Wednesday, February 2, 2011

Spanish court creates a “no-recourse” precedent on home mortgage default

One of the risks of buying property in Spain has been the extremely onerous mortgage conditions that buyers are generally subjected to. Many mortgages even give the bank the right to demand additional collateral (or foreclose) in the case where the home price drops below the amount of the outstanding mortgage, even if the property owner is not behind on payments.

In the case of foreclosure, banks have the right to continue to pursue borrowers if the foreclosure does not sell for more than the outstanding mortgage. In addition, they can tack on outrageous penalties, legal fees, etc to the balance.

However, court in Navarra recently ruled that it would be unfair to punish a property owner for the decline of the property value due to the global financial crisis, especially considering the banks own role in fueling the crisis.

In this particular case, it appears that there were actually no other bids at the foreclosure auction, which meant that the bank got it via a somewhat horrific process described here.

It will be interesting to see if this goes anywhere.

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