Government wants to lessen pain for mortgage default families

Dation in payment could be foreclosure option for poor

Spanish Economy Minister Luis de Guindos on Wednesday said the government was in talks with the country's banks on drawing up an optional "code of good practices" to alleviate the problems of poor families facing eviction for failing to service their mortgages.

Some 150,000 families have had their homes foreclosed in Spain over the past four years because of the economic crisis. The law in Spain makes the borrower responsible for repaying the full amount of the home loan taken out, which in cases of negative equity can mean not only the loss of the house in cases of foreclosure, but also a debt albatross around the borrower's neck.

Speaking in response to a question in Congress, De Guindos said the code could include US-style foreclosures in which simply handing over the keys of the home to the bank is accepted as settlement of the home loan, a legal arrangement known as dation in payment.

This option would be restricted to families on the "poverty line" whose only asset is their home and whose members are all out of work in order to avoid "abusive" and "fraudulent" use of this alternative.

"Dation in payment should be the exception, but the sad reality is that in some families, the family home is the only asset they have," the minister said.

Rental period

Other measures could include a delay of at least two years in executing a foreclosure. This period could be extended if the families and banks in question agree to a "fair" monthly rent.

De Guindos also left open the possibility of the homeowner and lender sharing the risk of negative equity. "It seems reasonable [...] that the lender, as a consequence of a poor appraisal or insufficiently diligent procedure, should be jointly responsible for the differences that exist between the appraisal value, and the amount obtained for the house when it is foreclosed," he said.

The code would also eliminate "abusive" penalties for failure to service payments due on the family home.

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