Returning the keys back to the bank

morguefile com1 (2)A REAL CASE OF A SUCCESFUL DACION EN PAGO

This is a real case that we saw in the office some months ago. For obvious reasons, no names will be mentioned. The important thing is what happened and how the matter was resolved. Let me explain what happened.

 

In year 2006 two friends bought a property in Spain in the peak of the market for the amount of 200.000 €. In that year, the housing prices were high due to the excessive demand and banks granted mortgages like bakers bake muffins: one after the other.

Spanish banks were happy to lend monies because property prices were continuously rising like there was no tomorrow. These two friends got a mortgage for 180.000 € and therefore only had to put 20,000 € from their own money plus another 20,000 for taxes and fees. Total investment into the property was 40,000 € and the rest was brought by the bank.

Not much later the real estate bubble bursted in Spain. Consequently, the housing market declined, housing demand plummeted drastically, the value of the properties decreased and people were not able to pay their mortgages. Banks repossessed the houses and they sold them out in auction; therefore, there were more properties in the market and prices decreased more and more.

In 2014 the two friends realised they could not face the payments of the mortgage and they stopped paying regularly. They also contacted our firm for advice. We informed them that there is an option for people like themselves who are prepared to surrender the keys to the bank and be freed of the mortgage. It is called “dación en pago” and it involves signing a deed whereby the property and title are handed to the bank in exchange of the redemption of the debt. It is not a great solution as it usually involves writing off any investment and money put on the property but at least allows the clients to clear their bad investment in Spain and start from scratch in the UK with no debts. These clients were prepared to take this route and therefore instructed us to talk to the bank and start negotiations.

We contacted the bank, explained our clients’ situation and pushed for a dación en pago. The bank came back to us saying that the value of the property was lower than the mortgage. There was a 30,000 € shortfall and this shortfall had to be paid somehow. In layman terms, the property was now worth 160,000 € and they still owed the bank 190,000 €. The bank wanted to recover the 30,000 € shortfall and the solution offered was that the dacion en pago would be accepted provided that the clients signed a personal loan for the remaining 30,000 €. This option was not entirely satisfactory to the clients but they were prepared to sign the loan if the conditions were affordable.

A few weeks later and while we were in the process of waiting for the bank’s proposal, a debt collection agency was appointed to deal with this matter. The property was valued again and we took the opportunity that a new person was dealing with the file to explore the possibility of a full dacion en pago. We are not sure if it was pure luck or persistency (I have got the feeling that their valuation came higher than they initially thought and probably saw the potential of the property) but the debt collectors accepted the offer of a full dacion and suggested a date for the signing of the dacion. This was excellent news for the client as a full dacion consisted in handing the keys and the title to the bank in exchange of the clearance of the debt. Exactly what they wanted. The only requirement placed by the bank was that the property was transferred up to date of taxes and management fees. These were paid by the clients and we proceeded to sign the necessary deed of dacion en pago which freed the clients from this burden.

It was not the best outcome as this meant losing any investment put into the property but clients got rid of a massive debt that was affecting their finances. Furthermore, clients were aware that if they defaulted in the mortgage, the bank would repossess the property and eventually come after them in the UK for any shortfall due (and believe me there is always a shortfall). A slightly happy ending to a bad story. Obviously not all stories are like this and not all property owners want to get rid of their properties in Spain. Most prefer to keep them and enjoy them during their holidays. Others prefer to let them and wait until the market recovers. However, for those where the mortgage is a burden, there is always this possibility. It is not the panacea but it could allow a person who is struggling financially to clear some debts and start from scratch as a new person with no debts.

 

 

 

Ok, a dación en pago has been approved. Now what?

 Businesswoman viewing the contract before signing

 

 

 

 

 

If you own a property  in Spain but you are no longer able to pay its monthly mortgage instalments, one of the possibilities contained in the Spanish legal system is the dación en pago which is the procedure to enable consumers to surrender their properties back to the bank in exchange of clearing the debt.

