Mortgage Arrears – Is “handing back the keys” a solution?

Please note that the information provided in this article is of a general interest nature and intended as a basic outline only. It is not intended as any substitute for detailed legal or other professional advice specific to the reader’s circumstances. Nothing contained in this article should be seen or taken as the writer or publisher providing legal or financial advice.

A few months ago, when I was writing the TRG Handbook "Buying Distressed Property in Andalucía" (http://www.distressedpropertyhandbook.com/) I was told some Spanish banks were anticipating an avalanche of clients who were in financial difficulties and would be seeking assistance with their mortgages. Recent reports suggest that the prediction is coming true.

From the banks point of view formal repossession proceedings are both expensive in terms of time and money. It appears for those facing such miserable circumstances that another option may exist. The solution is a legal procedure established by Article 1.175 of the Spanish Civil Code (SCC) known as a “Dación en Pago”.

This means handing back the keys to the bank, signing in the bank’s favour a formal Deed before a Notary under which the bank agrees to cancel the balance of outstanding mortgage debt and release the mortgage debtor from any continuing liability to the lender in respect of the old debt.

In order to consider whether a Dación en Pago is a potential solution there are three important provisos.

1.The borrower should – where possible – have not already defaulted in the payment of any mortgage installment.
2.The lender should not have commenced any formal repossession proceedings.
3.The target property should not suffer from any negative equity. This broadly means that the currently appraised value of the property must not exceed the mortgage lending on it.

If the mortgage loan when purchased was based on a high loan to value then there is a clear risk that the value of your property may have fallen since completion giving a negative in excess of the mortgage over current value.

If the debtor believes that on an independent valuation by a tasador that the value of your property exceeds the outstanding mortgage then the debtor should take independent professional advice with a view to approaching their lender bank to consider a Dación en Pago. We understand that they are not compelled to accept your proposal but if the case is commercially good for the bank they are likely to consider it.

It should be understood that the typical costs associated with a property purchase will apply to a Dación en Pago as for a usual sale and will need to be shouldered by the bank.

We suspect that those banks that are using such arrangements are looking for “end user” purchasers to buy the property from the bank. As a result, the bank will prefer to finalise their Dación en Pago arrangements in tandem with the standard purchase paperwork once a buyer has been found. This will mean that the “new” purchaser pays the final “purchasing” costs in the usual way.

To attract the “new” purchaser the banks seem, with some reluctance, to be discounting their outstanding on the relevant property in order to liquidate their position. This should mean the “new” purchaser getting a discounted property that may well be priced at substantially below market value.

© Mark FR Wilkins 2009 (Marbella)

Mark FR Wilkins
Domus3Sixty
The Rights Group SL.
mark@domus3sixty.com
mark@therightsgroup.com
+34 600 343 917

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