Present and future of the mortgage as security

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January 1, 2013 /

Javier Gómez Gálligo
Attorney, Directorate-General of Registries and Notarial Affairs
Standing Member of the Codes Commission

Approach

The mortgage financing model is on its last legs. And it will topple unless measures are taken, and quickly, for its reform. This is not only because of the current financial
crisis, which has caused credit in general to dry up, but because of a structural problem.

Mortgages are failing to provide what either lenders or borrowers want.

Lenders are starting to feel that mortgages alone are not enough to secure loans.

The objectives outlined in the preamble to the Mortgage Act of 8 February 1861 have now become a thing of the distant past, in the days when

“He who lends against a mortgage rather than a person may be said to have lent to the thing: The value of the mortgaged property is the cause for his entering into the obligation: The debtor is but the property’s representative; the lender has no interest in the credit, the fortune, the moral qualities of the person to whom he gives his money, because he takes them into no account at all; what matters to the lender is that the property suffices to reimburse him, by and by, for what he has given. His credit is not a personal credit, but a real credit; it does not depend upon the person of the debtor and is not subject to the debtor’s vicissitudes; what matters to the lender is that the mortgage must not vanish: On the contrary, his credit being attached to the property, he is not upset by any loss of its owner’s personal credit. Territorial credit is thus sufficiently secured; each person knows how far the preference he holds over other creditors reaches: It is as if a portion of the property’s price had been set aside for him against the day of payment, with no fear of privileged mortgages unknown to him, because what is not recorded in the registry can never aggrieve him. With the adoption of this system, capital will find solid, easy employment, the landowner will enjoy credit proportional to his true wealth, circulation will be spurred, the interest rate on money will fall, and new sources of wealth and prosperity will be born.”

The preamble notwithstanding, today’s mortgages fall far short of their goal as instruments for proper lender defence, unless they are combined with other instruments. The change has been so radical that now what makes or breaks a loan decision is not the loan to value, but the loan to income, something unheard of in Spain’s early mortgage legislation.

Nowadays a bank has to build up a bulwark of endless supplementary collateral –third-party guarantees, unemployment insurance, life insurance, direct depositing of the borrower’s paycheck– before it feels the bad debt risk has been beaten down far enough. What little financing banks are offering is surrounded by demands for extra security on top of the mortgage proper, ignoring the fact that Spanish consumer protection legislation forbids overcollateralization (Revised Consumer Defence Act of 16 November 2007, article 88). The stance lenders have taken is wide open to criticism, but to a certain extent it is also understandable, in view of the institutional aggression that has been mounted against mortgages.

Modern legislation has nipped away at the efficacy of foreclosure. To give one essential example, a mortgage is supposed to be an encumbrance on property to guarantee payment of an obligation. Therefore, it ought not to be affected in any way if the debtor goes insolvent. There ought to be a separate foreclosure procedure (and traditionally there used to be, even under the Civil Procedure Act of 1 January 2000). Today, however, now that Act 22/2003 of 9 July on bankruptcy has been enacted, when a borrower files for bankruptcy, any mortgages he has are frozen to await the bankruptcy proceedings’ developments, with a view to reaching some sort of arrangement. The freeze lasts for at least one year as of the time proceedings are declared under way.

There are many other examples of modern curtailments of mortgages. There is the establishment of privileged credits that take precedence over mortgages (as in the Workers’ Statute, article 32; and in the priority given to tenants’ association expenses in buildings run under horizontal property schemes), although conceptually it ought to be impossible for any mere credit, no matter how privileged, to jump in ahead of a mortgage. A mortgage implies a jus distrahendi in the assets of the borrower or third-party possessor of the property, and, as asserted by the Decision of 29 April 1998 of the Directorate-General of Registries and Notarial Affairs, no credit right can be placed before that, no matter how privileged it is.

The summary foreclosure procedure itself, which has been a key feature of mortgages ever since it was first introduced, has been repeatedly called into question. It has been challenged by borrowers who claim that limiting their grounds for opposition infringes constitutional rights such as the right to effective protection.

