Spain’s Supreme Court Flip-Flops on Mortgage Ruling After Just 1 Day Amid Bank Stocks Bloodbath, Legal Shitstorm Erupts

Plunging bank stocks got the Court’s attention, or something.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

That was fast: Spain’s Supreme Court on Friday flip-flopped on its own ruling announced on Thursday that had sent bank stocks plunging.

It started like this: Thursday morning, Spain’s Supreme Court did something nobody was expecting. It ruled that the country’s banks must pay stamp duty on mortgage loans, which would set them back billions of euros in legal fees and compensation while heaping further pressure on their lending business. News of the ruling sent many of the banks’ shares tumbling to new lows for the year while also heaping pressure on Spain’s ten-year bonds.

“The Supreme Court states that the person who must pay the stamp duty in the public deeds of loans with mortgage guarantees is the lender, not the one who receives the loan,” the court said in a document. The court ruling on Thursday, which overturned a previous ruling in the banks’ favor earlier this year, was final, the Supreme Court said on Thursday.

But by lunchtime Friday, the court had decided to suspend the ruling in light of the acute “economic and social impact” it was having — meaning the banks were in trouble!

The chart shows the shares of Bankia, which is 90% state-owned. Following the Thursday announcement, the already beaten down shares plunged 10% at one point. The Friday flip-flop repaired some but not all of the damage:

It’s impossible to tell just how much the total compensation bill would have come to, since stamp duty varies across Spain’s regions. As many as 8 million mortgage customers would have been affected by the court ruling, said the Spanish consumer association Adicae.

The question everyone — in particular the banks’ lawyers — were asking on Thursday is whether or not the law would be applied retroactively, as happened in the floor clause scandal of 2016, and if so, from when. Thursday’s ruling did not stipulate from what point clients would be entitled to be compensated, but Spain’s legal system allows customers to reclaim compensation from tax authorities for cases going back four years.

In March, the rating agency Moody’s forecast that the total cost will probably exceed the amount the sector has shelled out in compensation to victims of the floor clause scandal, which at the time of Moody’s report was between €3.5 billion and €4 billion. According to analysts consulted by Reuters, Spanish banks could have ended up paying anything between €1.7 billion and €10 billion in compensation.

Judging by the immediate response of Spanish bank shares to the news, investors were expecting the worst. Shares of mostly-state-owned Bankia fell more than 7% in early morning trading and ended the day at 5%, while Banco Sabadell and Caixabank fell 6.3% percent and 4.6% respectively. Smaller regional savings banks were also hit hard, with Liberbank and Unicaja down 7.2% and 5.5% respectively. The bloodbath continued into Friday morning, with some lenders down 3 or 4%.

The fallout was more muted for Spain’s two largest lenders, Banco Santander and BBVA, whose balance sheets are less dependent on the vagaries of the domestic market. Their shares ended Thursday down by 2.1% and 2.7% respectively.

The ruling would also have had a massive impact on Spain’s creaking court system, which is already struggling to cope with the avalanche of lawsuits sparked by the floor clause ruling in late 2016. Fifty-four special courts were expressly created to adjudicate those cases, but even those courts are complaining of being overwhelmed by the caseload.

Under Thursday’s ruling, Spain’s overloaded court system would have had to brace itself for a fresh deluge of lawsuits from bank customers seeking compensation for stamp duty. Instead, now everything is up in the air. BBVA and Banco Santander have even suspended their online mortgage services since it’s not clear who will have to pay the stamp tax: the banks or their mortgage customers?

To decide the issue once and for all, the Supreme Court has convened a plenary session of 31 senior judges. But even if their verdict comes down in the banks’ favor, that won’t necessarily mean the banks are out of the woods, since consumer groups could opt to appeal the decision at the European Court of Justice (ECJ), as they did with the floor clauses. The Spanish Supreme Court’s flip-flopping will almost certainly help their case.

There’s already a major ruling pending from the ECJ over the legality of foreclosure clauses contained in almost all Spanish mortgage contracts. Said clauses allow banks to initiate foreclosure proceedings on the basis of just one missed payment. Though banks rarely apply the clauses, their mere existence flies in the face of EU consumer protection laws.

