Mortgage Arrears – Is ‘handing back the keys’ a solution?
Please note that the information provided in this article is of a general interest nature and intended as a basic outline only. It is not intended as any substitute for detailed legal or other professional advice specific to the reader’s circumstances. Nothing contained in this article should be seen or taken as the writer or publisher providing legal or financial advice.
In the recession of the early 1990’s it became a cliché that certain banks were the UK’s largest private house holders as many owners ‘handed back the keys’ to their properties upon which they could no longer continue to service the mortgage payments.
A few months ago, when I was writing the TRG Handbook “Buying Distressed Property in Andalucía” I was told that certain Spanish banks were anticipating an avalanche of clients – particularly expats – who were in difficulties and would need to seek to resolve their position. More recent reports suggest that the prediction is coming true.
From the banks point of view progressing with formal repossession proceedings is both expensive in terms of time and money. It can take up to three years and cost the bank many thousands of Euros in lost interest and professional fees to recover a property enabling them to acquire the legal right to sell to a third party passing full title.
It appears for those facing such miserable circumstances and a potential calamity that another option may exist to defaulting on their mortgage and exposing themselves to a long term battle with their Spanish lender and having a potentially damaging effect on their credit history.
The solution for some may lie in a legal procedure known as a ‘Dación en Pago’.
In very simple terms this means handing back the keys to the bank, signing in the bank’s favour a formal Deed before a Notary under which the bank agrees to cancel the balance of outstanding mortgage debt and release the mortgage debtor from any continuing liability to the lender in respect of the old debt.
The Deed should also involve the bank’s waiver of any right that it may have to pursue the Ex-Pat in their home jurisdiction for the debt. As a consequence you should not need to disclose to any subsequent lender that you had difficulty in Spain and your credit history should be unblemished by your settlement with your bank lender.
This formal procedure is established by Article 1.175 of the Spanish Civil Code (SCC) whereby the defaulting mortgage (the borrower) transfers their property asset to the creditor (mortgagor – lending bank) in settlement of their debt. It is important to note that such a transfer, unless agreed otherwise, only releases the borrower from the liability – usually the value of the mortgage – which corresponds to the value of the asset handed over. As always, when a potential solution is highlighted there seems to be a downside. In order to consider whether a Dación en Pago is a potential solution there are three important provisos.
Firstly the borrower should – where possible – have not already defaulted in the payment of any mortgage installment. Secondly, the lender should not have commenced any formal repossession proceedings and finally the target property – vis a vis the mortgage debt – should not suffer from any negative equity. This broadly means that the currently appraised value of the property must not exceed the mortgage lending on it.
If the mortgage loan when purchased was based on a high loan to value then there is a clear risk that the value of your property may have fallen since completion such that there is a negative excess of mortgage over current value. It has been suggested that headroom of a minimum of 20% between the debt and current value is necessary for a bank to consider the viability of such a scenario. If the debtor believes that on an independent valuation by an accredited bank valuer or tasador that the value of your property exceeds the outstanding mortgage – and you can envisage no other solution then we’d recommend you taking independent professional advice with a view to approaching your lender bank to consider a Dación en Pago. We understand that they are not compelled to accept your proposal but if the case is commercially good for the bank they are likely to consider it.
Should the above criteria not be satisfied it would suggest that the solutions offered by a Dación en Pago are unlikely to be available and the bank will be left with the prospect of formal repossession. It should always be noted that by the operation of the provisions of Article 1.911 of the SCC, that following the repossession of their property, the borrower will be held personally liable to the full extent of their assets for any excess over the sums owed to the bank – which will include their professional fees, unpaid interest etc. and the value of the property realized following repossession.
Remember that until a mortgage debt has been formally written off in the manner envisaged above there is an enduring liability of the borrower for the debt. It may be that the bank chooses to explore the possibility of enforcing the debt in a debtor’s home jurisdiction and whilst seemingly unlikely given the commensurate costs if the volume of debts increase the banks may be more willing to consider this kind of solution.
The other side of the equation for the bank is if they progress by way of this ‘writing off’ procedure will they be able to find a purchaser to liquidate their ‘cash’ out of the property they have re-acquired and into whose name the property will be registered. Acquiring ownership will mean that the bank acquires their borrower’s responsibility for the ‘cuota’ for the property – if on an urbanization – being the ongoing and associated share of Community fees that run with that ownership.
It should be understood that the typical costs associated with a property purchase will apply to a Dación en Pago as for a usual sale and will need to be shouldered by the bank. These will include the usual Transfer Tax of 7%, Notary and Land Registry fees etc. and there will need to be further discussion with the bank in relation to Capital Gains Tax – if any – and the municipal Plus Valia which would usually be paid by the ‘seller’. We suspect that those banks that are using such arrangements are keenly looking for ‘end user’ purchasers to take over the property from the bank. As a result, we believe that the banks prefer to finalise their Dación en Pago arrangements in tandem with the standard Compraventa paperwork once a purchaser has been identified. This will mean that the ‘new’ purchaser pays the final ‘purchasing’ costs in the usual way. To attract the ‘new’ purchaser the banks seem, with some reluctance, to be starting to agree to discount their outstanding exposure on the relevant property in order to liquidate their position. This should result in the ‘new’ purchaser getting a discounted property that may well be priced at substantially below market value.
Â© The Rights Group SL 2009 (Marbella)
Mark FR Wilkins
+34 600 343 917
TRG E-Guide to Completion of an Off-Plan Property Published April 2008. Check out the new E-guide here