In previous posts we commented that the amount of these procedures has decreased and it is no longer easy to get a dación en pago accepted. The fact of being a non-resident does not make things easier and some Spanish banks are too busy to be concerned about non-residents debtors as they have more important defaults to deal with in Spain.

If you have contacted your Bank and the Bank has accepted your case, there will be some tax consequences that you have to face. One of them is the payment of 3% Capital Gains Tax retention. This percentage is usually known for being the tax on the gains obtained in the sale of a house when the sellers are non-resident.  Given the circumstances in which this process is approved, you may think that there is no obligation to pay it. However, the truth is quite different. The 3% retention over the value of the property is also applicable in a dación en pago. The only exemption applicable to the dación en pago applies to those who are close to the level of poverty and for whom the house is their main residence. Therefore this kind of transactions for non-residents are still considered taxable regardless if there is a gain or a loss. Having said that, many Banks will bear that cost if the value of the property justifies it.

This 3% should be differentiated from other taxes due as the payment of the plusvalia tax, the payment of the annual property tax (I.B.I or SUMA) and the Community of owners’ fees which also need to be paid by transferor of the property before its transfer. In spite of the above, the real challenge these days is to have the dación en pago agreed. Banks are no longer keen on this agreement and very often the only way to achieve this result is instructing a lawyer able to negotiate the terms and explain the situation to the bank in plain Spanish. And for those lucky (or unlucky, depending on how you view it) enough to have arrived to an agreement with the bank for the surrender of the property, bear in mind that the Bank is entitled to request payment of all the appropriate taxes and costs prior to the transfer. Once again, it will all depend on your negotiation skills!

 

 

 

 

 

CHANGES TO THE SPANISH LEGISLATION REGARDING FORECLOSURE

 

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Given the increase of evictions and the drama that this carries to the Spanish society, a new Law (1-2013 14th May) has been launched in order to protect those who cannot pay the mortgage. The new law aims at helping those who, if provided with a longer time to improve their economic situation, will be able to recover financially and take control of their momentary financial distress.

The main novelty is the possibility to suspend the eviction procedure for a period of two years to give a breath of fresh air to these families.

Those who qualify for this specific measure are the vulnerable people who are in the parameters of special risk. These parameters are the following:

–          To be a family of three or more children.

–          To be a single parent family with two or more children

–          To have a family member that is less than 3 years old

–          To have a member of the family who is disabled

–          The mortgagor is unemployed and has no more estate benefits

–          The mortgagor is a victim of gender domestic violence

At the same time, the combined family income cannot be higher than 1,597.53 euro per month (which corresponds to three times the ´IPREM´, an economic indicator that is used in Spain as a guidance figure to grant benefits and aids).

Finally, the mortgagor needs to prove that the financial capability of the family has changed in the last 4 years and differs from the previous circumstances when the mortgage was signed. For instance, if the mortgage was signed when two members of the family were fully employed, an example of the qualifying criteria would be that one of them is jobless and that this situation has arisen in the last 4 years.

The above is the special measure to suspend evictions for a period of 2 years but there are other measures that are worth noting and that apply to all types of mortgagors. For instance, the lender, generally a bank, will not be able to foreclose the mortgage unless the debtor or mortgagor is 3 or more months in mortgage arrears. In the past, the bank was entitled to foreclose the mortgage as soon as the mortgagor was 1 month in arrears. Now, the bank needs to wait until the mortgagor is 3 or more months behind with his mortgage. This measure applies to all type of mortgagors, those who qualify under the special risk parameters and those who don’t. Other changes included in this law are the limitation of the default interest and the improvement of the conditions at the point of auctioning the property in order to avoid situations where the property is sold in auction or repossessed and the mortgagor still owes the bank a very substantial amount of money.

At the same time, pursuant to the ruling from the European Union Court of Justice of the 14th March 2013 regarding abusive clauses in Spanish mortgage deeds, the Spanish Notaries are now entitled to warn and advise the mortgagors prior to the signing of a mortgage deed that contains abusive clauses. The judges are entitled as well to appreciate by themselves these abusive conditions in a foreclosure proceeding and declare them as abusive, suspending the eviction.

