Edward Hugh – This legal decision can become very important. The banks can only recover the mortgage up to the value of the property offered as guarantee. This is the first time in Spain. I also think the reasoning of the judge is good. If the banks themselves value the property at a certain level, and then sell for less, they shoul…d not come after the mortgage holder for the difference.
A decision by a regional court in Spain, although an important step will be unlikely to influence the remainder of the country. The bank is also going to appeal and it could be overturned. These autonomous regions tend to be a law unto themselves. Witness the Valencia land grab issue.
In any case I have not heard of to many banks pursuing negative equity on a large scale yet. However that might change as they are forced to sell off repo. stock substantially below the guaranteed amount.
the rating agency dealt with a recent ruling by a judge in the Spanish province of Navarra, which said that giving a mortgaged house back to a bank is sufficient to cancel mortgage debt, even if the house has negative equity. This is rather different to what normally happens in the Spanish system, with banks able to go after the assets of defaulted borrowers for up to 15 years.
Fitch understands that the legal ruling made by the judge in Navarra contravenes the Spanish Mortgage Law and Civil Code. Consequently, Fitch expects that the lender’s appeal will overturn the initial sentence.
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