BAD BANKS

Mortgage lenders picking their way around eviction law amendment

Banks dodge reform requiring them to pay more to keep foreclosed homes

It may be legal, but the lawyers involved in the public auctions feel it makes a mockery of the law. In July 2011, following months of public pressure, the government approved a royal decree raising the minimum price that lenders had to pay to keep foreclosed homes, thus leaving the evicted owners responsible for a smaller amount of the deficient balance.

Up until then, if there were no bidders - and that was nearly always the case - the bank could keep the property for 50 percent of its appraisal value. With the reform, that rate was raised to 60 percent.

But a law always has a loophole. Many lenders are still paying just 50 percent instead of 60 percent by coming up with a bidder that is, in fact, their own subsidiary company.

The legal reform only applies to properties that are the owner's regular residence, not holiday homes. This means that banks that resort to this trick are seriously harming the poorest evictees, the ones who have nothing to sell to save their house.

It is a trick; the bank uses a real estate subsidiary to keep the home for 10 percent less"

"I have to say the procedure is legal, but in practice it leaves the reform without effect, precisely when it was made to relieve the situation of those who cannot pay," explains Andrés Domínguez Luelmo, a professor of civil law at Valladolid University.

Ever since the crisis began there have been over 150,000 foreclosures in Spain, and 300,000 more are pending. There are no figures indicating how many of these are regular homes, but everything seems to indicate that it is a socially relevant figure.

Until recently, most auctions saw virtually no bidders because few investors were ready to pay for a home that would be difficult to resell. But banks have found a way around that. The other bidder is themselves, hiding behind a different legal personality. This other entity bids for a lower amount, so that the bank gets to keep the property for 50 percent of its value plus one euro.

The real estate website Idealista.com reported this situation, and several legal sources have confirmed it.

"It is clearly a trick," says Domínguez Luelmo. "The entity uses a real estate subsidiary in order to keep the home for 10 percent less than it would have to accept if there were no bidders."

For evicted homeowners, this means owing the bank 10 percent more on the deficient balance.

"When the law was modified a year ago, article 670.4 was left untouched, probably an oversight on the lawmaker's part," adds Domínguez Luelmo.

"All it takes is a change to this article to establish a 60 percent minimum, and I propose doing that."

Ramón Falcón y Tella, a professor of financial and tax law at Complutense University in Madrid, says he understands that financial entities need help and protection given the difficulties they are experiencing, but he also thinks this practice is a legal incongruity that makes the reform useless and seriously harms the evictees.

And that 10-percent gain is not the only advantage for banks, says Falcón y Tella. In order to qualify as a bidder, it is necessary to deposit 20 percent of the property's appraisal value prior to the auction. But in this case, the subsidiary merely presents a guarantee that has been issued by its parent bank, and may bid at no cost.

Rules
Recomendaciones EL PAÍS
Recomendaciones EL PAÍS