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The most distressing consequence of any recession 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 position that any homeowner must face and we have seen many owners these last few years forced to accept this hard reality. As a consequence we offer this article to explain the processes, effects, differences and causes which have contributed to the increase in bank repossessions here in our area. We are very grateful to the many client contributions we have received and must thank the extremely informative property news section supplied by kyero.com - and also the work of the lawyer/abogado, Raymundo Larrain Nesbitt, of Marbellalawyers.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 you will come to see that these terms are generally over-stated… 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 the 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, are now struggling to keep their monthly payments are now faced tied to the Euro rate and 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 now looking to recover losses by turning to the International risk management and credit referencing agencies around the globe such as Experian. A situation that 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: since the recession [#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 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 sell on their burgeoning portfolio.
Taking the most simplistic view 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 new builds in part construction, are understood to be easier to sell on. It is estimated that these account for more than 70% of the current stock. Spanish banks are now using their own property divisions and their regional branch networks to sell these 'A' properties by offering discounts and also preferential lending terms to buyers willing to take on such developments. The balance of the stock, type 'B', is those repossessions from home owners who can no longer afford to pay their mortgage. Forecasts for 2017 alone increased to more than 100,000 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 even auctioned.
Bank held properties that have been sold over the last years have sometimes not always been debt free - with purchasers later learning that unpaid utility bills remain against the property and have to be cleared by the new owner before they can be contracted, or unpaid community charges remain that need to be incorporated before the new owner can be involved.

The Legal View
According to figures from the Bank of Spain, it was in 2009-2010 that realized the unprecedented increase in bank repossessions of property throughout the country. 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 fell 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.
Stable Spanish property values, have 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). In 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. 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 that were originally conceived. Consequently Spanish banks will now actively attempt to track the borrower, via International agreements, and look at the assets of those borrower's abroad in order to recover debts on their property in Spain.
Also 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 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 that, additional associated costs involved in the repossession process include the banks legal fees, taxes and notary charges – which are then again legally reclaimed from the original borrower within the consolidated loan amount.
In rare circumstance, Spanish banks may consider an "out-of-court-settlement" but only if there is no negative equity and if the borrower is agreed to sign over the property by notarised public deed to the bank. By returning ownership to the bank, and by 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 certain cases it may be necessary to ask your Spanish lawyer to act for you on your behalf; but 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 – usually at the property address which can be frustrating for second home owners.
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 central Bank of Spain. This action alone can weaken the lender's liquidity stock and is something the banks, affected by the credit crunch, will certainly try to avoid as best they 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 – and again is usually sent to the property address.
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 borrower’s assets, including those abroad in order to repay the agreed loan outstanding. 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.  
Eviction –
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; they 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.
Once a Spanish bank begins to instruct legal action to recover outstanding debts then usually the borrower is over 3 months in mortgage arrears. Even when you may have agreed a settlement after this period (which is 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 before 2005 will have seen their capital growth increase substantially relevant to the original loan value that they took to purchase. However those of 2008 onwards 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 the boom period 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 set 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 typical 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 history. The period contracted can range between 20 and 40 years depending on your contract, age and so forth; and with 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.
[#4] Back in 1999, when the average one bedroom frontline apartment in Almunecar cost just under 6 million pesetas (approx 36,000 Euros) then 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 the decades however these have no longer been published as the banks look at new ways of marketing and off-loading their stock of properties on-line. Given that the banks since 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 today 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 rate is 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 2.5% or more 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 http://www.canalhipoteca.com/euribor.php

Edit: 08.2017