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.
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