The Spanish Constitutional Court has had to decide repeatedly on the legality and constitutionality of the procedure. Constitutional Court Ruling 41/1981 of 18 December, recently backed up by Constitutional Court Decree 113/2011 of 19 July 2011 (Boletín Oficial del Estado, 17 August 2011), confirms the procedure and the constitutionality of the terms that limit the grounds on which a borrower may oppose foreclosure in a summary mortgage foreclosure procedure.[1]

In this context, the fact that Spanish law does not obligate lenders to accept the collateral in full payment of the debt is another thing society points at as the height of abuse by financial institutions. It is felt (even by some courts, as in the well-known order of the Provincial Appellate Court of Navarra of 17 December 2010) that, since it was financial institutions that caused the financial crisis, financial institutions ought to shoulder the risks stemming from the drop in value of the property used as collateral.

We will return to the topic of surrender in lieu of payment later. If banks were forced to accept it as a means of debt termination, it could curtail mortgages even more.

Debtors are even less satisfied with mortgages.

From the consumer’s perspective, there is argument about how constitutional the direct foreclosure procedure is, and there is criticism of the restrictions on the grounds of opposition open to borrowers. Furthermore, it is felt that the burdens are distributed unequally among the parties to mortgage contracts. A mortgage is, after all, not only an in-rem right, but also a contract in which a mortgage is accorded (As contracts, mortgages are regulated by the Civil Code, Book IV, Title XV). Consumers see mortgage contracts as abusive right from the start, but they are quite wrong. The rigorous consequences entailed in a mortgage contract are like those entailed in any act of disposal, and it is a mistake to think that for that reason the contract is abusive.

It is a fact that certain lenders in the business of mass mortgaging (financial institutions) have attempted to abuse their position of dominance by writing in truly abusive clauses. The law has had to react accordingly (thus, Act 7/1998 of 13 April on general contract conditions and the transposition of Directive 93/13 EEC). And it is also true that a mortgage loan as such is not a synallagmatic contract, where the parties’ obligations and benefits are equivalent.

But that does not mean the contract is in itself abusive or overbalanced toward one party. The mortgage contract is a suitable instrument for modern society to use to exercise of the constitutional right of access to housing and, as asserted in the course, it is an instrument designed for people who are not well-to-do, because wealthier people do not need financing.

The fact is that a borrower who takes a mortgage has to be aware that, if he fails to pay, the lender is entitled to realize the collateral. A mortgage is like a sale that remains suspended until the borrower defaults on the loan. Even so, the realization procedure is thoroughly regulated by imperative rules and rules of public order (which cannot be changed at the parties’ will) precisely in order to ensure a fair balance between the lender’s position and the borrower’s.

The disappearance of censos

Censos underwent a similar institutional crisis[2]. They gradually faded from favour and finally vanished in the 19th century after having slowly lost the trust of annuity payers and recipients alike.

Now, when I refer to censos, I am not talking about the emphyteusis, which helped in the development of agriculture and trade in a context of mortmain and perpetual ties to the land. What I am basically talking about is the censo reservativo, a transfer of a property in exchange for an annuity, with the possibility of redemption, all in exchange for a certain sum of capital.

Financing through censos reservativos fell into disuse due to the combined effect of a sharp rise in interest rates[3]

and the fact that the transactions themselves were lacking in legal certainty. The legal certainty problem was due to widespread breach, judges’ failure to admit unregistered derivative censos ordered under the Pragmáticas in the 15th to 18th centuries and the obligees’ fear of eventually losing their property, as the other party inevitably gained a feeling of ownership.

Investors eventually switched from censos reservativos to sales by a mechanism called “letter of grace”, or else direct investment in real estate for subsequent leasing, encouraged by disentailment legislation.

Censos received their coup de grace from the 1861 mortgage law, which regulated mortgages and established a system whereby unregistered liens could not be enforced. This was followed by the 1889 Civil Code, which made mortgage registration constitutive and therefore rendered unregistered censos void vis-à-vis mortgage lenders.

To put it another way, history shows that guarantees that fail to satisfy credit needs are replaced by other guarantees.

Usurious financing system: a thing of the past

In the search for an alternative to the mortgage, financing systems that have proved unequal to the task in the past should not even be considered. For example, all systems based on the pacto comisorio (a contingent forfeiture arrangement, under which the lender takes immediate possession of the collateral and returns it after payment, prohibited by the Civil Code, article 1859), systems based on the conveyance of property ownership to a trustee as security (subject to re-conveyance on discharge of the debt), sales under letters of grace and sales with a resale agreement to secure credit –These are all out of the running. While it is true that such agreements are still used in some areas of Spain (pacto comisorio in Navarra, and letters of grace in Cataluña), and while they may be regarded as very good protection for credit, agreements such as these enable businesses (financial institutions) to strike an abusive imbalance with consumers in contracts.

