The repossession process in Spain differs considerably from the UK.
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 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 of trying to sell the property directly.
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.
Agreed payment holidays for loans in arrears is not possible and will not stop any legal process.
The process of repossession is long winded and costly, these costs are added to the loan. 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 in fully in arrears. Normal Penal Rates are between 3% to 4% but can be higher and are recorded at signing in 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 be 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 deemed to be in arrears.
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.
If the banks lawyers are unable to ensure the customer is formally notified and given a certain amount of time to clear the arrears 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.
If a property sells at auction the customer will owe the difference between the price achieved, 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 takes ownership of the property at 50% of the auctionable value and must pay purchase taxes etc based on this amount.
Whatever price the Bank finally sells a property at whether this is a lower amount than the 50% of auctionable value they can at this point only look to the customer in the future for the difference between 50% of the auctionable value and the final bill.
This rule also means that in the instance where the bank sells the property for more than the debt the best that happens for the customer is the bank does not pursue them for the dent that was crystallised on day of court auction. If sum above the outstanding loan is achieved 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 enough equity in it for them to receive monies back. This will never be the case and neither technically will their debt be wiped out.
The example below shows the impact of the way outstanding debt is calculated.
Debt outstanding € 200.000
Auctionable value € 250.000
Bank cost 50% € 125.000
Customer owes € 200.000
Difference between outstanding debt minus 50% of auctionable value € 75.000
Sale price below € 125k customer owes € 75.000
Sale Price above € 125k Bank keeps all sale funds and customer still owes € 75k
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 and it is entirely possible that past debtors in Spain will find earning attachments linked by the courts or being forced to sell assets they hold to repay debt left in Spain.
In present climate the issues for the Spanish Banks is so vast that they will take action to recoup outstanding debts and 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, so have little sympathy with the debtor.
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 we getting away with having a holiday home or investment for absolutely no cost, on basis if it went wrong they had lost nothing and in many instances took profit before it was generated may learn the hard way there is no such thing as free lunch.
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