As many foreign owners of property in Spain are discovering, where a job is lost and income disappears, paying back the banks in Spain can become an impossible task. The banks in Spain continue to push for full repayment of the debt. But, what can be done when the Spanish bank account's empty?

The current real estate market, marked by the falling value of property and scant levels of sales, may make it impossible to cancel the debt by selling the property. As a result, there is a growing level of interest in a form of 'payment-in-kind', which involves the sale of the house to the bank as satisfaction of the mortgage debt.  This is known in Spanish as "Dacion en Pago".

However, it should be noted, first, that the Bank is not obliged to accept payment in kind, being always the result of an agreement between the debtor and the Bank mortgaged. This is important to note as it is often believed that the bank is required to accept the property while it has a value greater than the debt that is maintained with the Bank.

However, as stated by Article 1166 Civil "the debtor of a thing can not compel his creditor to receive a different...although it be...of equal or greater value to the debt. " Accordingly, the Bank has no obligation to keep the house, even if their value exceeds the debt that has not yet been settled. It should also be noted also that the banks are not in favor of this option, since their business is not to buy property and the last thing they may want is to accumulate large portfolios of homes in the difficult real estate market today.

But what is to be done about the client's inability to pay the mortgage payment? A number of options exist, for example, renegotiation of the loan, an extension to the deadline or perhaps give a grace period in which only interest is paid the mortgage.

A payment in kind, by offering the property to satisfy the mortgage debt, is usually only accepted by banks in specific cases, such as foreigners who return to their country of origin and who cannot make the mortgage payments nor sell the property. It should also be noted that, according to the Spanish Mortgage Association, in the current economic situation this solution could well "have very important advantages to avoid the enforcement procedures and their inherent costs."

Given the above, it is interesting to consider how banks manage payment-in-kind solutions:

- As mentioned, the Bank is not obliged to accept payment in kind, so it is up to the mortgagee to make a proposal to their bank or financial institution. Before accepting the proposal, the Bank will conduct a study to ascertain the status of payments, depreciation, etc... how much mortgage debt is remaining and it will make a new appraisal of the property. It is worth mentioning that the bank will tend to give a lower valuation in cases where it is preparing to accept the property as payment-in-kind. However, the home owner may always request an independent valuer.

- It must be noted that, for the study, the Bank generally requires being up-to-date with payments of light and water, be current on payments of the 'communidad' and have no IBI (property tax) payments outstanding. Generally, the costs of the study and property evaluation are borne by the client, while the notary expenses are paid according to an agreement between the parties.

In situations where the home owner is unable to make the mortgage payments, it should be noted that:

1. If the value of the property is lower than that needed to pay off the mortgage completely, the home owner remains liable for the balance. The individual must repay by either sale of other assets or by paying off the balance as a smaller mortgage together with the applicable interest.

2. Should the property be valued as being greater than the loan amount outstanding it is often tempting to consider proceeding with foreclosure whereupon the property is auctioned and any excess is returned to the home owner. This stands in contrast to the 'payment-in-kind' solution which, regardless of the price obtained, will only satisfy the mortgage debt owing on the property. However, it is important to point out that, in the auction of a property in foreclosure, the final price achieved is rarely the market value, not even taking into consideration the costs and interest payable.

While hardly a perfect solution, payment-in-kind by transfer of the mortgaged property may well provide a solution to desperate foreign purchasers of Spanish property who are unable to service the debt and who are planning to return to their country of origin.

 

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