All such agreements are usually disguises for usurious loans given at disproportionate interest rates or acknowledging less money than is actually lent (leonine compacts long proscribed, since the Azcárate Act of 23 July 1908). The same applies to sales under letter of grace where the acknowledged or deeded repurchase price is not the real price, but is actually much higher than the price the borrower/seller received, because it conceals a disproportionate interest rate.

The matter can brook no delay.

And just because guarantees of this sort already exist in commercial dealings, where forfeiture is not prohibited, is no excuse. Private accords regulating dealings between companies (establishing, for example, collateral clearing systems or calling for the award of valuables to the lender in the event of default of a previously set sum) are standard practice in business. After all, negotiation between entrepreneurs does not fall under consumer protection legislation. Mortgage loans do, being essentially civil loans.

The future of the mortgage as security

The future of the mortgage as security depends precisely on finding solutions so that lender and borrower both are protected sufficiently.

The lender must have instruments to hand for recovering its investment. Collateral instruments that make the investment inefficient are no good.

The consumer, in turn, must be protected from lender abuse. A mortgage, as we have seen, is a pre-arranged sale or attachment that is going to entail the conversion of the mortgaged property into cash by force, no matter who its possessor is. The consequences are already tough enough for the consumer without lender abuse as well.

A fabric of rules designed to enable an efficient market will do no good if consumers are reluctant to participate in it. If their rights are not secured, they will be afraid to engage, and the market will slow to a halt.

Consume protection

Consumer protection must be provided through the following criteria:

Obtaining sufficient information before and during the contract-making procedure

There must be no hesitation about introducing codes of conduct instructing financial institutions to inform consumers adequately about the consequences of the products they are going to sign up for.

Perhaps the right to abandon the contract after its conclusion should be introduced. This right is already par for the course in other areas of business (timesharing, sales outside commercial establishments, etcetera).

Preventing the allocation of risks to the consumer when the consumer is not specialized enough to deal with them

There are some products that are so complex that they should never be offered to consumers. Financial intermediaries must be stopped from doing so. In terms of civil law, such sales should be declared null and void. Moreover, the offering banks should be held criminally liable. The MiFID Directive requires this as well.

Avoiding the forced inclusion of abusive clauses in mortgage loans

It is true that ultimate responsibility for checking that contracts in general and bank contracts in particular are lawful rests with the courts. But notaries and registrars too must surely conduct their own preventive checks, not only because it is their raison d’être, but because they are expressly required to do so by consumer protection laws stemming from European Union directives.

Now, their preventive checks must not keep new financial products from being introduced. That would hamper economic development and violate freedom of contract. Clauses cannot be considered abusive just because they generally make for an imbalanced contract; there must be some specific legal prohibition on which the decision is based. Otherwise, it would be hard to create new financial products. Just think about how difficult it proved to introduce the use of mortgages to secure revolving credit in Spain: The practice was sometimes unjustifiably regarded as some sort of reservation of seniority by a given creditor, to the detriment of all other creditors.

Notaries are required to abstain from authorizing public instruments containing abusive clauses, and registrars are required to refuse to register titles holding abusive clauses, under article 84 of the Revised Consumer Defence Act passed by Royal Legislative Decree 1/2007 of 16 November (formerly article 10.6 of the revised 1984 Consumer Defence Act as worded by Act 7/1998 of 13 April on general contract conditions, transposing Directive 93/13/EC on unfair terms in consumer contracts). This they do in certain cases only.

Namely, notaries and registrars much reject abusive general conditions in the following three cases:

  1. When the conditions are undoubtedly included on the blacklist of abusive conditions (now given in articles 85 to 90 of the Revised Consumer Defence Act of 2007, formerly additional provision one of the 1984 Consumer Defence Act). The reason is that the blacklisted clauses are null “in every case,” and no interpretation is admissible;
  2. When the conditions conflict with some imperative or prohibitive law that clearly rules them out;
  3. When the clauses have been declared null by a court in a final ruling entered in the Registry of General Contract Conditions.[4]

A notary cannot abstain from notarizing abusive clauses, and a registrar cannot declare abusive clauses unfit for registration, if all they have to go on is a general declaration of abusiveness under article 82 of the Revised Consumer Defence Act of 2007 (formerly article 10 bis of the National Consumer Defence Act). In such cases, it is the court’s job to declare the clause null and have the contract listed accordingly. Of course, clauses negotiated individually and clauses concerning the object of the contract (such as the price in a sale or the interest rate in a loan[5]

Increased institutional and preventive control

Another measure that must be taken is to increase measures of institutional control.

