On March 14th 2013, the Luxembourg Court of Justice of the European Union ruled against the present Spanish mortgage laws and will force Spain to adapt the present legislation governing evictions and foreclosures to EU directives.
The slowly recovering Spanish economic situation and unemployment (now at 22.2%) continues to make it difficult for homeowners to meet mortgage payments and consequently the number of property foreclosures increased sharply from 2008 when the real estate bubble busted.
CatalunyaCaixa and case C-415/11
The EU ruling is based on the case of Mohammed Aziz who took a mortgage out from CatalunyaCaixa in 2007 and who was eventually evicted in 2011. During the procedure Barcelona Commercial Court n3 asked the EU court of Justice if Spanish mortgage law was in agreement with European Union consumer laws as Mr Aziz lawyers were claiming that several of the mortgage clauses were “abusive.”
Spanish Mortgage law is complex and takes its roots from texts from 1909 (Ley Hipotecaria de 16 de diciembre de 1909). Over the years the regulations have been updated but the core procedure and concepts are still the same as the original transcripts from 1861 and 1909. In practice if the mortgagee defaults on any of the clauses of the hypothecation contract, the lender institution can enforce the contract sanctions irreversibly (repossessing the property), without the possibility of a judge to temporarily freeze the process in order to rule if any clauses in the contract are abusive. Spanish mortgage law protects the mortgagee “a posteriori”, with compensations if any major abuse was found but without possibilityof getting back the property.
The ruling from the Luxembourg court
The Luxembourg EU court ruled that this is fundamentally against EU Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts. Therefore the mortgagee challenging the fairness of the contract should have allowed the judge to temporarily freeze the repossession process.
It is very important to note the ruling didn’t state anything about the unfairness of CatalunyaCaixa mortgage terms, as this will have to be judged by a Spanish court.
On the one hand, the law change dictated by the EU increases dramatically the time in which Spanish financial institutions will be able to retrieve part of the assets and this might hurt the restructuring process of the Spanish banking system. On the other hand, it encourages banks and mortgagees to renegotiate repayments terms rather than directly initiate the repossession procedure.
Future decisions of Barcelona Court n3
In Mr Aziz’s specific case the clauses that were challenged were:
- The fact that CatalunyaCaixa could immediately reclaim the full amount due as soon as a single mortgage payment was missed (in perspective a single payment of €600 compared to a total mortgage of €138,000 over 30 years)
- The fact that the bank could charge interest on outstanding amount at 18.75% while the standard interest rate of the mortgage was 4.87%. The judges will have to decide if the interest on outstanding amounts is adequate in order to protect banks interest or if it is excessive.
In other words, the final ruling of Barcelona Commercial Court n3 will set a precedent that will have far reaching implications. Since these types of clauses are fairly common in Spanish mortgages any amendments of these types of clauses could have several unintended consequences, like increasing the mortgage interest rates and decreasing the percentage of property price financed by the banks.