Antonio Flores’ Blog

Following my previous post, where I propose a decalogue of tips to obtain a response from the bank when it is just not possible to keep repaying, below I have excerpted a sample of a letter of instruction, given to a lawyer, to act on behalf of the troubled borrower when nothing else has worked. The associated fees are not so important (there is absolute freedom in this respect) but it would give a guidance as to what should be expected when having to deal with this scenario and the actions that can be taken.

Letter to Potential Client

Dear Mr Doe

In relation to our services regarding your mortgage loan, our firm can act for you in three distinct stages:

1. Actions to attempt to reduce the mortgage installment whether by re-mortgaging, conversion of the repayment to interest only, reduction of the interest rate being applied (3.5 % should be the interest payable now) or a combination of all. The acceptance by the bank implies signing a contract with the new conditions and requires that you are present, unless we act for you with a power of attorney.
2. Actions to attempt to obtain an agreement whereby the debt is to be cancelled against transfer of the property to the bank, if repaying a loan is not possible. The acceptance by the bank implies signing a mortgage deed of transfer of the property and requires that you are present, unless we act for you with a power of attorney.
3. Actions in a Court of Law should none of the above are attained. In this instance you may need to have a lawyer acting for you if the equity on the property is substantial as you may wish to try to sell before auction (or ensure you get a fair deal) and this requires liaison with Court proceedings. Also, if you reach the auction stage, having a lawyer may help in ensuring that if there are bidders for the property they can get the information for the property promptly, even if it means providing them with access to it (many bidders refrain precisely because they cannot access the property, which is an obvious thing!). Finally, note that it is possible for the bank to foreclose and adjudicate the property, through the Courts, for 50% of the value of the property for mortgage purposes (that generally coincides with the valuation), which could be far less than the debt. This means that if the value of the property is 100.000 the debt is 90.000 Euros, the bank could end up keeping the property for 50.000 Euros, and you would still owe 40.000 Euros. It is therefore recommendable to appoint a lawyer and find a “dummy” bidder (who would be a friend) to force the bank to push up the bid as much as possible. This however would require lodging 30% of the value of the property for mortgage purposes, a deposit that would be reimbursed by the Courts.

Courts can take up to 12 months to finally adjudicate the property to the creditor or a third party so there is some time to act.

If the equity is negligible or negative (the outstanding mortgage loan will need to be increased by an average of 10 per cent for legal fees and arrears) there is no point in incurring in heavy legal fees unless there is an opportunity to sell it, or there is a risk that a substantial portion of the debt will remain unsettled (as explained in point 3).  Renting the property during this period will bring in some cash but it is advisable to inform the tenant of the situation, unless it is for short rental.

Our fees to act on your behalf have already taken into account the financial difficulties faced and are as follows:

• For Stage 1: 750 Euros plus VAT (inclusive of signing at the Notary office).
• For Stage 2: 1400 Euros plus VAT (inclusive of signing at the Notary office
• For Stage 1 and 2: 1600 Euros VAT.
• For stage 3: will depend on the value of the property (minus whichever amount paid as above).

Although it is not possible to force banks to agree, acting quickly can help your position as bankers sympathise with borrowers who are sincere and upfront in their proposals. We are aware that your current predicament is shared by many property owners and that you may sustain a monetary loss if you eventually lose the property. In addition, it is important that you take some measures to limit or even eliminate completely any bad credit records both in Spain and in your country as well as to try and prevent any further action by the bank.

Antonio Flores Mortgages, Property, Uncategorized dacion en pago, foreclosure in spain, spanish mortgage repayments

Revisited 20-11-2008

Being unable to keep up the mortgage repayments is indeed a difficult situation for many and the topic is now becoming an all too often familiar situation. Keeping up the repayments is the best way to avoid problems but since this is not always possible below are some recommendations I would use when dealing with your Spanish bank:

1. Be frank to the person in the bank you deal with and tell them about your problems, which are incidentally shared by thousands of persons. The branch manager (with whom almost invariably you will be now dealing with and from whom you should not expect much help), will either try to  a) make you feel guilty about the situation and say that the ball is in your court and that they cannot help you further and b) scare you out of all proportion by making you think that if they foreclose you will be chased around the world for this debt, now and in future, which is probably not true as they will keep the property and forget about you if there’s not a substantial nagative equity on the property. However, some banks use credit-search sites which they can link to other site within the EU, something which may have an adverse effect on your credit history back home.
2. Always answer the telephone if they are chasing you, even if it is to reassure them that you cannot pay (going silent is a bad sign and who knows, perhaps they have good news to communicate as we found out once). Branch managers are accountable to regional managers in respect of difficult cases and so they will show more willingness to help if they can contact us for updates.
3. Propose your lender an interest only payment for a minimum of 2 years. This will see your repayment greatly reduced.
4. Propose your lender that interest rates are revised every quarter as opposed to every 12 months. Bear in mind that rates in the EU zone are going down and it is very likely that by mid next year the Euribor should be in the 2% mark, according to many analysts (if they can still be trusted!). As an example, a €200,000 mortgage repayable in 25 years and it´s rate to be calculated in December could be reduced by €120 per month and up to €300 per month by mid next year.
5. Combine the above with a rental, even if it is below the market. On a property worth €200,000 you should be able to get a minimum of €6,000, around €500 per month.
6. It is now (time of writing) a great time to think of switching your mortgage to a multicurrency loan with the Yen as the main currency, given that the interest rates are very low (1%) and the Yen at one of the highest exchange rates in the last years in respect to most western currencies (EUR, GBP). This means that if it goes down you will end up paying a smaller installment and will owe much less. Not all banks offer this type of loans but it is worth considering as a  €1,000 loan would go down to around €500. However, be advised that this can be risky; if the Yen goes further up, you might end up having to pay more for your mortgage. You could also consider USD, Swiss Francs or even GB pounds sterling, which will see your exchange rate risk eliminated (although the rate is still not favourable to the pound).
7. Some banks will accept listening to a refinancing plan which is basically adding the unpaid balance to the principal of your loan and increasing your payments slightly to cover the extra amount.
8. If the bank is not willing to help, then coldly ask them when is it a good time to come to see them as you want to hand them over the keys to the property, the deeds and the utility bills. Of course this will not discharge you from the obligation of paying the debt but you will see a change of attitude in them immediately and will listen to proposals more attentively.
9. If realistically there is no possibility to continue paying and the lender is totally inflexible (which is bound to happen if you are behind by more than 3 payments) it is then crucial that an agreement is struck with the bank where they keep the property in payment of the debt. This is called ‘dacion en pago’ and it basically consists on formally handing over the deed to your home to your lender who agrees to release you from your mortgage. A lawyer may be required for this but it is certainly a good way to spend that last bit of money so that one’s name is not published on a debtors list in Spain (and in some cases like with the CAM bank, also published in other countries, including the UK).

Again, always remember that banks are not real estate agents nor wish to be and so foreclosing and repossessing is and should be the very last option for the bank.

Antonio Flores Property arrears in spain, bank repossessions, dacion en pago, delinquency in spain, en dacion de pago, foreclosure in spain, pay mortgage in spain, pay off mortgage in spain, spanish mortgage repayments