It is not just a question of the Bank of Spain’s general supervision of financial institutions, their commissions, clauses and brochures. Banks’ mortgage portfolios have to be monitored effectively. Just as the Spanish Securities Market Commission looks into securities, prevents bundled securities from going on the market and stops securities from going out unless they meet the rigorous requirements set by mortgage market legislation for mortgage bonds, certificates and securities. In short, it restricts issues of subprime mortgage securities.

Instruments of preventive control are one part of institutional control that has to be strengthened.

Liability must be exacted from any brokers who fail to provide the information they are compelled by law to furnish.

Likewise, when notaries fail to give due information on the risks entailed in mortgage financing or when property registrars enter deeds without ensuring that all abusive clauses have been removed, effective, rigorous liability proceedings must ensue.

It is true that registrars, due to the very nature of their function, have done more than notaries to remove abusive clauses from business practice. In this sense, the position of the Directorate-General of Registries and Notarial Affairs is clear. In a recent interpretation of article 12 of the Mortgage Act, the DG supported the removal of clauses contrary to imperative or prohibitive law or contrary to a final court ruling (see Directorate-General of Registries and Notarial Affairs, Decision of 4 November 2010). This new interpretation contrasts with the criteria supported earlier by the DG on the transcription of financial clauses.

It is my feeling that, in this matter, it is essential to have free will, under article 1255 of the Civil Code, without hindering competition among Spanish financial institutions or preventing the creation of new products, but also without ever losing full respect for the limits of imperative and prohibitive law, as stated in article 1255.

Earlier, in its Decision of 19 April 2006, the Directorate-General of Registries and Notarial Affairs had declared that registrars could not look for abusive general conditions of all kinds when scrutinizing documents for due form. This pronouncement was echoed by later decisions, the foremost of which was the Decision of 24 July 2008. This latter decision limited the role of notaries and registrars in the preventive check for abusive clauses to an exaggerated extent. It stated that, in the wake of Act 41/2007 revising article 12 of the Mortgage Act, registration ought to be a transcription of the financial clauses in the exact terms used in the title. Registrars could not, it said, reject any clauses on the grounds of abusiveness. Contrary to this point of view, the ruling delivered on 1 April 2011 by the Provincial Appellate Court of Tarragona annulled the DG’s Decision of 24 July 2008. The court ruling was based on Supreme Court case law (Supreme Court Ruling of 16 December 2009) and on the more recent, better advised posture of the Directorate-General itself (inter alia, decisions of 1 October 2010, 4 November 2010, 21 December 2010 and 11 January 2011).

According to this more recent, wiser position shared by case law and the DG, notaries and registrars must reject abusive financial clauses (including early maturity clauses) if the clauses have been declared null in a final court ruling. Moreover, they must also reject any financial clauses that are observably abusive, without any need to look into the particular case’s attendant circumstances. In other words, the abusive clause check must be applied to all clauses presenting objectively appreciable, direct grounds for annulment, because that is clearly what the law says; and the law says no further legal concepts need be examined.

Based on the court rulings cited above, here are some examples of clauses that should not written into a title or registered.

  1. Early maturity triggered by attachment or by a reduction of the borrower’s solvency, in which the borrower is not given the opportunity to post fresh security;
  2. Early maturity triggered by subsequent leases subject to quiet title proceedings, because they do not harm the mortgage;
  3. Prohibition or restriction of the borrower’s power to alienate the property, except in reverse mortgages, which, under Act 41/2007, may contain this proviso;
  4. Borrower’s waiver of notice of credit assignment; article 242 of the Mortgage Regulation, which used to allow waivers of this type, is considered repealed;
  5. Early maturity of mortgage loan payments triggered by failure to discharge accessory obligations;
  6. Clauses setting commissions on mortgage cancellation or refinancing that are contrary to the legal maximum;
  7. “Floor clauses” where a minimum interest rate is set but a maximum rate (“ceiling clause”) is not set.

