They were supposed to protect banks and punish homeowners in difficulties — but they didn’t prevent banks from collapsing.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
In a somewhat unexpected move, the EU Advocate General, Maciej Szpunar, recommended that all Spanish mortgages containing a clause allowing banks to initiate foreclosure proceedings on the basis of just one missed payment is abusive and therefore should be annulled. While the EU Advocate’s ruling is not binding, in most cases it presages the ruling of the Court of Justice of the European Union (CJEU), which is expected to take place in the coming weeks.
If the CJEU does draw the same conclusion, it will mean that many mortgage contracts will have to be annulled, potentially paralyzing thousands of foreclosures. The ruling would fly in the face of a recent ruling by Spain’s bank-friendly Supreme Court that the mortgage contracts containing the clause could be modified to adhere with EU law without having to halt the evictions, as long as there is a minimum of three missed payments.
The CJEU has a history of striking down elements of Spain’s excessively bank-friendly mortgage legislation. In the wake of the last housing collapse, banks in Spain were, by law, able not only to evict mortgage holders after just one missed payment; they could also — and almost always did — saddle ex-homeowners with debts for life following foreclosure. Those debts grew ever larger as additional fees and sky-high default interest stacked up, until, in some cases, they exceeded the amount of the original mortgage.
In 2013 the CJEU ruled that this aspect of mortgage law was “abusive.” It ordered the Spanish government to bring its laws regarding the protection of bank customers in line with those of its EU partners. For its part, the European Commission gave the Spanish government until March 2016 to get its house in order. Yet today, 28 long months later, those changes have still not been made.
Almost a year ago, the Commission reported the Spanish government to the CJEU for non-compliance. Every day since the May 2016 deadline passed, Spain is sanctioned €105,991 for failing to adjust its laws, meaning that today it owes a total of around €90 million in sanctions. In other words, Spanish taxpayers could end up having to cough up around €100 million, or more, for draconian legislation that punishes them as consumers while protecting the banks, and which no Spanish government since 2013 has come even close to changing.
As for Spain’s judicial system, it is having enough trouble trying to deal with the fallout from the CJEU’s ruling, in December 2016, that the so-called floor clauses in Spanish mortgage contracts were also abusive. These clauses set a minimum interest rate — typically of between 3% and 4.5% — for variable-rate mortgages, even if the Euribor dropped far below that figure, as has patently happened. After the ruling, Spanish banks were instructed to reimburse all the funds they’d overcharged their mortgage customers — not just from the date of the ruling, but from when the mortgage contract was first signed.
The total cost of the ECJ ruling for the 40 (out of 42) Spanish banks implicated in the floor clause scandal is estimated to be around €6 billion. One of the banks most exposed to the financial fallout, Banco Popular, collapsed in June 2017, though to what extent the “floor clause” payouts played a role is still not clear. What is clear is that when Grupo Santander took over the toxic debt laden bank for the princely sum of €1, its accountants discovered that 55,000 customer complaints concerning floor clauses had been “put completely on hold,” in direct contravention of the CJEU’s ruling.
Rather than automatically reimbursing all affected mortgage customers, Spanish banks have contested each floor-clause case in court. This has led to an avalanche of lawsuits that have made some law firms very rich while clogging up Spain’s notoriously slow, inefficient judicial system to such an extent that 54 special courts were expressly created to adjudicate the cases. In the last year those courts have heard a total of 247,000 lawsuits and handed out 23,000 sentences, 97% of which have been favorable to mortgage customers.
But today, even those courts are complaining of being overwhelmed by the caseload. In the north-eastern region of Catalonia the magistrates presiding over the floor clause cases say that, based solely on the current case load, they will have their work cut out for the next seven years.
As if that wasn’t enough, the CJEU is now mulling over another key aspect of Spanish mortgage law: the number of missed payments required to begin foreclosure proceedings. If, once again, the CJEU sides with consumers against the banks, Spain’s already overwhelmed court system will have to brace itself for a fresh deluge of lawsuits that it’s clearly not ready for.
The ruling could also have big ramifications for the banks. Since the suit was first brought against the foreclosure clause, in January 2017, the number of foreclosures in Spain has dropped by 55%, from an average of 5,500 per quarter to 2,500. According to the financial daily Cinco Dias, there may be more than 17,000 foreclosure proceedings currently on hold, awaiting the outcome of the trial.
“If Luxembourg concurs with the advocate general’s recommendation, which is very likely, many foreclosures will be annulled,” says Juan Ignacio Navas, a partner-director of the klaw firm Navas & Cusí. “Not only that, but those affected will be entitled to claim compensation.”
Spain’s Supreme Court, once again doing the banks’ bidding, has warned the CJEU that the clauses at stake, which allow banks to foreclose after just one missed payment, “have been used in almost all mortgage contracts,” and that “the Spanish banking system could suffer serious and systemic disruption if banks are impeded from carrying out foreclosures.” This could ultimately lead to a “sharp contraction of bank credit in the future,” it added for good measure. By Don Quijones.
