Spain Asks Banks to Reduce Mortgages

In an attempt to ease the social cost of the country's worst economic crisis in decades, Spain's government presented a series of new protections against eviction for low-income families that can't pay their mortgages.

Spanish banks that voluntarily sign on to a newly approved code of good practices will be required to restructure the mortgage debts of certain distressed borrowers and in some extreme cases repossess properties and write off the debt.

Spanish Prime Minister Mariano Rajoy's conservative administration approved a decree law containing the new guidelines, the deputy premier, Soraya Saenz de Santamaria, said.

She said the new rules seek to "mitigate the dramatic plight of more than 1.5 million families that have all their members out of work" and are on the road to foreclosure and eviction due to a lack of income to cover their mortgage payments.

The new measures will serve as a buffer for families "at risk of social exclusion," the deputy prime minister said.

She estimated that a total of 300,000 foreclosures have occurred in Spain since the onset of the financial crisis.

For families to qualify for relief, the affected home must be their only residence, all the members must be unemployed and mortgage payments must represent at least 60 percent of household income.

The home being targeted for foreclosure also may not be worth more than 200,000 euros ($263,000) if it is located in a city of more than 1 million inhabitants, or more than 120,000 euros if it is situated in a town with a population of less than 100,000.

Although the code of good practices is voluntary for banks, those that sign on to it must adhere to its guidelines, Saenz said.

Before a foreclosure process has begun, mortgage holders will be able to request a four-year window in which they only will be required to pay down the interest on the loan and not have to make capital repayments.

They also will be able to extend the payment term on the mortgage to as much as 40 years to lock in lower monthly payments, as well as reduce the applicable interest rate on the loan to 0.25 percentage points above the benchmark Euribor rate.

In cases in which the mortgage payment would still exceed 60 percent of household income even after refinancing, a family will have the option of seeking cancellation of the remaining debt by surrendering their property.

This new rule will protect borrowers from banks, which often seek to collect on mortgage debt even after foreclosure if the property is currently worth less than the original loan.

If the family chooses to default on the mortgage and surrender the property, its members would have the right to live in the repossessed home for at least two years and pay annual rent equivalent to 3 percent of the cancelled debt.

The Bank Users Association consumer group responded immediately to the announcement of the new guidelines, describing the new decree law as "woefully insufficient to solve Spain's serious mortgage problems."

Tens of thousands of families have been evicted from their homes after falling behind on their mortgages.