On the other hand, the following will be admissible:

  1. Extension of the mortgage to cover foreclosure costs;
  2. Unilateral settlement offers by the bank;
  3. Agreements to offset the debt with other mature debts between the same borrower and the same bank, with the exception of several loans to which various people are party;
  4. Early maturity of the mortgage loan triggered by failure to meet just one of the principle or interest payments;
  5. Early maturity triggered by lease of the mortgaged home when it is not subject to quiet title proceedings pursuant to article 13 of the Urban Leasing Act, because such leases do hurt the mortgage lender, who will have to assume the lease.

Improvements in foreclosure

We have seen that the future of mortgages involves protecting consumers from abuse of process by financial institutions (and abuse of process is prohibited by the Civil Code, article 7.2). On the other hand, we must acknowledge that mortgage lenders ought to be able to collect quickly if a borrower defaults on a loan.

In this sense, the current limited grounds on which a borrower can oppose foreclosure ought to be maintained. The range should not be extended to other possibilities, which would lessen the efficacy of mortgages.

Perhaps borrowers should be given the chance to mount a broader opposition to the financial institution’s unilateral determination of the balance; such a possibility is envisaged in Spanish law (see the Mortgage Act, article 153 bis, and the Civil Procedure Act), but there are a lot of doubts about compliance with European directives against abusive clauses. In fact, the European Court of Justice has raised an issue of unconstitutionality because of it, and though Spain would like to keep unilateral balance establishment clauses valid, it is quite possible that the Court of Justice will declare that judges can annul such clauses right in the foreclosure process, without the need to wait for declaratory judgment.

Extrajudicial foreclosure procedures must be strengthened, too. There are some extremely harmful precedents set in case law. Though it has been rendered outdated by the Civil Procedure Act reform of 1 January 2000, there is case law on the books upholding that foreclosure procedures must necessarily be conducted in court.

Greater flexibility in mortgage products

Just as I believe the future of the mortgage as security requires the elimination of abusive clauses, greater institutional and preventive control and summary efficacy, I also believe it requires the acceptance of concepts and practices to make the use of mortgages more flexible.

For a paradigm of what I mean, look at the Act of 30 March 1994 on subrogation and novation of mortgage loans, which allowed borrowers to switch banks (under the Civil Code, article 1211) without changing the mortgage’s seniority of registration. And take Act 1/2007, which gave further cases of novation affecting refinancing and lengthening maturity. It also inserted a fresh article 153 bis in the Mortgage Act, accepting global mortgages securing a number of mature or future obligations of the same or different types, provided that they stem from a given causal relationship.

Another prime example was the DG’s acceptance of single mortgages taken with a group of lenders acting jointly (under an arrangement whereby, in the event of foreclosure, the lenders will act jointly) without the need to split up the mortgage payment by payment, as refinancing for companies in pre-bankruptcy situations. The subject is addressed in the Directorate-General of Registries and Notarial Affairs’ Decision of 8 June 2011.

Surrender in lieu of payment

The financial crisis has led to a higher debt default rate and more evictions, with many people being thrown out of their homes. In foreclosure due to default on a debt secured with a mortgage, handing the property over to the lender does not solve the problem. Spanish legislation is based on the rule of unlimited personal liability (Civil Code, article 1911). Accordingly, if the value of the home at the time of foreclosure is not enough to pay off the debt, the lender can still sue to have other assets belonging to the debtor attached, until the entire amount due for principal, interest and costs has been paid in full (Mortgage Act, article 105, and Civil Procedure Act, article 579).

However, some isolated rulings sparked a debate: How fair is it for a lender to be able to take dual personal and in-rem action? The rulings in question held that strict application could involve abuse of process, because, even if property has been devalued, financial institutions ought to be bound by their initial appraisal and assume the risk. That is to say, surrender of the property used to secure the loan ought to do to pay off the loan.

In contrast, the bulk of case law leans toward the view that this is not an abusive exercise of the bank’s right. It is an option allowed by Spanish legislation, and the bank does not gain unjust enrichment.

The important thing is to keep a broad picture of the problem in mind when dealing with the issue of surrender in lieu of payment as a mandatory form of terminating obligations. Thoughtless decisions may be spurred by an understandable feeling of solidarity with evicted homeowners but ought to be avoided nevertheless.

