Tuesday, December 14, 2010

Not paying your mortgage in Spain

There’s been a fair amount of hyperventilating in the international press about falling home prices in Spain and what this will do to the foreclosure rate. The assumption is that underwater homeowners could choose not to pay their mortgage.

What is missing from the story are the really horrible consequences of not paying your mortgage in Spain. It’s not like California where you can mail in the keys and get on with your life. It’s more like the beginning of a life-long nightmare, where even fleeing to another country won’t help. In theory, for a debt to be pursued to another country the defendant has to agree to the claim or have had the opportunity to object, but in Spain, you give up the right to object when you sign your mortgage, so tough luck.

In another particularly egregious case, a bank debited 26,000 euros from the account of a (soon to be ex-) homeowner to pay for the legal fees for their lawyers to sue and reposes his home. This was after the same bank had extracted all the equity out of his home, invested it in a Luxemburg-based complex financial transaction that lost all his money, and then came after his house to make them whole.

Another factor is the prevalence of co-signing for mortgages among families and friends.It’s been pretty common practice to have a best friend or family members co-sign a mortgage, without really much thought being given to what happens if things turn bad. This has had some positives for the banks, but it has also caused a ripple-effect, where one person in a family defaults on their mortgage, and soon everyone else is on the hook, and can’t afford their mortgage either. There was a profile of some of these cases in El Pais a couple weeks ago, but I can’t be bothered to dig up a reference.

If you compare this to the US, where disorganization and shoddy paperwork have meant that in many cases lenders cannot even prove that they own the mortgage, the odds of escaping from an underwater mortgage in Spain without life-ruining consequences is slim.

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