It is impossible to overstate the importance of tourism to Spain’s economy. Read… Be Careful What You Wish For: Weak Mass-Tourism Threatens Spain’s Five-Year Economic Recovery
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
Wow. With so many ways to make a bad situation worse, Spain and the EU seem to have chosen all of them…
Abusive contracts that should never have been legal… but to which everyone agreed.
Banks refusing to handle customer complaints in a timely fashion. (And how often have we heard THAT one since 2008?)
Banks abusing the legal system to facilitate extend-and-pretend and avoid loss recognition.
Outside government regulators nullifying contracts with retroactive liability.
Ownership of millions of properties in question due to gaming of the legal system (again, how often have we heard THAT one since 2008)…
While it appears the EU has homeowners’ backs on this one, I bet there’s more to it than that. In Europe it seems there’s always some unexpected angle, one group of elites cutting another off at the knees…
Why any rational, ethical investor would want to invest in Spain, especially its banks, is beyond my comprehension.
Most don’t. But it only take a few investors (who think they have inside data or a “good connection”) to start throwing money around.
Even I, a pretty cold-hearted capitalist, think eviction for 1 missed payment and “debt for life after foreclosure” is abusive.
Incompetent/indebted EU governments, and the EU banking environment in general (Spanish baks in particular) are so weak that they’re running out of “kick the can down the road” options to “save the banks” so no more taxpayer bail-outs were required.
EU governments were trying to whistle past the graveyard while banks returned to normal. Well, things are now so screwed up they can’t return to normal.
The faster & more rigorous a banking problem is detected and resolved (really fixed, not just papered over), the less expensive it will be. However regulators/politicians who blow the whistle and stop the gravy train will be pilloried.
Re “Most don’t” (Why any rational, ethical investor would want to invest in Spain, especially its banks, is beyond my comprehension.) –
Except for all the index-fund investors who think they are wise for not timing the markets, but in fact are enablers of all the corporate evils, because they end up owning everything regardless of quality or morality.
WS
I take it you don’t like index funds (so don’t buy any).
That doesn’t make them evil & immoral. If they track the market, they have to own part of the market.
Taking a tiny grain of truth (index funds do indeed own some crap) and conflating it with absolutist, judgmental & reactionary opinions that find civilization-ending fault with almost everything/anything isn’t wisdom, it’s throwing a tantrum.
JC – “If they track the market, they have to own part of the market…”
I think WS’s point is that if the market is corrupt and immoral , because its component companies are so, funding and trying to profit from them (owning part of the market) puts the investor in the same boat .
Without investors the immoral companies would go broke, no ?
There is plenty of (ir)responsibility to go round though, so only blaming investors is not correct either… it will rest on their conscience I suppose, and even if they get ripped off or dumped on.
Abusive contracts that should never have been legal… but to which everyone agreed.
I am with the EU on this one. Sign this or live in the street is kinda an abusive choice.
In Denmark, as a consumer, one can quite readily sign on an illegal contract because it is non enforceable and in that case, the default laws will apply, not the contract. Every damn year stupid rentiers get nailed on that and go whining to the newspapers to put some cream and a strawberry on top of their incompetence.
What the EU would need to do would be direct enforcement at the banks, not their government (this probably needs some chain in the legal structure of the EU, which can happen faster once we are rid of the UK).
Just a few top bankers doing a few years in the slammer will do wonders for compliance!
The banks are also backing themselves into a corner with this regulation. One well organized protest against a single bank were a huge percentage of borrowers have a mortgage strike, puts them out of business. It could make for a real s**t storm.
Between Blackstone and Cerberus buying up large blocks of distressed properties does anyone smell a rat in the woodpile or is it just me ???
In Spain, there’s always a rotting corpse under the floorboards……
The banks – and government – in question appear to be such inveterate EU scofflaws that I’m surprised the European Commission hasn’t threatened them with draconian measures of its own in order to force compliance. I’m not sure precisely what tools the EC has available to it here, I’m thinking of something along the lines of pulling the banks’ charters.
The way the EU is set up, most of the power resides with the local governments. The EU and the Commission can legislate by issuing directives, it is up to the local governments to make the directives into local laws and enforce them.
The power and capabilities of “Bruxelles” is similar in many ways to a governments Civil Services – they can advise, but, they have to be loyal to their government.
This creates a weakness of the EU in that local governments like to bleat and whine about “Big Bad Brussels making them do this or that” while in reality they made the mess themselves or they specifically went to Bruxelles to push the legislation they are now “totally forced” to enact!
I am not sure what tools the EU has to use against governments who just don’t give a f*ck. I think it would be worth studying.
“Government has coddled, accepted, and ignored white collar crime for too long. It is time the nation woke up and realized that it’s not the armed robbers or drug dealers who cause the most economic harm, it’s the white collar criminals living in the most expensive homes who have the most impressive resumes who harm us the most. They steal our pensions, bankrupt our companies, and destroy thousands of jobs, ruining countless lives.” – Harry Markopolos, Madoff Whistleblower
On the surface, this looks like EU trying to protect the consumer. But I really have to wonder how much of the responsibility on payments are in the hands of the consumer in the first place. Perhaps the next step is for the Spanish to consider Spanexit if the EU keeps pushing those rules down its throat. Although I highly doubt this, since Spain seem to have a vested interest in staying in the EU. The consequences of leaving would be just too horrible to consider.
