MADRID Feb 26 For more than a century, Spanish
law has determined that if a person borrows money to buy a home,
they can only be freed of the debt when it is repaid. Even in
death, the debt is not cancelled. As the country enters another
year of recession, calls are mounting for the system to be
relaxed. But the banks worry this would damage their access to
Take Francisco Lema, an unemployed 36-year-old builder, who
dropped off his 8-year-old daughter at school on Feb. 8 and
returned to the family's rented fourth-floor flat in the
Andalusian city of Cordoba.
The house he built himself had been repossessed, leaving a
debt of 22,000 euros ($29,000) on the mortgage he took out to
cover building materials, said family friend Maria Jose Vadillo,
an activist for Stop Evictions Cordoba, a pressure group. His
parents had stood guarantor for part of the loan. Now he was
struggling with the repayments, said Rafael Blazquez, another
activist with the same group.
His wife, who was out, returned home to find his body on the
street, covered with a sheet.
Everything pointed to suicide, a police spokeswoman said; a
witness had called to say Lema had jumped off the balcony. His
wife declined to be interviewed. Of the two banks involved in
the case one, Kutxabank, confirmed Lema had a mortgage with a
savings bank it owns. The other, Caja 3, did not respond to
inquiries. Activists and police say Lema was one of four people
who have killed themselves this month in Spain because of forced
evictions and the consequent debt loads.
"The foreclosure process here is very tough," says Jose
Garcia Montalvo, economics professor at Universitat Pompeu
Fabra. "The law is brutally clear and it's not interpretable
case by case."
Mariano Rajoy's conservative government has taken steps to
ease the burden. In November, it said it would suspend evictions
for two years for vulnerable homeowners who can no longer pay,
including those with small children, the disabled and the
long-term unemployed. Last month, the finance minister announced
more measures including partial debt-forgiveness for some
defaulted borrowers who pledge to repay a certain amount of the
remaining debt within five years.
But lawyers, activists and opposition politicians want more.
Thousands of Spaniards bearing placards and banners took to the
streets in 50 cities around the country on Feb. 16 to protest
against forced evictions. Spain's three main judge associations
have said the government has not done enough, and a petition
with close to 1.5 million signatures this month persuaded
parliament to debate the possibility of cancelling mortgage debt
once a home is handed back to the bank. Spain's eviction law is
in breach of European law on consumer protection by not offering
homeowners a legal chance to argue against eviction until after
they have been thrown out, Juliane Kokott, the Advocate General
of the European Court of Justice, has said. The Court ensures
the application of European Union law across the member
"The mortgage law is missing a social dimension," Fernando
de Rosa, a conservative judge with strong links to the ruling
People's Party (PP), told Reuters. "It's too strict in the
relationship between the bank and the borrower."
Spain's banks, which have already been bailed out by Europe
to the tune of 40 billion euros, are lobbying against any
Moody's said earlier this month that easing the legislation
would diminish borrowers' incentive to keep up with mortgage
payments. Any change in the law eroding investors' protections
would undermine confidence, the agency said. That risked
damaging Spain's already weak credit rating. As of Jan. 10, two
ratings agencies pegged Spanish debt just one notch above junk.
In the United States, if you default on your mortgage you
can often cancel the debt by handing back the house to the bank,
and hope the bank agrees to accept it in lieu of the outstanding
sum. In Britain, you can write off the liability through
personal bankruptcy: your credit will be damaged for a time but
you can wipe the slate clean. In Ireland, which suffered a
similar housing boom and crash to Spain, the government has made
it easier for people to be declared bankrupt, and proposed new
routes for mortgage holders to discharge their debt.
In Spain, homeowners remain liable even after the bank has
repossessed the property. Banks have a claim on debtors'
salaries, and can put a claim on the estate of the deceased.
That's not unique, but experts say it is harsher than in many
Spanish house prices are around a third below their peak.
More than 80 percent of the population own their homes; the
mortgage debt totals over 600 billion euros or around two-thirds
of gross domestic product. So far, nearly 400,000 properties
have been repossessed by banks since the 2008 housing crash, and
the number is rising, although no statistics are available on
how many of these are homes.
