What is a foreclosure?
When the holder of a mortgage stops paying the installments, the bank that has granted the loan can collect its debt by executing the guarantee reflected in the contract. In general, this guarantee is the own mortgaged home. This procedure, which is known as foreclosure, allows the bank to finalize the contract, pay off the debt and auction the property to recover the capital invested.
This process can only be activated in those cases in which the debtor has failed to pay three or more monthly installments. The entity will claim the monthly payments in arrears together with the rest of the pending credit, with an interest that usually ranges between 20% and 25% for penalty. Likewise, the legal expenses generated will be borne by the debtor.
What is foreclosure?
Once the foreclosure process gets under way, you can end up with the seizure of the property and the eviction of the tenants. This is often enough to resolve the outstanding debt between the mortgagee and the financial institution. If this is not the case, the personal guaranteeso that the remaining debt would be settled with the present and future assets of the mortgagee.
In Spain, foreclosures skyrocketed after the 2008 financial crisis and hit all-time highs in subsequent years. For example, in 2014 there were around 35,000 foreclosures of habitual residences, according to data from the National Institute of Statistics (INE). The figure has decreased in recent years, despite experiencing a rebound as a result of the pandemic: in 2021 there were nearly 12,000 seizures, an increase of 57% compared to 2020.
What steps are followed in a foreclosure?
Foreclosures carry a lengthy legal proceedings, which is made up of different phases. Throughout this process, the debtor can reach an agreement with the entity or pay the outstanding installments to stop the execution. These are the main steps that are usually followed:
- First bank contact. About 15 days after the first non-payment, the bank will contact the mortgage holder to notify what happened and ask for the reasons.
- official notification. If it happens 1 mes and the debt remains unpaid, the entity will send a written communication. This notification can be carried out via SMS, email or letter.
- Entry in list of delinquent. To the 5 months of non-payments, the bank will include the debtor in a registry of defaulters such as ASNEF or RAI. This can have very negative consequences for the client, if in the future he wants to get a loan or hire other services.
- Lawsuit. The Mortgage Law has established an extension of terms for executing the early maturity commission, which is the formula that allows the entity to request the court to start the execution. The procedure is activated from the twelfth unpaid installment in the first half of the mortgage and the fifteenth month if it is the second half of the loan. In addition, it applies retroactively except in clauses already applied.
- Registration of charges. The bank will launch a notification to include the charges that exist on the home in the Property Registry.
- auction call. The house will go up for auction and the date, time and starting price will be published on the Notice Board of the Town Hall, the Property Registry and the courts, as well as in various official bulletins. In any case, it is not mandatory that this information be communicated to the debtor.
- Auction celebration. The property will be awarded to the highest bidder. If there is no buyer who reaches the minimum price, the bank can keep 60% of its value. If it ends up being auctioned for a price lower than the amount that the mortgage holder owes to the bank, there would still be a debt in favor of the entity.
- Eviction. The last step of the process is the release, in which the tenant will have to leave the home, in the presence of a judicial procession, a locksmith and, in cases where it is considered necessary, the police.
Can a foreclosure be avoided?
If you find yourself immersed in a process of foreclosure and subsequent eviction, you should know that there are different mechanisms or ways to stop the procedure once it has started:
- Through a lawsuit for abusive clauses in the mortgage contract. If these types of clauses exist, the procedure could be declared null. It is a way that allows you to save time, in the same way as a lawsuit for errors in the notification, although the bank can demonstrate that the clauses were not abusive.
- Reaching an agreement with the bank. In certain cases, it is possible to agree with the entity to cancel the eviction in exchange for the commitment that you will pay the debt if it extends the term or grants you a grace period.
- Paying pending payments. Bringing up to date with the amount owed before the auction will cancel the execution procedure, as long as the property is the habitual residence of the owner.
- Relying on the Code of Good Practices. If you are within the threshold of social exclusion, you can ask the bank to stop the eviction proceedings and restructure the debt, by means of an extension of the mortgage.
- Making sure you form part of a vulnerable collective. If you meet this requirement, the entity will not be able to evict you despite the fact that the execution has already occurred. Among others, groups such as large families and single-parent families with one child are considered vulnerable debtors, according to Royal Decree-Law 6/2020.
These mechanisms are the most common, but there are other alternatives. One of them is the Settlement, which would allow you to return the property to pay off the debt and thus clean up your history. However, the system in Spain does not include this option by default, so the owner may owe money to the bank even after losing their home. Another option is the mortgage subrogation which, however, is not easy to achieve.