A deeply distressing consequence of any recessionary period is the loss of equity in your home and the constant fear of the property being reclaimed. It is perhaps one of the most stressful and painful realisations that any homeowner must face and here at SpainCostaTropical we have seen many owners these last couple of years forced to accept this had reality. As a consequence then I have compiled this article to explain the processes, effects, differences and causes which have contributed to the increase in bank repossessions here in our area. I am most grateful to the many client contributions I have received since 2010 and must thank the extremely informative property news section supplied by kyero.com - also the work of the lawyer/abogado, Raymundo Larrain Nesbitt, of Marbella lawyers.com. If you find yourself in such a position then I do hope you find something here that helps to make that difficult decision a little more tolerable.
Negative Equity & Distressed Properties [#1]
There has been a great deal of media chatter concerning the issue of negative equity and distressed property sales; so much so that many investors believe that the hunt for a distressed property is a REAL long term bargain. However, as you read further on here then I am sure you will come to see that these terms are generally hyped statements… and that in many instances the factors involved are not always so clear cut.
The concept of negative equity in a property occurs when the value of the asset upon which the loan is secured falls below the outstanding balance of that loan – this is the prime concern of any new homeowner when faced directly with a recession and/or deep currency fluctuations. This has an even greater influence here in the region of Spain's Costa Tropical where over the last years there has been an influx of second home, buy to let, relocation and retired owners who having taken advantage of the beneficial Euro rates and easy mortgage options, but are now struggling to keep their monthly payments being now faced with a strong Euro rate and evermore, seemingly inflexible loan options. [#2]
The simple outcome is that many more properties start to enter the resale market; and while they can be described as "distressed" they are only so in as much as their owners are capable of discounting the price to a level that is at the least break even or at worse an ongoing debt that they are forced to write off! However, while banking systems worldwide appear to be writing off THEIR bad debt portfolios many other banks and credit service companies are today now looking to recover losses by turning to the International risk management and credit referencing agencies around the globe such as Experian. A situation which has added further fears for property investors who no longer have the simple option of handing over the keys of the property to the lender without further redress. [#3]
Spanish Banks: The Summer of 2009 [#4]
Since the start of the property crisis there have been many articles published in the Spanish daily newspaper "El Mundo" looking at the current development of bank repossessions in Spain and what exposure the 10 major lenders have in today's property market. Spain's banks and savings banks (cajas) are now recognised as being the country’s largest real estate companies. "Nobody knows how many properties they own, not even the banks themselves," one property expert reported to El Mundo, and with their stock of repossessions continuing to grow fast the banks are forced to classify their burgeoning portfolio.
Taking a simplistic model they classify property as type A or B; and the banks are desperately looking at ways to liquidate this vast level of stock. Type 'A' is for those new builds from developers and promoters who can no longer repay their loans, and being quality new builds in a good condition, are understood to be easier to sell. It is estimated that these account for more than 70% of the current stock. Spanish banks are now using their own property divisions – often newly established - and their regional branch networks to sell these 'A' properties by offering both discounts and also preferential lending terms.
The balance of the stock, type 'B', is those repossessions from home owners who can no longer afford to pay their mortgage. Forecasts for this year alone expect to increase to more than 75,000 homes, and with the legal costs and notary costs involved, then full recovery of the debt is even less likely when such properties are re-sold or auctioned.
The following list shows how the top ten Spanish banks with their recorded property stock are reacting to the current property predicament…
Banco Santander - Spain's leading banker has an estimated 1,300 discount properties, 400 of which have been sold to their employees or other named parties such as employees of Telefonica, Spain's leading telecoms operator. Discounts of 20% to 30% and 100% financing with terms of 40 years have been offered to purchasers . It is reported that the stock balance will be made available to the public market through its property division - Santander Altamira Real Estate.
BBVA - the second largest bank in Spain has 900 new build developments (type 'A') and 600 re-sales (type 'B') throughout the country. On offer through their property division Anida; their appears to be no common agreement between the regions in regards the discounting or finance arrangements for new buyers.
Banco Popular – with 700 properties around Spain being sold to the general public through their property division Aliseda Gestión Inmobiliaria. However preferential financing terms are only available to bank employees and their immediate family members.
Banco Sabadell (aka Solbank) – have a portfolio largely comprised of building lands much less housing. They are selling these plots to other property professionals through their property division Solvia Gestión Inmobiliaria.
