Court Rules “Repossessed Property Covers Excess Mortgage Debt”
January 28th, 2011
In what could be the beginning of a change in Spanish law, a judge in Navarra has ruled that the proceeds gained from the sale of a property repossessed by a bank should be sufficient to clear the former owner’s debt.
Under current Spanish law, mortgage lenders have the right to make a claim on all of a borrower’s assets and not just the home on which the mortgage was based on.
In this case, the borrower had an outstanding debt of 28,129 euros from an original 71,225 euro loan, after the lending bank, BBVA, sold the property in Navarre for 42,895 euros. Once sold, the bank continued to demand mortgage payments and the case ended up in court.
The judge surmised that the fall in value of the property was a direct result of financial mis-practice. “The truth is that the bank was awarded a property which they themselves has valued too highly,” justified the judge.
It was noted by the Navarra court that just a few days previously, the Congress of Deputies has begun to consider a proposal whereby “the secured obligation of mortgages should only be effective on the goods mortgaged, and should not apply to other assets of the debtor.”
BBVA plan to appeal the decision and it should be noted that a regional court’s decision does not set a precedent for other cases, this would require two Supreme court judgments. However, there is a strong prospect that other repossessions will head to court in the hope that other judges rule in a similar fashion.
If the Spanish banks thought about this very carefully, they could turn a potential issue into an opportunity.
They should grasp the nettle of negative equity that now exists with nearly all overvalued properties in Spain and revalue the property. If the outstanding mortgage falls within the 70-80% criteria of the revaluation then the mortgage should remain as it is. However, if the outstanding mortgage falls below this, then the banks should offer a renegotiation of the property and an option to purchase the property at the new 70-80% figure. E.g. 100,000 euro valuation = 80000 purchase option. The banks will be able to provide accurate asset valuation figures to the Bank of Spain and whilst they may lose out with some of a mortgagees outstanding balance they would reap long term benefits and make more money than throwing repossessed properties at auctions that would barely realise even 50% of current valuations in the current climate.
I’m not so sure that this is a good idea. Despite the fact that people will start to abuse the situation, banks will also be forced to sell repossessed property for more than usual. This will make it harder to sell and scare of those who are now keen on buying repossessed property.