Spanish Government rejects proposals to protect mortgage holders who cannot pay their debt

The Spanish Vice President for Economy Elena Salgado refused the idea proposed by three Catalan parties to allow mortgage holders end their debt by returning their house to the bank. This measure already exists in the US and other countries. In Spain, a country with a high unemployment rate, many people are not able to afford to pay their mortgage. However, at the moment, debt does not disappear when banks execute mortgages and take away the house. Salgado wants to keep the current system in order not to harm the banks and thus the recovery, but at a high social price.

CNA / Roger Pi

January 11, 2011 10:43 PM

Madrid (CNA).- The Catalan Eco Socialist Party (ICV), the Left-Wing Catalan Independence Party (ERC) and the Populist Catalan Independence Party (SI) announced their intention to debate a new measure at the Catalan Parliament with the aim of having it passed to the Spanish Parliament. The measure would aim at protecting mortgage holders in debt, whose house was taken by the bank. However, the Spanish Government’s Vice President for Economic Affairs Elena Salgado rejected the idea feeling that it would put Spanish banks at risk. According to Salgado, if banks saw mortgage loans on housing being ended in return for ownership of the houses, the Spanish financial sector could be seriously harmed because the difference between the mortgage loan's remaining quantity and the house’s market price would be assumed by the banks. This system works in the United States and in many other countries, but not in Spain, where people who are not able to keep paying their mortgage loose their home and are left with the remaining part of the mortgage. This debt is a terrible burden for some people, who without a home and many times a job are condemned to social downgrading and in the worst cases social exclusion.

Let’s take the case of a person who buys a house for €600,000. This person has already paid the first €100,000 in cash and has asked the bank for a mortgage of €500,000 plus interest, so the purchased house becomes the warranty.  Three years later the person in question has already paid €40,000 to the bank, leaving €460,000 plus interest to be paid. With the housing price depreciation that Spain has experienced in the last 2 years, the house’s market price is no longer €600,000 but rather €425,000. If this person loses their job (something common in a country with an unemployment rate of almost 20%) and cannot keep paying the loan, the bank can execute the mortgage and take the warranty which is the house.  Since the house’s market price is now €425,000, the bank will take this value as a reference. Therefore, after all the calculations, this person would be jobless and homeless and have a bank debt of €35,000 plus interest; all this having already spent €140,000 for a three year period when they were living in their house.

Thousands of people are living this nightmare in Spain. However, in other countries, such as the United States, this would be unthinkable as the moment the bank executes the mortgage, the debt is dissolved. The three Catalan political parties, ICV, ERC and SI want to follow this model and will take legislative steps in this direction. But it is unlikely this proposal will be approved in the Catalan Parliament and even more unlikely to be finally approved at Spanish level, which is required to enter into force. In fact, the Spanish Socialist Party is already opposed to this measure.

The Vice President of the Spanish Government for Economic Affairs Elena Salgado already refused the proposal. According to Salgado, it would put the Spanish financial sector’s strength at risk, as banks would be the ones assuming the loss of housing’s value and not the families. Putting the banks at risk would be extremely dangerous as they are the base of the economic recovery. Salgado acknowledges that banks should have been more cautious when giving out mortgage loans. However, she also stated that “we all should have been more cautious while thinking if we had possibilities to pay this credit in the future”. Salgado thinks that implementing this measure “from one day to the other would be very complicated for the financial system”, as banks gave the mortgage loans under some concrete conditions.