Banesto - with 13,000 new builds throughout Spain, they offer properties that are priced to "reflect the market situation." Selling to the public through a network of more than 20 real estate agencies, including Knight Frank International. Banesto offers preferential financial terms of Euribor plus 0% over 40 years. The bank is claiming that they are currently closing over 100 sales a month, nationally.
La Caixa – is Spain's number 1 savings bank (caja) with over 2,000 re-sales in Spain. Their largest selection, 320, being in the Murcia region. Selling through their own real estate division Servihabitat, La Caixa offer discounts of 25% minimum, and an additional 5% to their better clients.
Caja Madrid – have 1,000 properties primarily located in big cities and on the costas. Their greatest selections are in Madrid (244), Valencia (276), Catalonia (177), and Murcia (91). Selling to the general public through their website and the auction house Reser. Caja Madrid are offering discounts of up to 40% and financing of Euribor plus 0.5% with no opening commissions.
Bancaja – offers 800 re-sales at prices they claim are, "adapted to the times." The properties are available from its website, with more than 50% of the stock located on the coasts of Valencia (240), Alicante (134), Castellon (59) and Murcia (24). Preference is given to existing clients, bank employees and their families.
Caixa Catalunya – has more than 3,600 properties throughout Spain. 1,700 are on offer with discounts of up to a maximum of 30%, and a further 1,800 properties are available for rent with the option to buy. They are offered to the general public through their real estate division Procam. To help buyers, Caixa Catalunya, assures that they will re-purchase the property if the buyer has problems paying the mortgage.
CAM Bank – with over 2,500 properties (not only residential but commercial too) is offering discounts of 20% to 50%. Properties are sold through their real estate division Mediterranean Inmobiliaria with both auction and bidding systems available online.
The figures quoted above are based on stock held at the beginning of 2009; since then the trend towards greater acquisitions has continued to develop. Evidence currently shows that the banks are continuing to offer discounted property stock primarily to its own employees, their families and agents at preferential rates while still subjecting all applicants to the usual full credit checks. It is only in the last year that some of the banks have been more proactive to widen exposure of their products and develop their own real estate businesses. Further of the above listing of banks of 2009 - 2 have united (Bancaja and Caja Madrid - BANKIA) & CAM was absorbed by Sabadell. More changes are expected in the Spanish banking sector in 2014...
The Legal View
According to figures from the Bank of Spain, 2009-2010 saw an unprecedented increase in bank repossessions of property througout the country; a level not seen since 2000. The principal causes were not only the world economic crisis; high levels of unemployment, rising inflation, and the Euribor (used as the base rate for the Spanish mortgage) [#5] had reached a historic peak and subsequently led to even higher repayment rates for consumers.
The strength of the Euro against other currencies such as Sterling or the US Dollar now meant that it was even more difficult, and expensive, for those currency holders to accommodate their monthly mortgage repayments in Euros. As Spanish property prices fall then this too has discouraged many potential purchasers, as well as making it difficult for people to borrow against their properties through equity release or life-time loans.
Falling Spanish property values, has now forced many foreign owners to consider ending their mortgage commitment on their holiday home as they witness the effects of the move towards greater negative equity (that is where they owe the bank more than the current market value of their property). For many foreigners, especially those in the UK and US, there is the misconception that simply handing over the keys for the property to the bank or loan company will be enough to resolve the matter (see Note [#3] below). It is true to say that until the end of 2008, most Spanish banks were willing to accept this solution – looking at each particular case independently on the proviso that the asset was not affected by negative equity. However, today the picture is very different, as most banks are now far more reluctant to accept this solution having realised that your property is no longer worth, even at public auction, the value of the outstanding mortgage loan and costs. Consequently Spanish banks will now actively attempt to track the borrower, via International agreements, and look at the assets of borrower's abroad in order to recover debts on their property in Spain.
Further, the Spanish mortgage contracts include a clause that states that when the value of the asset falls below 20% of the independent valuation (the original value by which the loan was assessed) then the bank can discretionally demand supplementary collateral from the borrower to offset the financial shortage. While Spanish banks rarely enforce this option they could legally do so.
