MADRID (Reuters) - Spain will make it harder for banks to evict homeowners after Europe's highest court ruled that the country's mortgage laws were too harsh for borrowers struggling to pay.
The European Court of Justice decreed that Spanish judges should be allowed to halt evictions when homeowners contest abusive clauses in their contracts, such as excessively high interest rates when a loan falls into default.
A deep recession and soaring unemployment triggered by a housing crash has led to an increase in forced evictions of homeowners unable to pay their mortgage. Under Spanish law, those evicted remain liable for outstanding debt, even after handing their home back to the bank.
Lenders have opposed a loosening of the strict rules, fearing any relaxation would damage their access to funds backed by mortgages. Spain's mortgage default rates are low, despite the severe economic downturn.
A rash of suicides linked to people losing their homes and sinking into debt has pushed the issue to the top of the political agenda.
The government said it would incorporate the ruling of the European court into a new law that is currently being debated in parliament.
"We commit ourselves to revise all aspects of the law that have been declared in breach of the European legislation," Justice Minister Alberto Ruiz-Gallardon said on Thursday.
The opposition Socialists urged the government to extend the revision of the law further to stop all forced evictions.
"The government has the chance to pass a law that puts an end to mortgage abuse and revise unfair legislation that leaves families without a house and in life-long debt," said Socialist Economy Secretary Inmaculada Rodriguez-Pinero.
Prime Minister Mariano Rajoy said in parliament on Wednesday he was against any rules to cancel debt once homes are returned to banks because it would only make mortgages more expensive.
The European ruling was greeted with joy by consumer groups and activists, but analysts said it would do little to alleviate Spain's chronic mortgage problem as it only applied to a small percentage of cases.
"This is a one-off measure that will affect a very small proportion of evicted homeowners," said Mikel Echavarren, chairman at Irea, a Madrid-based consultant specialising in real estate.
Under current rules, people cannot halt the eviction process while they try to contest abusive clauses in their mortgage contracts, meaning that even if they eventually win a case against a lender, they may not be able to recover their home.
Parts of contracts can be found to contain unreasonable terms, such as clauses demanding a sharp increase in interest rates to as high as 25 percent on remaining debt if the borrower falls behind in payments.
This small loosening of the rules - a victory for campaigners - could now bog banks down in many months of legal disputes with homeowners before they can evict them for falling behind on mortgage payments.
"In practice, if people start looking for abusive clauses more, this could make the eviction process lengthier and less efficient, and more costly (for banks)," said Jose Garcia Montalvo, economics professor at the Universitat Pompeu Fabra.
(Additional reporting by Blanca Rodriguez; Editing by Toby Chopra)