But how can this affect to non-residents such as the readers of this blog who are generally residents in the UK but have property in Spain? The special rights, such as those that allow stopping eviction proceedings, will not apply to non-residents as one of the main conditions is that the property affected constitutes the main residence of the mortgagor. However, some of the other improvements can benefit non-residents. This is the case of the abusive clauses detected by the Judge or the fact that the bank will not be able to foreclose on the mortgage until the mortgagor is 3 or more months in arrears.

Many people have criticized the new regulation stating that it is not sufficient to cover the needs of those who are in financial distress and in the verge of losing their houses. However, the success or failure of this new law will be determined in a few months’ time when checking the eviction ratios. If these go down, then the law will have been successful. If these continue at the same level or grow then clearly new measures will be required. My personal impression is that these measures are probably too shy and could have been more ambitious. There are many families that are in the verge of losing their main homes and for a pure matter of arithmetic or statistics will not fit in the criteria but there will be others who will benefit from this law and will get the necessary break to try to improve their circumstances and, hopefully, avoid eviction. This is better than nothing and any proposal in that respect should be welcomed with an optimistic mind. At the end of the day, this shows an intention to address a social and important problem in Spain’s society.

Dacion en pago for non-residents. Do we have a deal?

Do we have a deal?If you have read the Spanish press this week you will probably have seen plenty of articles on the Government’s new proposal to solve the current problems with those who cannot pay the mortgage.  Luis de Guindos, Minister of Economy, will announce this week some new measures to enable consumers to surrender their properties back to the bank in exchange of clearing the debt (a procedure known as “dacion en pago”).  

This would be applicable to low income families where all the family members are unemployed. The “dacion” will enable the debtors to return the property to the bank and have the mortgage debt cleared entirely. This can be positive as many property owners who are behind in their mortgages, are in negative equity and therefore owe more than what their asset is worth. Under the current rules, the borrower responds with all his personal assets and therefore the repossession of the asset does not end the debtor’s liability if the asset is in negative equity. The debtor will still owe money to the bank until he has repaid the full amount. This is extremely burdening for low income families and the new proposal will try to find a solution to the current problems enabling some families to return the “keys” to the bank and start from scratch without debts. The proposal will also contemplate the possibility of renting the property from the bank and paying the bank a “socially acceptable” rent until the debtors can get back into the employment ladder and refloat their finances.

The above will be, obvioulsy, subject to the bank’s approval but Miguel Martin of the Spanish Bank Association has already stated that the banks will be interested in co-operating and finding useful solutions for those families.

The above looks promising but unfortunately will only be applicable to those properties that form the main residence of the family. This means that non-residents owning property in Spain, such as the usual readers of this blog, will not be able to benefit from the new proposal.

So, where does the above leave non-residents who are currently struggling to pay their Spanish property? Well, the proposal has not been launched with their situation in mind. Those non-residents will have to contact their banks and suggest a dacion but the bank will not be obliged to accept these.  In fact, during my daily practice in law I have seen a decrease in the amount of “daciones en pago” accepted by Spanish banks. Some of them are even too busy to be concerned about non-residents debtors as they have more important defaults from Spain to deal with. 

I read a post the other day where the blogger indicated that a bank will not consider the “dacion” if the mortgage is in arrears. With all the due respect to the said blogger,  I have found in my practive that this is not always the case. In fact, I have seen banks telling me that they cannot consider a dacion until the mortgage is in arrears!!! Very confusing. 

In my experience the key thing is to try to keep with the payments and keep the property. Otherwise, all the money and dreams invested in the property will dissapear. However, sometimes this is not possible and therefore a person may have to consider a measure as dramatic as the dacion. In those circumstances, it is better to come clean with the bank and show all the cards. The financial situation should be explained and documentary evidence provided. Obviously, the assistance of a lawyer can also help as sometimes relevant information is lost in translation and in the peculiarities of the Spanish legal system.