But on the other hand, I suppose given the workload of the courts, it can help Spain with its unemployment problem, just produce more lawyers. *I can’t believe I said that with a straight face*
They are abusive because the banks and government are desperate….desperately trying to stave off bankruptcy – at the expense of everyone and everything around them. Not unlike RBS that raped good businesses in the UK to try and save its own bankrupt skin.
Surely Spanish banks can provide mortgage financing on something other than medieval terms. Its not as if the collateral is going to disappear though foreclosure tends to be the most costly way to resolve a delinquent mortgage.
I am not sure where I stand on this. It was only after the move to democracy, not too long ago, that Spain really changed to a freer and slightly more open form of economy. Even small easing of restrictions were seen as a triumph by many, while the more conservative kept in place the previous form of management and planning to a degree, in part via the banking system. Traditionally, if you started a business, or bought a house, it was counted as THE serious long term commitment, it entailed a lot of scrutiny and was difficult. If you passed that step, you were considered in, and though banks held a very heavy hand in their favour, it was not used as today to process assets, but more as a hidden reminder of who was in charge. So many businesses were generations old, change was slow and predictable as far as the relationship between a bank and its customer were concerned. The whole economy had been state managed, and people’s places in it were as well, often in a protective and familiar way.
This remained to a fair degree till Spain joined EU, you could sense a background transition occurring after that. Still, the banks held the reigns, keeping their side tight, and it was not until the Euro started that it all really melted up.
I am sure different Spanish have different views on this, and I won’t say one is right or wrong. They basically fast-tracked into the modern financial world, threw off much tradition, being naturally keen to uptake all things new, including consumer offerings.
The result is what you see now, a population that has competed with itself, outdone itself often, no properly coordinated evolution, laws which are outdated in a more modern setting but with people also looking for further favour. The government does not know what it wants to be for over a year now, there are strong own influences running through local power, or via legal contract as per the article, via other corps of authority. Into this you have EU law thrown in, which really is confronting some of the last of the old traditions, just as EU financial management reframes the equation, offering technocratic reasoning and legal jurisprudence to a circumstance that it does not fully understand or is not truly subject to. Law is logical to a dictatorial level, a judge in Brussels or wherever only sees one outcome – if part of the clause is considered abusive by his criteria, then he is obliged to strike down the whole clause.
The amount of evictions was and is a travesty of this all, just by itself. You have Eurozone ( and only Eurozone) financing the bubble, the unprepared local banking hierarchy in competition with faster new banking , too much going on to oversee, corruption as well, then the harder traditional Spanish approach forcing evictions to reset the bar , and EU stepping in saying not like that…even though EU is also part of the fuel to the event, used by both bank and customer. Where do you start in all of that ? Do the Spanish really want to be moderated from outside, and as an afterthought?
There are just too many different people in charge, too many overlapping obligations, and it is leading to one set of confrontation and difficulty after another.
It is not all like this, and I am sure there are a thousand other points of view, but I hope that sort of describes one of the base conflicts present in people’s sentiments, to a degree. Those to the left are all for state protection of their circumstance, see the traditional banking framework as predatory (even though the banks would very rarely foreclose in practice after one missed payment, even though the public bought the offering) … I find the banks now manipulative and corrupt , they sold out, but the politics much more predatory because it works outside of private contract, is predatory on the difficulty of others and often only dressed in sheeps clothing . It can all be argued ad infinitum…the public “chose” Euro, “chose” the mortgages without obligation, “chose” EU law, etc. etc. etc.
Maybe the Spanish are really all on a train to Brussels now…
https://translate.google.com/translate?sl=auto&tl=en&u=https://www.meneame.net/m/cultura/estoy-hasta-cojones-todos-nosotros
“SHITSTORM” I a common German language dictionary term used even by merkel.
Herr Richter should allow it in his headlines and Be Dammed to the PC mob’s.
I had a major internal debate about this :-]
A should I stay or should I go moment ?
https://www.etymonline.com/word/shit
But I think manners are good, you start with descriptive expletives in conversation and there is no limit… and I have heard more than my fair share of uniquely assembled verbiage of that nature, fortunately not directed at me…as far as I am aware anyway…so far.
You all pointing the banks when the problem are the judges, yesterday some women died cause the judge denied protection for her, judges majority come from a tradition of far right dictatorship and have privileges making them a caste, someone in the ue finally seems to have noticed this and probed days ago
https://www.thelocal.es/20180917/spain-pm-vows-to-strip-officials-of-judicial-privileges
the massive shitstorm of leaks against current goverment is snowballing day after day with a cia trained spy in jail releasing tapes
http://www.catalannews.com/politics/item/leaked-audios-reveal-spanish-police-commissioner-s-alleged-link-to-prostitution-network
add to that the stop of qe money with the rates going up on a country with great debt