The EU Advocate General, Maciej Szpunar, has already ruled that the clauses in question are abusive. If the ECJ draws the same conclusion in the coming weeks, it will mean that many Spanish mortgage contracts will have to be annulled, potentially paralyzing thousands of foreclosures. Spain’s Supreme Court — henceforth known for flip-flopping — recently warned the ECJ that “the Spanish banking system could suffer serious and systemic disruption if banks are impeded from carrying out foreclosures.”

In December 2017, we warned that 2018 could prove to be a “stressful year” for Spanish banks, but even we could not have imagined that it would be this stressful. The list includes the damage from the heavy exposure of Spain’s two largest banks, Santander and BBVA, to Turkey, Argentina, and Brazil; Banco Sabadell mind-boggling and costly IT blunder at its UK subsidiary TSB; and Spanish banks exposure to roughed-up Italian government debt. By Don Quijones.

Outside Italy, euro credit markets are sanguine, and no one says, “whatever it takes,” and as long as it stays that way, there may be no rescue of Italy. Read… Italy’s Debt Crisis Thickens

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  15 comments for “Spain’s Supreme Court Flip-Flops on Mortgage Ruling After Just 1 Day Amid Bank Stocks Bloodbath, Legal Shitstorm Erupts

  1. Ishkabibble says:

    We, the bewildered herd, are about to find out the true cost of the Elite’s “too big to fail” banks. Enjoy.

  2. Bobber says:

    It appears the Supreme Bank Sector is a higher authority than the Supreme Court. Legislators should put that into law so there is no doubt about it.

    The uncertainty surrounding the relative powers of the banking sector and Supreme Court might lead to confusion if they don’t formally ordain the Banking Sector.

  3. mark says:

    Hey – That would be a good name change for the Fed – ordain it

    “The Supreme Bank Sector”

  4. Crysangle says:

    The technicalities are confounding . The sentence reads

    “que el negocio inscribible es la hipoteca y que el único interesado en la elevación a escritura pública y la ulterior inscripción de aquellos negocios es el prestamista, que solo mediante dicha inscripción podrá ejercitar la acción ejecutiva y privilegiada que deriva la hipoteca”.


    “En cuanto a impuestos, el sujeto pasivo es el que genera el hecho económico por el que paga impuestos, según establece la ley.”

    Which in English translates to the obligation to pay duty is the one who generates the economic reality, which has just been taken to mean the lender because only the privilege of (the dutiable) inscription of the mortgage allows the lender to carry out his business.

    If this were understood as the legal basis originally, lenders would just have upped their fees or rates, and nothing much else might have changed…but now they are facing reclamations without means to cover them…so don’t ask me who is really at fault in this.

    • Prairies says:

      “obligation to pay duty is the one who generates the economic reality” would be the lender, they provide the funding for the transaction and profit off the transaction in the process. As far as covering the new costs I would argue the interest they have earned on free money should easily cover these new expenses.

      It is sad to see that when home owners struggle from day to day we see no sudden and abrupt action to remedy any of it, but when bank stocks start to lose some value the governing body can instantly stop the bleeding within 48 hours. Let the free market be a free market and the strongest will survive, otherwise we will see more zombie banks taking advantage of this power they still hold.

      • Crysangle says:

        I agree, and there is a clear moral hazard with suspending the sentence.

        On the other hand, buyers knew and accepted they were going to pay that cost. They were free to reject it, demand a discount, or the lenders to charge it simply as administrative costs.

        On the other hand again, this looks like EU law disrupting Spanish custom, as there is the EUCJ waiting to dictate (one reason for Brexit). National custom becomes law, even if not de jure.

        On the other hand yet again, before the housing bust there was more a free market in housing. In Andalucia several hundred thousand houses were built without permission on inexpensive rustic land. This was ignored completely by authorities, it was just seen as a token for locals while the big market was official. I built own during that time, legalised the house after four years as was permissible. Come the housing bust, and the persecution started. The rule allowing legalisation was made impossible ( heavy fines if you declare, if I remember, or demolition) , patrols were set up to stop new building, with demolition and fine. All existing buildings in limbo were swept into some endless bureaucratic resolution, that generated revenue and paid hommage to authority. The authorities started fining anything… a pergola for example. All very miserable. The other side to this was that the existing buildable land ( usually zoned between landowners and buddies in local council) regained value. Housing stock banks could not sell became main option. For those who could not afford? Well the townhall parades new dismal communistic like subsidised housing blocks for the unfortunate, meaning a nice cut for in the know and co. , and some new unpleasant neighbourhood springing up on the outskirts that redefines the town. They tried forcing Gypsies into a building like that, from their traditional camp, and they basically trashed the place, and good on them for it. Money money money.

