*Spain rejects US-style mortgage foreclosure system

The Spanish parliament has rejected a proposal to make mortgage foreclosure rules similar to those in the United States.

The Galician National Block (BNG), had asked legislators to amend the law to allow mortgage holders to walk away from their debt by handing over the keys to their properties. The proposals would also have allowed partial debt write offs and permitted homeowners to delay mortgage payments beyond stipulated deadlines.

Under Spanish law, like in the UK, if a property is sold for less than the outstanding mortgage on the asset, the bank can claim the difference from the borrower. Lenders can make a claim against all of a borrower’s present and future assets and earnings.

The BNG lobbied parliament to convert to a system of one of non-recourse loans, similar to the US, where mortgage holders can walk away from their debts in the event of negative equity.
Social outcry

The BNG argued that the new system would help to alleviate social problems.

“We are talking about a social problem of the highest order,” said Francisco Xesus Jorquera, a BNG lawmaker, before yesterday’s vote in Madrid. “It’s a debate that must take place as there is social outcry for the mortgage law to be reformed.”

According to BNG figures, as many as 300,000 homes were repossessed in Spain between 2008 and 2010.

Comment

The BNG’s thinking has mass market appeal. The logic that banks should be made to bear more of the costs of the crisis is a compelling political and social argument.

There are also long term economic benefits. A change in the system would precipitate a sharp increase in housing supply and a consequent drop in prices. The housing market and transaction volumes would return to “normal” more quickly which would be good news for agents in the longer term.

The problem is the immediate pain. If banks had to assume all the losses made during the boom and subsequent bust, the financial system would collapse.

The damage to the banks’ balance sheets would mean a sharp rise in lending costs and a period of mortgage scarcity that would make today’s financial environment look like the land of milk and honey.

Changing the rules maybe a good idea but it can only be done safely in a healthy market. Moving the goal posts now not only creates a problem of moral hazard but risks causing more of the economic and social pain that the policy aims to alleviate.

Source: Global edge

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