Whatever measures are taken, they must not be to the detriment of mortgages per se, unless mortgages are to go the way of the censo.

Obligatory acceptance of the collateral in lieu of full payment is not a formula that fits in with the Spanish system. Under our system, any rise in value –and therefore logically any fall in value– of the property used as collateral is the borrower’s.

Not even in Anglo-Saxon mortgage systems is surrender in lieu of payment a widespread system. In most states, some sort of agreement has to be reached.

Neither, however, do I agree with the postures that are radically against mandatory acceptance of the property in lieu of payment (mistakenly called “surrender in lieu of payment”), because Spanish legislation does not outlaw it entirely. Quite to the contrary; not enough emphasis has been given to the fact, but the mandatory acceptance solution is applied in pledges and chattel mortgages.

Article 1872 of the Civil Code has this to say about pledges:

«A lender whose loan has not been property settled may proceed to realize the pledge. This sale must be conducted in a public auction to which the borrower and the owner of the pledge, if they are not the same, have been summoned. If at the first auction the pledge is not sold, a second auction with the same formalities may be held; and if the second auction fails also, the lender may take ownership of the pledge. In this case the lender is obligated to give a receipt for payment of the debt in full.”

In other words, if Spanish legislation holds the award of goods with full release from payment to be a good enough arrangement for personal property (and we all know that the aphorism of res mobilis res vilis has aged badly, with the way personal property has risen in value), then it can hardly be claimed to threaten any essential principles of the Spanish system (though that very assertion has been made in this course).

Macroeconomically speaking, it can be proved that the practice of obligating the lender to accept the collateral in lieu of payment reduces the borrower’s incentive to repay the debt, kicks off a trend toward devaluation and fosters property abandonment. So, in an environment where collateral in lieu of payment is the rule, interest rates would rise to compensate for the mounting risks.

But the arrangement is not unheard-of in Spanish law, as we have seen regarding chattel goods. And it is not unheard-of in real estate, either. In Act 41/2007, Additional Provision One on reverse mortgages sets up a system for limiting heirs’ liability to the assets they receive from the estate, in clear limitation of the general principle in article 1911 of the Civil Code.

If surrender in lieu of payment is allowed, it must be regulated so as to differentiate between the system of rules for voluntary surrender, which is a contractual arrangement, and mandatory acceptance, which is more of an act of duty.

1) Conventional surrender in lieu of payment poses no problems save those due to the fact that there is no established procedure for cancelling charges outranked in seniority by the cancelled mortgage. So, conventional surrender can be arranged, either when the obligation becomes due or prior to maturity, through a compact that limits the mortgage liability to the mortgaged property (Mortgage Act, article 140).

It ought to be mandatory for financial institutions to include the possibility of this sort of mortgage in the precontractual information they are obligated to furnish. Right now precontractual information is regulated by the Ministry of the Economy’s Order of 28 October 2011 on transparency and protection of bank customers, which replaced its sister Order of 5 May 1994.

Nevertheless, tax-related measures ought to be taken to encourage the use of conventional surrender in lieu of payment. One good measure would be to make the second transfer of ownership (from the bank to a third party) exempt from stamp tax, in an analogy with the provisions for auctions followed by conveyance in article 20 of the Tax Regulation passed by Royal Decree 828/1995 of 29 May.

One way of preventing charges whose priority is junior to the mortgage’s from taking precedence over the mortgage is to set up a repurchase of the surrendered property by the borrower for a limited time. This would keep the mortgage from being cancelled due to confusion of rights, which is what leads to junior charges’ being given priority.

Another measure would be to encourage banks to lease the property to the surrendering borrower, acknowledging preference for access to public financial aid for tenants. The terms could be similar to those set for people evicted from their main place of residence under a judicial or extrajudicial foreclosure, as referred to in article 13 of Royal Decree-Law 6/2012 of 9 March.

2) Surrender in lieu of payment as a mandatory solution cannot be generalized or imposed as the general rule. Not because it shatters any essential principles of Spanish law, but because it is not the best solution macroeconomically (it weakens the Spanish mortgage market) or the solution that best favours consumers (it fosters higher interest rates and a higher loan-to-value proportion).

If it is allowed in exceptional cases, it must be limited to borrowers below what is called the “exclusion threshold,” and for main places of residence only, as in the Royal Decree of 9 March 2012 approving the Good Practice Code for this subject.

