intention of legal action. Where a mortgagee is resident this is easier and quick as papers can be sent registered post and signed for or papers can be served directly to the customer.

For non –resident mortgagees ensuring the customer has received notification is more difficult. The customer does not reside at the house, the customer may have moved in the UK without notifying the Spanish Bank. The banks lawyers will try to ensure the customer is notified but from Spain it is more difficult for them to ensure this is the case. In many instances the notifications are ignored by customers who do not understand the long term implications of just allowing repossession to take its course.

Whilst the legal process requires the customer is notified; during the time it takes to ensure this has happened costs are mounting up. At this point only full clearance of the arrears and costs will stop the process. There now remains no ability to negotiate new payments terms or pay back what is owed over time.

If the Banks lawyers are unable to ensure the customer is formally notified and given a certain amount of time to clear the arrears in the full; they are required to post a notice on the board of the relevant court for that property. This notification must be in place for a full 3 months. If after that three months has passed the customer has still not contacted the lawyer or the bank to resolve the arrears the full court proceedings will go ahead.

All properties in arrears go directly to auction. On the Nota Simple, of all properties with a loan, it is recorded what the auctionable value is. The property cannot be sold at auction for less than 70% of the auctionable value. Normally but not always the auctionable value is the valuation given to the property at the time the mortgage was first set up.

If a property sells at auction the customer will owe the difference between the price gained and outstanding mortgage, legal costs and penal interest, this debt is not wiped out at sale of the property and the banks will pursue the outstanding amount.

If the property does not sell at auction the bank has 21 days to find a buyer or must take over the property themselves. They take over the property at 50% of the auctionable value and must pay purchase taxes etc based on this amount.

If unsold at auction; which is nearly always the case; the debt is then crystallised at the difference between 50% of the auctionable value and total debt outstanding.

If the Bank sells within the 21 days timescale, and before they take over the property, they can choose to sell at a price lower than the 50% of auctionable value. The Spanish Bank can only however pass onto the customer who held the loan the difference between 50% of the value and the total outstanding amounts owed including all costs as of day of auction as this is the final crystallised debt. Any loss below the 50% has to be taken by the bank.

The Bank may however choose to do this and write off some further sums rather than have to pay purchase taxes and become responsible for the property in its entirety.

Whatever price the Bank finally sells a property at; whether this is a lower amount than the amount they have taken it over at they can only look to the customer in the future for the difference between 50% of the auctionable value and the final outstanding amounts owed at day of auction.

Any agreement by the bank to sell below the amount they have taken property over at must be written off by the bank.

What many customers do not appreciate is this process also means that in the instance where the bank sells the property for more than the amount they took it over at or even for more than the debt left the best that happens for the customer is the bank can choose not to pursue them for the debt crystallised at auction.

The original owner will not be paid back any monies over and above the debt outstanding as is the case in the UK.

This is a crucial point; many customers may believe it is better to allow the property to go to court than to sell before court action happens on basis there is some or enough equity in it for them to receive monies back or reduce amount outstanding need to be aware this will never be the case in Spain. Any future profit or contribution to debt made on sale of the property is the Banks money not the original owners and does not technically remove or reduce the crystallised debt.

The example below shows the impact of the way outstanding debt is calculated.

Mortgage capital outstanding € 200.000

Auctionable value € 250.000

Banks value 50% € 125.000

Customer now owes difference between 50% of auctionable value and total debt so €75.000.

Sale price in excess of € 125.000 mortgagee owes € 75.000

Sale price lower than € 125.000 mortgagee owes € 75.000.

Any court order in Spain is applicable across Europe where the customer originates from an EEC country. The bank in Spain can take this court order and have it implemented in a UK court.

Whilst it is difficult to see a UK court forcing a UK resident to sell their main home to pay back the Spanish debt given that there is; as specified in this article; Spanish Banks do not follow the process UK banks would apply to do everything to ensure the property does not go to court; it is entirely possible that debtors in Spain will in the future find earning attachments linked by the courts or being forced to sell assets that do not constitute their main residence in the future.

This time round unlike in the 90’s the issues for the Spanish Banks is so vast they will take action to recoup outstanding debts. There is an inbuilt view within the Spanish Banks that many clients stop paying because they think they can just walk away from their obligations. Whilst this rather sweeping view is a little unfair and many other factors, like lack of ability of the Spanish Banks to communicate effectively, have a big impact, desperate banks battling to survive will do whatever they have to recoup monies owed.

Under Spanish Law a debt never goes away until it is finally paid so the issue could dog many buyers of Spanish Property for years to come.

Those people who took loans in Spain linked to valuations rather than purchase price and thought they were getting away with having a holiday home or investment for absolutely no cost; and in many instances took profit before it was crystallised may learn the hard way there is no such thing as free lunch.

Some questions asked by overseas property owners here in Spain include;

If I am in arrears in Spain or am struggling to pay my Spanish Loan what options do I have.

Customers suffering difficulties should always speak to the bank or an independent third party who can talk to the Bank on their behalf before getting in arrears.

Customers should always stay aware that late payments not brought up to date are considered as arrears.

Whilst a few years ago banks were unwilling to help customers who were struggling to pay; with the right communication at the right time they do will now consider options that will reduce the impact for the bank and the customer.

What are these options

1) The bank can agree to extend the term of the loan. There are some minor costs incurred in this instance which the customer must be able and willing to pay but it can have the impact of reducing the monthly obligation

2) The bank can agree to take back the property as full and final settlement. Unless there is significant equity in the property the bank will be unlikely to agree to do this as they take over responsibility for selling the property, running costs of the property, taxes for the transfer and already have a vast amount of stock on their hands.

3) The bank can agree to allow you to sell the property at whatever price you can get for a quick sale even if this is below the mortgage level owed.

More and more banks will be willing because of the vast amount of properties they own to consider option 3. If they agree to option 3 your obligation is wiped out with no future recourse for the bank to pursue any amounts left unpaid between debt and actual funds gained.

In the current market conditions option 3 may provide a much better long term solution for struggling mortgagees and the banks even if this means selling below current market price.

Further information and advice is available at www.imsmortgages.com