Is Handing Back the Keys an Option?
With so many second (and indeed first) home owners struggling to pay their mortgages in Spain, is “handing back the keys” a solution? Right now Spanish banks “own” a huge amount of properties where people have done exactly that…However that may not be the end of the story for those who have simply walked away. The banks are the biggest unwilling estate agents in Spain and the UK at the moment and they are not happy. Recent agreements between Spanish and UK financial institutions provide for exchange of information and, in theory, outstanding debts here in Spain can now be charged against UK assets.
From the banks point of view when a defaulter walks away they have to start formal repossession proceedings, which is expensive and it can take up to three years to recover the property, enabling them to acquire the legal right to sell it on. Whilst this process is going on the defaulter is exposed to a long battle with the bank, potentially resulting in damage to their credit history and a claim against their property or any other assets in the UK.
This is a situation which clearly does no-one any favours so, in order to try and avoid such action, the banks have come up with what may be a solution for some. A legal procedure known as a “Dación en Pago”. In very simple terms this means you can hand back the keys provided the bank has agreed to this first.
The debtor and the bank sign a formal Deed before the 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. Effectively they are buying the house back from you for the price of the mortgage. The Deed should also involve the bank’s waiver of any right to pursue you in your home jurisdiction for the debt. As a consequence you should not need to disclose to any subsequent lender that you had difficulty in Spain and your credit history should be unblemished by your settlement with your bank lender.
As always though, things are often not that straightforward. Leaving aside the fact that you lose any equity in the property, there are also three important provisos to consider when deciding whether a Dación en Pago is a viable option.
Firstly the borrower should have not already defaulted in the payment of any mortgage instalment. Secondly, the lender should not have commenced formal repossession proceedings. Finally, and here is the rub, the property – vis a vis the mortgage debt – should not suffer from negative equity of more than 20%. Ouch! House prices have fallen over the past 18 months by around 25%. Given that a large percentage of property purchased in the last five or six years was bought by ex-pats with the aid of 80-100% mortgages based on over-inflated valuations, there is a very real possibility that they are now in negative equity. The transfer of debt using this method is also limited to the amount of the mortgage which corresponds to the value of the property. In other words, if you have a mortgage of 100,000€ on a house worth 80,000€ you will still have a debt to the bank of 20,000€.
If you can meet the criteria however, Dación en Pago is the favoured option for most of the banks too. The sooner they have legal possession the sooner they can liquidate their cash by selling on, saving them expensive legal proceedings and relieving them of the owner obligations to pay community fees, SUMA etc. Not all banks will be favourable though in all situations and they are under no legal obligation to accept your request.
So if Dación en Pago isn´t an option, what else is?
Apart from waiting it out, you could try to sell. If you are in negative equity though, you will still be left with a debt to the bank. The only other option would appear to be to negotiate better terms with your bank individually or through a financial advisor. This may take the form of an interest only period, a payment holiday or a new lower rate. Bear in mind though that any change to the mortgage deed will entail a visit to the Notary, will incur bank fees and will probably end up costing you more in the long run. The banks are not compelled to accept any proposal but if the case is commercially good for them they are likely to consider it.
So… stopping the mortgage payments and handing back the keys may seem like a tempting way to go, but you could end up looking over your shoulder for a long time and potentially lose more than just your home in the sun. Following repossession the debtor will also be held personally liable to the full extent of their assets for any excess over the sums owed to the bank – which will include their professional fees, unpaid interest etc. and the value of the property realized following repossession. If you really want to get shot of your property with no repercussions then Dación en Pago could be the way forward. Or you could try and sell it….thats tough at the moment but houses are selling if they are priced right. Holding out for a decent price is probably not a good idea in the current market, given that your main objective is to clear your debt without incurring any more.
Note that the information provided here of a general interest nature and intended as a basic outline only. Nothing contained in this article should be seen or taken as providing legal or financial advice. Information source regarding Dacion en Pago is Raymundo Larrain Nesbitt, Lawyer. For more information or to read his original article, click below
The Dación en Pago Explained – 28th March 2009
