What is a “cedula hipotecaria”?

You may have heard about the “cedulas hipotecarias” or covered bonds.

A “Covered Bond” is a financial product guaranteed by the whole mortgage portfolio of the bank itself with an interest linked to it. This is a safe product in a normal economic climate and it could be quite profitable (in fact, during the property boom it brought a lot of investors). But in the current economic climate it does not give any benefit, and it has a big defect: if the investor wants the money back, he will need to sell the Covered Bonds and who would want to buy anything linked to mortgages these days? Nobody!

Therefore, the investor has a problem. He has the money and needs it but he cannot take it. What can he do? Spanish Banks usually offer the following: The bank will take the covered bonds in exchange for a 4 year term deposit account, with low interest and the prohibition of getting the money out during the first year. It does not look like a great investment (except for the bank), but it is a good solution for those investors with this problem.

Prior to signing any agreements, the investor who got trapped in the covered bonds, needs to consider some important issues:

Firstly, he should check all the details of the offer, read all the clauses and seek advice from a professional to avoid being caught in trouble again, and finally compare the options available. Obviously, Banks usually look for themselves and therefore the agreement may not be as attractive for the investor.  The investor should ask for copies of the offer and the contract, take them home and read them carefully.

Of course, most foreign investors will struggle to understand the language and the terminology. It is therefore advisable to seek professional advice from a qualified Spanish lawyer or Economist. If in the end, the investor opts for this agreement with his Spanish bank and he is living in the UK, he will be able to grant power of attorney to either the bank or someone he trusts to sign the necessary paperwork in Spain. As mentioned in previous posts, a power of attorney can be signed in this country without the need to travel to Spain and this could prove helpful to those who do not want to use their holidays just to sign an agreement.

As always, it is better to be safe than sorry so don’t rush into agreements or products until you are entirely sure of what you are signing.

Photograph from www.dreamstime.com


Some hope for Spanish home owners in mortgages arrears

The Court of Appeal in Navarra issued on the 17th December of 2010 a Judgment that is raising hopes and expectations for home owners of Spanish properties that are today in mortgage arrears. 

Any person entering into a Spanish mortgage responds with all his personal assets for the payment of that debt. This means that, contrarily to what happens in the USA, returning the keys back to the bank is not sufficient and the bank can pursue you for any shortfalls after repossessing or selling the property.

However, the recent Judgment from the Court of Appeal in Navarra has created a precedent that could benefit thousands of borrowers. The case is as follows: the debtor signed a Spanish mortgage in 2006 for a sum of €59,390, then re-mortgaged it and increased the loan in a further €11,865.39.  The loan was secured with a mortgage on the property and the bank valued the property for repossession purposes in €75,900. The debtor failed to meet the monthly payments and the bank issued legal proceedings to have the property sold in a public auction. As no one shown interest on the property, this was assigned to the bank for a value of €42,895.

The bank then issued proceedings to claim the shortfall on the loan, interests and legal costs. Surprisingly, the district Judge rejected the application. This was then taken to the Court of appeal by the bank and, more shockingly, the Court of appeal confirmed the rejection.

It is interesting to note that in its decision, the Court of Appeal, considered that pursuing the debtor for further monies when the property was valued for this specific purpose for €75,900 was unnecessary as this amount was more than sufficient to cover the debt, interests and costs. The fact that the value of the property had declined since it was bought and the property assigned to the bank for just €42,895 was irrelevant to the Court. Finally, the Court commented on the banks’ responsibility in the current economic crisis, which came as an unexpected sign of solidarity with the people who are now struggling.

To summarise, this is a very brave decision from the Spanish Courts that can give some hope to those who purchased properties in Spain at inflated prices and find themselves in difficulties to pay the mortgage. Up until now, it was impossible to contest the bank’s rights but now it looks like there is some hope and even some legal grounds to defend some cases. As usual, each case is different and this decision cannot be extrapolated to all the cases. However, I am sure that the news will be welcome by many and looked with animosity by Spanish lenders.

I can’t wait to see how this evolves as this is not only an interesting news from a legal but also from a social and ethical point of view.

About the Spanish “swaps” in the banking practice

   Photograph by www.freefoto.com

“Swaps”. Perhaps not a word that would mean much to the people who live outside Spain but the truth is that this is a hot topic right now in the Iberian Peninsula. The reason, as always, has something to do with the banks. In this case, the word “swaps” refers to a high risk product offered by the Spanish banks to their clients from year 2006 onwards with the purpose of protecting borrowers from the risks of high mortgage interest rates.

The “swaps” were in most of the cases an addendum to mortgage loans whereby the parties, that is the bank and the borrower, agreed to subject the mortgage to a fixed interest. However, the real deal was much more complicated that what it initially looked in the sense that the agreement was linked to the fluctuations of the “Euribor” (this is the interest rate for which European banks lend money to each other) and therefore if the resulting interest rate was higher than the agreed rate, any excess would be covered by the bank. On the other hand, if the resulting interest rate was lower than the agreed rate, then the borrower was obliged to pay for the difference. And this is exactly what happened in late 2007 onwards. The “Euribor” went down noticeably due to the worldwide financial crisis and those borrowers who were benefiting from the “swaps” agreement suddenly ended up paying much more for their mortgages.

It then emerged that the “swap” was an ideal product for the good times, where interest rates are usually higher but a real pain for recession times, where interest rates decreased to historical minimums. The problem is that most of the borrowers who entered into this type of agreements had no idea of the potential risks involved. They were under the idea that they were contracting some sort of insurance that would freeze the mortgage interest rates for a few years and therefore protect them from escalating interest rates.

The above has caused a recent trend to sue the banks asking that those agreements be declared null and void and that large compensations be paid. The reasoning behind those claims is that the “swap” is a complicated and high risked product that should only be offered to individuals with a minimum financial knowledge. Both, the Spanish Consumers Act and the Stock Market Act as well as the European regulations in this field, impose banks and financial entities the obligation to carry out a test on the clients to ensure that they have enough financial knowledge to understand this type of agreements. We are now seeing many cases where those tests were not carried out. Furthermore, recent Court decisions have shown that the terms of the “swaps” agreements were sometimes even too complicated for the own staff at the bank.

Hundreds of claims have been lodged recently and a relevant part of them have been successful. Obviously, this does not mean that all claims can be successful as each case is different but the truth is that the Spanish Courts are and will be inundated with this type of claims for a while.