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September 21, 2017

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In Spain, mortgage default spawns debt nightmare

ALCALA DE HENARES, Spain -- Inma Rodriguez lost her job, and now that she's defaulted on her mortgage, she's about to lose her home. But the nightmare doesn't end there: Once creditors kick her out, she'll still need to pay back the money she borrowed to buy her house.

It's a mortgage anomaly seen in much of Europe, but especially acute these days in Spain, a nation grappling with an economic crisis triggered by the collapse of a real estate bubble. Since the 2008 property crash, more than 300,000 have been hit by the potential double-whammy of eviction and mounds of mortgage debt.

"It hurts so, so much," says Rodriguez, choking up as she looks up at the ceiling of the home where she's lived for 30 years and raised two children.

Under the terms of her contract, Rodriguez will probably have to pay almost half of her 200,000 euro-plus (US$290,000) bank debt, plus court costs and penalties after she leaves — in stark contrast to the U.S., where defaulters can return the keys to the bank and walk away from their debt.

Defaulters are a small minority in Spain — nearly 98 percent of mortgage holders are up to date on payments. But their plight is generating a wave of solidarity as unemployment soars to record highs: When an eviction appears imminent, demonstrators often gather by the hundreds outside the property to try to block it.

In the rallies, protesters form a human cushion and physically prevent court clerks and bank officials with a locksmith in tow from ejecting residents. The association behind the demonstrations has succeeded about 50 times since 2009, although ultimately it just delays the inevitable.

Last week, the government passed a decree that seeks to address the plight of evicted debtors. It protects more of their wages from being claimed by banks, and changes the way such people's post-foreclosure debt is calculated, to try to trim it.

If the bank manages to sell a foreclosed home, that amount is struck off the remaining debt. But the norm these days is that the property is put up for auction and nobody bids. That has meant the bank then takes over the house for just half its originally assessed value, and wipes the amount off the remaining debt — leaving the borrower still owing a bundle. The legislation passed last week raises the proportion the bank has to effectively pay in the event of non-sale to 60 percent.

The Platform for Mortgage Victims — the association staging the doorstep rallies — wants Spain to usher in U.S.-style mortgage legislation. But the Spanish Banking Association says that would wreck Spain's low interest rate mortgage system: Even now, as loan-shy banks raise rates, they can be below 3 percent, with repayment periods of as much as 40 years and no mandatory mortgage default insurance.

The result, it says, would be banks granting fewer, smaller and more costly loans that are repayable in a shorter time, meaning the nearly 98 percent of mortgage-holders who do make their payments on time would suffer.

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