Spanish banks used to allow up to 6 months defaulting of payments but since 2009-2010 this has been reduced to just 3 months only. Only when the bank is forced to take the property, then usually they look to sell them first through the Public Auction system. Historically this has always been the prime method of debt recovery but since the auction value of a property can fall to as much as 50% of the current market value then the banks have been looking at more sophisticated ways to recover the full loan by setting up their own real estate divisions, internet portals and collaborations. Please note too that, additional associated costs involved in the repossession process including the banks legal fees, taxes and notary charges – are then again legally reclaimed from the borrower within the consolidated loan amount.
In very rare circumstance these days, Spanish banks may consider an "out-of-court-settlement" only if there is no negative equity and if the borrower is agreed to sign over by notarised public deed the ownership of the property to the bank. By returning ownership to the bank, and in the same act, the bank usually consents that it will no longer pursue the borrower to recover the debt further.
It is essential that borrowers who are faced with this situation always maintain dialogue with their lenders; and wherever possible keep copies of all written communications and to follow up all verbal discussions with a letter. In exceptional cases it may be necessary to ask your Spanish lawyer to act for you on your behalf; and only when agreement is not possible, then the repossession procedure is as follows:
The borrower falls into arrears -
Failing to service the mortgage repayments then the lender will introduce what it terms as delayed interest rate procedures (interés de demora). The bank will also write to the borrower initially to settle the matter out-of-court.
The borrower falls into technical default –
90 days on from the first arrear, the bank manager is forced to send the client file onto the bank's debt collection department who begin procedures to recover the debt. The bank sets aside a provision to offset the prospective loss. At this stage many banks are open to negotiation before being forced to deposit the exact provision required before the Bank of Spain. This action alone can weaken the lender's liquidity stock and is something the banks, affected by the ongoing credit crunch, will certainly try to avoid as best it can.
The Foreclosure process and notary intervention –
After several weeks of dialogue between the parties involved, and depending on the possibility of full debt recovery, then within 15 or 20 days after that the borrower is in technical default. The lender sends a registered communication (buro-fax) via the public Notary office with acknowledgement of a receipt. This document basically informs the borrower that the repossession procedure is imminent.
The Repossession order –
Legal proceedings continue and the matter is then brought to court and a trial date is set. The judge then advises the borrowers (or their legal representative) of the mortgage repossession. The value of the asset in the public auction is determined either from that which is lodged at the Land Registry, or else the bank may request a more recent independent valuation appraisal. If the bank chooses the latter then they will use the appraisal to decide on whether it is worthwhile or not to proceed with the repossession order since there can be even greater associated expenses in this approach.
The Court sets a date for the Public Auction –
Several months on from the initial court action, usually between 6 to 12 months, the judge will then decide on the date of the public auction. At the auction, and if there are no bids for the property, then the bank will take actual possession. Usually, the bank will attempt to offset the outstanding loan debt from the auction by a reserve price. In some cases the property, despite being assigned to the winning bidder, may not raise sufficient to recover the debt and associated repossession expenses. In this instance, the bank is entitled to pursue the rest of the borrowers assets, including those abroad in order to repay the agreed loan outstanding. Note that if there is a guarantor listed on the mortgage deed then the bank will chase their assets too. After this, the property title is now assigned and registered to the new owner.
Following the Public auction act, and only when the "previous" owner is still resident in the property, then after a period of no more than six months, the Police and a locksmith will be called to evict the occupants by force. However, there are occasionally exceptional circumstances where this may not be possible due to legal or health reasons.
As you can see defaulting on your Spanish mortgage can have drastic consequences both for your assets in your home country and also your personal credit rating in the future. Prior to going in to arrears it is important to begin negotiations with the bank; who will usually be willing to assist in offering some options in the short or long term. These can include extension of the mortgage period, reducing the interest rate or moving to an interest-only mortgage for an agreed duration until the borrowers economic circumstances recover. However, these options will often incur charges in order to ratify the terms of the revised mortgage deed before the notary. Such charges will either be incorporated in the new agreement or requested by the bank as a provision of funds towards these costs.
As stated, Spanish banks begin to instruct legal action to recover outstanding debts, once the borrower is over 3 months in mortgage arrears. Even when you may have agreed a settlement after this period (this may be doubtful since after that period the lender now regards you as a defaulter) then you will still be liable not only for the outstanding arrears and interest but also any of the legal expenses that the bank has had to incur for the recovery up to the time of settlement.