So, there is some hope for Spanish based families who are struggling to pay their mortgages and are afraid of still owing a large amount of money to the bank after the house is repossesed. For those who do not live in Spain, the situation is not as good, if not worse, but Spanish banks will consider the possibility of a dacion and in some occasions approve it. 

 Photo from www.dreamstime.com

No way out?

Recently and as a result of the sum of several factors such as the unstoppable fall of the sales of properties and an increase in mortgage defaults, Spanish banks have accumulated more than 150,000 million euros in property assets. Assets which, incidentally, the banks do not want but the truth is that since October 2008, the amount of acquired houses by banks has not decreased, quite the opposite, it has continued to grow.

 
This is partly due to the so-called “dación en pago”, common and usual practice in Spain, which consists in giving the house or flat to the bank and canceling the mortgage debt or part of it, after the property has been valued. In some cases, the Dación en pago involves payment of the total mortgage debt (dati pro solute) and in others cases payment of part of the mortgage (dati pro solvendo).

However, the truth is that as result of excessive accumulation of assets by banks, the chances of banks accepting the “dación en pago” these days without an offer for sale for the property by a third party have declined.
 

 

Another strategy used by families in Spain to keep ahead and tackle debt is called “REUNIFICACIÓN DE DEUDAS”. It consists of clustering all sort of debts (including personal loans and mortgages) into a single mortgage, the monthly payments being refinanced and maturity dates being extended. This practice reduces the total monthly payments and restores the family’s or individual’s creditworthiness. The downside of this practice is that it would mean either re-mortgaging the property if there already was a mortgage in place or mortgaging the property if this was free of charges. For those without a property it would mean committing to a longer repayment plan with higher interests 

In my opinion the “dación en pago” and the “reunificación de deudas” are appropriate measures to keep afloat financially. In the case of the former, it would mean cancelling the mortgage and being able to start from scratch without debts. In the case of the latter, it would allow buying some time to make things work and hopefully be able to tackle the debt later on in a better position, mentally and financially.  These options prove much better than defaulting on debts, as this always implies legal consequences that stay with the debtor for years, whether this is bad creditor reports or the fear of being sued in Court.

Picture from www.freefoto.com   

 

Struggling Britons seek ways to offload Spanish holiday homes

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Higher mortgage interest rates in the Eurozone, a fall in the value of the pound and the effects of the recession mean that many Britons who have bought holiday homes in Spain are now struggling to meet their monthly repayments.

Our firm has seen a rise in the number of people seeking help to renegotiate their Spanish mortgages or advice on alternative options.

The increase in mortgage interest rates from 2.5 to 5 per cent in Spain and the weaker pound have both increased the cost of mortgage repayments. However, buyers who allow their homes to be repossessed could face consequences in the future.

Under Spanish law a borrower is liable with his own personal assets for any mortgage signed in Spain. Where a home is repossessed by the bank and sold and the value is not enough to cover the outstanding mortgage, interest and costs, then the bank will be entitled to claim against the borrower for the shortfall. In the case of UK residents this could mean the lender issuing proceedings in the UK. 

The borrower could also be put on a register of bad debtors and be blacklisted in Spain for six years. This may not worry UK residents who decide to leave Spain. However Spanish lenders are fully aware of the importance of credit ratings in the UK and are now exploring ways to pass on information to UK databases.

Some are looking into signing reciprocity agreements under which they can share information with companies in different countries. Ultimately UK residents who default in Spain may find their credit history affected back in the UK. A decision by the European Court of Justice on 23 November 2006, which clarified the circumstances in which financial institutions may exchange this type of information, has brought this scenario a step closer to reality.

Options for homeowners in financial difficulties include renting out the property, extending the mortgage term or remortgaging, or ‘dación en pago’ in which the property is transferred to the bank in lieu of the outstanding mortgage.

Whatever the situation, handing in the keys and simply walking away is one of the worst things you can do. It’s worth exploring the options as a rash decision could come back to haunt you at a later date.