People who call for reform note that while individuals have
no escape from their mortgage debts, real estate companies -
which built up debts of 280 billion euros to the banks - have an
easier get-out. Many have declared themselves bankrupt and their
bad loans have ended up in Sareb, Spain's so-called 'bad bank.'
Others say huge, lifelong debt burdens will deter even the
able-bodied from seeking work or starting a business, so are not
profitable for the banks to hold onto.
"It encourages these people to work in the black market or
live on subsidies and it doesn't benefit banks other than acting
as a threat for others to keep up with their payments," said
Mikel Echavarren, chairman at Irea, a Madrid-based finance
company specialising in real estate.
Pressure is mounting internationally. Warming himself by a
tin bucket filled with smouldering coals outside a central
Madrid branch of Bankia, 38-year-old unemployed Ecuadorian
Emilio Azuero is one of many who came to Spain during the boom
years, bought property at the height of the market, and now face
eviction and debt. He joined a spontaneous protest at the site
for three months until police cleared the site at the beginning
In his home country, mortgage debt is cancelled with the
return of the property to the bank. In Spain, his debts would
exceed 100,000 euros if he lost his home.
Ecuador said in January it had presented a case to the
European Court of Human Rights that argues Spanish law abuses
fundamental rights by not allowing homeowners to explain their
situation in court during the eviction process. The Latin
American country estimates that as many as 15,000 Ecuadorian
families in Spain are affected by eviction processes or mortgage
LOW DEFAULT RATES
But one important reason the banks oppose reform is that, as
the euro zone debt crisis runs into its fourth year, they have
struggled to borrow on the money markets. Instead, to a limited
extent, they turn to the mortgage-backed bond market where they
can use their home loans as collateral.
Spain is the biggest issuer of mortgage-backed bonds in
Europe, with 578 billion euros of bonds linked to mortgage
assets outstanding as of November 2012, according to Moody's.
That is equivalent to 15 percent of the banks' total funding.
Making it easier for bad debtors to cancel debt would push
up the rate of default, which for Spanish banks is at 3.5
percent - around a third the rate of the home loan defaults in
"We have managed to maintain one of the lowest mortgage
default rates in Europe despite the recession," said Santos
Gonzalez, chairman of the Spanish Mortgage Association, which
represents banks accounting for most of the mortgage market,
including Santander, BBVA and Bankia. "Do we want a knee-jerk
reaction to a crisis that has affected a small percentage of
people by changing the structure of our whole mortgage market,
weakening its guarantees?"
Laws governing the repayment of mortgages ensure that
homeowners keep up with payments, says economist Montalvo of
Universitat Pompeu Fabra. "If you don't pay, the bank will get
it back somehow and with interest," he adds.
One way banks have kept the default rate low is by
renegotiating mortgages with borrowers. Official data is not
available but according to an independent audit carried out by
consultant Oliver Wyman in September, banks have renegotiated
almost one in 10 residential mortgages. By comparison, 11
percent of large companies' borrowing has been restructured.
A POSSIBLE EXIT
Marcheline Rosero has reached an agreement with her bank
which reformers say could serve as a partial model. She and her
family escaped eviction from their small Madrid flat when she
fell behind on mortgage payments two years ago, and lender
Bankia repossessed it.
The unemployed 45-year-old, confined to a wheelchair by
childhood polio, reached an agreement to stay by paying the bank
a nominal rent of 240 euros per month.
But under the existing law she still owes most of a 222,000
euro home loan even after handing the property - now valued at
60,000 euros - back to Bankia. "I've got a debt there that I
haven't paid back that is accumulating interest," says the
former office clerk, greeting her three children as they return
Bankia said the bank does everything possible to find
alternatives before eviction. It has renegotiated around 80,000
mortgages since 2009, a spokeswoman said: she could not say how
big a share of the total that was. The bank declined to comment
on proposed changes to law until they materialised.
Chema Ruiz, a Madrid-based activist for 'Support for those
Affected by Mortgages,' a not-for-profit group which advises
those struggling with repayments, says banks delayed many
evictions in November, but courts have started to send out
eviction notices again.
More homeowners are attending weekly support meetings, he
said; he sees 80 to 100 new cases a week. "Every week there are
more people and of higher social standing."