Whenever possible it is therefore essential to begin dialogue with your lender or the bank; and if you have problems communicating locally then speak to the regional office or, in exceptional circumstances, contact the banks divisional representatives in your home country.
[#1] Historically, the concept of distressed properties is not entirely new. However, the model needs to be set in context if it is to be classified as a true bargain in the current market. In Spain, those who purchased property with a mortgage more than 10 years ago will have seen their capital growth increase substantially relevant to the original loan value that they took to purchase. However those of 5 years or less will have experienced either nil or limited capital growth, have paid primarily interest only on the loan amount during that period, and have more than likely received the original loan based on a higher than anticipated valuation of the property. It is almost certainly the case, that borrowers were often given access to higher valuations in order to satisfy their loan requirements. During these times the local bank managers had almost carte blanche to offer loans that were as much as 90% or even more of the purchase. Based on independent valuations that were well above the actual purchase price; buyers who required almost full funding could achieve this despite the fact that officially the banks could only lend up to 80% to non-residents and 95% to residents.
Another factor that requires consideration is if the asset has been re-mortgaged.
Generally speaking then properties that are 10 years older or more may provide a bargain – since they will be "distressed" and for sale at the original mortgage value of a decade ago that remains pending and unpaid to the lender. Less than 5 years then the figures simply may not attract the same investment potential – a topical case being off-plan properties. A purchased off plan option in 2006 with an 80% mortgage due to complete in 2009 – the buyers today may be shocked to learn that if they try to switch the mortgage or increase the capital then independent valuations can be as much as 15-20% less than the agreed purchase price; and thus constituting relative negative equity.
[#2] It is important to clarify the distinct differences between the mortgage system in Spain and that of the UK and the US. Based on the French-German repayment system (as most mortgages granted by Spanish banks are), then it is important to understand that you will only be paying a small fraction of the mortgage capital in the early years of the loan. The period contracted can range between 20 and 40 years depending on your contract, age and so forth. This is because in the French-German system you will be paying interest-only during the initial mortgage repayment period. Therefore, and only after the first couple of years, will you gradually move towards capital-only reductions. Following a lineal sliding scale of repayments; it is a system that allows regular monthly payments that are invariable (while allowing for the annual interest rate fluctuations as set by the Euribor) throughout the life of the mortgage and where the proportional interest to capital ratio repayment is adjusted.
[#3] The application of the legal Spanish article 1911 of the Spanish Civil Code relative to signing a Spanish mortgage deed means that you will be held liable with all your current and future assets for the loan repayment in full. The mortgage is technically regarded as an assurance; and is subject to the finance being given where the property or underlying asset acts as the collateral. For borrowers then the legal implications and responsibilities need to be fully appreciated before signing a Spanish mortgage deed. Under article 1911, if you default on your Spanish mortgage payment then the bank can seize the property or asset that represents the collateral. Further, if you fall into negative equity with the property then the bank is entitled to pursue you for the outstanding debt beyond Spain and even in your home country. Consequently, and unlike in the UK and the US, when handing back the keys to the bank this will not stop them chasing you for the outstanding debt in the future.
[#4] Back in 1999, when the average one bedroom frontline apartment in Almunecar cost just under 6 million pesetas (approx 36,000 Euros) and consequently the mortgages were very much lower, the banks who repossessed at that time published every quarter a subasta (auction) magazine that listed its properties at extremely reduced prices. Over more recent years however these have no longer been published as the banks look at new ways of marketing and off-loading their stock of properties. Given that the banks since 2003-2004 had been offering higher than average valuations in order to offer 80% mortgages (which in reality accounted for financing as much as 100% of the purchase price) then in today’s market the remaining loan value can still be greater than the actual market value and eventual selling price. It is therefore a cautious investor who only purchases from the lenders without first checking the home turf…
[#5] Most Spanish banks review annually the Euribor rate, and for those of us whose mortgage is reviewed each September then the July rates are crucial to calculate the new rate for the next 12 months. For those taking a mortgage today then many of the Spanish banks are guardedly offering a minimum base rate of between 3.5% and 4% to compensate for the low Euribor rate – therefore it is wise to check first the conditions offered by various banks before agreeing to the loan. A useful guide to the movements of the Euribor rate can be found at