Mandatory acceptance of collateral in full payment might also be allowed as an exceptional course of action in bona fide personal bankruptcy, as an exception to the general rule allowing bankruptcy proceedings to be reopened, pursuant to article 179 of the Bankruptcy Act.

First, however, procedural measures must be fostered to avoid dispossession. Measures like:

  1. The establishment of a preliminary mandatory reconciliation system;
  2. The possibility of establishing immunity from attachments for a larger body of assets than is currently permitted (although steps in this direction have already been taken in Royal Decree-Law 8/2011 of 1 July, in connection with which personal action under article 579 of the Civil Procedure Act is barred);
  3. Amendment of article 671 of the Civil Procedure Act, so it can be applied to an appraisal made by a certified appraisal firm no more than three years old. The objective is to limit the use of article 579 of the Civil Procedure Act by a lender who has received surrendered property (without actually obligating the lender to give a receipt for the debt in full, as the lender must do for personal property) to that part of the debt (principle, interest and costs) that is not covered by the surrendered property (at 100% of its updated appraisal value).

Conclusion

Mortgages as security are being threatened by a number of different factors. If no solutions are found, the only thing left to do will be to change the way collateral works. From the lender’s viewpoint, mortgages are not as efficient as they used to be, because of the acceptance of privileged loans, tacit mortgages, bankruptcy situations that freeze foreclosure and doubts about the constitutionality of the foreclosure procedure. From the borrower’s side, mortgages are widely regarded as a tool of abuse for financial institutions, and borrowers espouse the idea of surrendering the mortgaged object in lieu of payment, as a way of forcibly extinguishing the debt. Mortgages have made it possible for millions of citizens to buy their own property. If we want to keep mortgages from tapering off toward disuse, we must boost lenders’ and borrowers’ confidence in mortgages.

Lenders’ confidence must be boosted by making mortgages as collateral and the mortgage foreclosure procedure effective; borrowers’ confidence must be won by eliminating abusive practices and clauses from mortgage loan agreements. In this context, the function property registrars play is essential. Property registrars must stop abusive clauses from being registered and therefore being applied in foreclosure.

Mandatory acceptance of collateral in payment of debt would be extremely harmful for the economy as a whole and mortgages in particular, but there is nothing standing in the way of taking measures to encourage voluntary surrender in lieu of payment and procedural instruments binding the lender to the appraisal. Nor is there anything stopping the use of solutions for exceptional cases only, in which certain insolvent borrowers or borrowers under the exclusion threshold may be released from their debt with surrender of the property.

Foot notes

1The clinching argument, given in the ruling’s seventh consideration of law, is this: “[T]he person who took the mortgage consented to the position in whh the enforcement order places him, as his position stems from a legal act. A conventional mortgage, says article 145 of the Mortgage Act, is created in a public deed, with the special guarantee thereby entailed, and it is entered in the Registry with a constitutive entry. The creation of the mortgage is thus subjected to the creator’s will in the pre-registration phase and in the registration phase proper. Accordingly, the right of both parties to be heard in the broad sense of the term and the borrower’s defence against the lender’s claims not only are guaranteed by plenary declaratory action, but also are guaranteed, during the lifetime of the mortgage, by what might be called ‘the registration procedure.’” In short, the Constitutional Court uses the fact that a notary and a registrar are involved in the process as an argument for the constitutionality of mortgage foreclosure.
2T.N.: In Spanish history, censos were contracts whereby real property was subjected to payment of an annuity in compensation for money advanced.
3On the evolution of censos and their gradual disappearance, see SALUSTIANO DE DIOS et al., (coordinators) “Historia de la Propiedad, crédito y garantía,” Servicio de Estudios del Colegio de Registradores, 2007.
4Article 84 of the revised Act passed by Royal Decree-Law 1/2007 (formerly article 10.6 of the National Consumer Defence Act as worded by additional provision one of the Act on General Contract Conditions) states that notaries and registrars, in the professional exercise of their public functions, are not to authorize or register contracts or legal acts that attempt to include clauses that have been declared abusive and are therefore null under a ruling registered in the Registry of General Contract Conditions.
5Whether the rate of interest on late payment is subject to scrutiny, no matter how high it appears to be, is a very debatable point; and only interest rates for overdrafts under the Consumer Credit Act can be rejected on the basis of the revised Act of 2007.