        So where do you start in all of that?

        • Viking says:

          Were you affected by the persecution? Did they go back on the legalization that had already been completed?

        • Crysangle says:

          No, I was ok and they did not touch already legalised houses. Other people caught out went through some kind of hell though. What affected me was the change in attitude, was very unpleasant. In fact I was caught offguard – they buldozed the country road a bit wider, cutting a small vertical bank inside the property, so I built a nice low ( 50cm) wall to support that. Further up the road two meter high embankments they cut collapsed and the town hall was forking out for the repairs… so I figured own repair would be welcomed. Not. They said to demolish or pay a 1000 eu fine and have demolished. I appealed, then a while later they sent me exactly the same notice, I appealed newly again… then they said appeal rejected because too late…using the date of the second appeal for the first notice. I denounced the townhall, they told me that is not how it is done in Spain, the townhall later said their process was archived, I withdrew the denuncia, then they said it was not archived, I told them I had received a letter saying it was archived, they said that letter was undelivered, I said yes but their courier had read it to me in person… I denounced them again. That is Spain. In fact turns out the townhall was auctioning people’s property without warning at closed auctions to associates for a fraction of value. That again is Spain.

          So you see why the courts are full.


          Just remembered, there is a precedent a bit like this – they changed the size of rustic unzoned land needed to build on legally, increasing area needed. People who had bought and not built yet were caught out and left without redemption.

    • Viking says:

      This seems pretty shady, sticking somebody with a cost after the fact. It is sad that the reversal is not due to a sense of justice, rather due to shit hitting the fan.

      I did a brief search on costs of property sales in Spain, and they seemed outrageous:

      Can these fees still be avoided by shielding the property inside a corporation, and sell the shares in the corporation, rather than selling the property directly. That is how property sales in Spain was explained to me 15 years ago.

      • Jeremias says:

        Agencia Tributaria learnt the trick years ago and today in Spain if you sell a corporation wich you have more than 50% of the shares and more than 50% of the assets of corporation is real estate you will have to pay vat or itp as if you would sell the property directly.

      • Crysangle says:

        I don’t know the intricacies, but I know that is still an option used. It shields from various other taxes also. It is a big topic and needs proper advice, on whether to form local company or offshore etc. also, and to calculate properly if all worthwhile.

        Another custom is to under-declare sale price to avoid transfer tax. If you don’t perpetuate this you get charged high capital gains on the difference , and even more if you are not resident, though ( maybe changed now) only a few % of that tax was required retained and people would just skip the country. So not uncommon to see large private transactions of cash going on just before or after the sale, or if the notary had to leave the room for a moment . Now all notarised transactions are centrally registered, to oversee private notarised dealings… everything has been centralised in fact… but legal loopholes and some old ways still exist.

        The good side is that annual property taxes are low compared to many other countries.

        • Jeremias says:

          ha ha ha I remember the times where notary left the room and bank notes changed hands.
          If it is an offshore corporation it is more difficult for Agencia Tributaria to search.Gibraltar is famous for this.

    • Javert Chip says:

      Hmmmm…I dunno…

      The only party initiating a real estate transaction is the guy buying the house; that decision maker sure seems like the moving party. Some banker just didn’t wake up one morning a say “What the hell, let’s give Jose a few hundred-thousand euros and see what he does with them”. (Well, ok, maybe Spanish banks do this).

      In any event, this EU bank legal stuff smells a lot like the NFL not being able to adequately define a catch (a fundamental part of the game).

      How something this fundamental to millions of real estate closings was allowed to go “unexamined” until just now is amazing. After the “floor” court ruling, every Spanish bank should have had lawyers crawling over every fundamental process to ensure each had a basis in law. How hard can it be?

  5. Nelson says:

    So, if an invester assumed that the whole system is rigged in favor of the banks, and thus bought at the bottom of that drop, they’d have made money when a little while later the rigged system steps in and bails out the banks.

    Not sure about the past payments, but going forward this would have very little impact. Everyone who has ever dealt with a bank would know that if the banks have to start paying a fee on each mortgage, a sudden new fee for the homeowner would appear that covers the fee plus some more so the banks makes their profit even on this fee they are supposed to be paying.

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