March 12, 2011
By GRETCHEN MORGENSON
ONE crucial reason the nation’s mortgage industry ran itself — and the entire nation — off the rails was its obsession with speed. Mortgages had to be approved chop-chop, loans pooled instantly. When it came to foreclosure, well, the quicker the better.
So it is disturbing that the same need for speed is at work in the bank settlement being devised by state attorneys general relating to improper loan-servicing and foreclosure practices. When Tom Miller, the Iowa attorney general who leads the talks, announced initial terms of a deal on Monday, he said, “We’re going to move as fast as we can.”
While some might argue that a rapid approach will help borrowers, it is apt to benefit the banks far more. Hurrying to strike a deal means less time to devote to understanding how pernicious the foreclosure practices were at the nation’s largest institutions. How can you determine appropriate penalties for troubling practices when you haven’t conducted a full-fledged investigation?
Remember that the attorneys general who are participating in this settlement process have been a coalition only since October. Two people who have been briefed on the discussions, but who asked for anonymity because the deal was not final, told me last week that no witnesses had been interviewed and that the coalition had sent out just one request for documents — and it has not yet been answered.
And, yet, along comes a 27-page outline of remedies that the banks would have to abide by in their loan servicing and foreclosure businesses. Talk has also circulated that the banks would have to cough up $20 billion to close the deal, though there are no figures in the outline.
Mr. Miller declined to be interviewed about the proposal. But Geoff Greenwood, his spokesman, disputed the notion that the attorneys general have done no investigation. “We have dealt with this issue for some three and a half years on a day-to-day, front-line basis with consumers,” he said. “We know what the problems are, and we know what needs to change.”
Maybe so. But being able to produce reams of deposition testimony from bank employees and documents turned over under subpoena would give those negotiating for consumers and mortgage investors far more leverage than they’d have working with a series of talking points.
Recent lawsuits filed against Bank of America by Terry Goddard, then the Arizona attorney general, and Catherine Cortez Masto, Nevada’s attorney general, show the power that in-depth investigations provide. Both cases contend that the bank engaged in consumer fraud by failing to abide by loan modification provisions of a previous state settlement completed with Countrywide Financial in 2009. The bank has disputed the allegations, but the filings by these officials are chock-full of details gleaned from investigating more than 250 consumer complaints.
Mr. Miller’s list of remedies is helpful in showing just how dysfunctional and abusive the loan servicing business has become. Consider this proposed requirement: “Affidavits and sworn statements shall not contain information that is false or unsubstantiated.” And how’s this for revolutionary: “Loan servicers shall promptly accept and apply borrower payments.” (When they don’t, late fees magically appear.) And, get this: Loan servicers should also track the resolution of customer complaints.
You don’t say!
To be sure, there is substance to Mr. Miller’s proposal. A settlement would bar servicers from foreclosing on borrowers amid a loan modification, for example. And when a modification is denied, the servicer would have to explain why, and in detail.
But the terms severely disappoint in their treatment of second liens, a major sticking point in many loan modifications. The proposal would treat first and subsequent mortgages equally, turning upside down centuries-old law requiring creditors at the head of the line to be paid before i.o.u.’s signed later.
Treating holders of first and second liens alike is a boon to the banks, since so many second mortgages are owned by the nation’s largest institutions; many of the firsts are held by investors in mortgage-backed securities. The banks want the first mortgages to take the hit, leaving the seconds intact. Or at least for them both to share the pain equally.
To some degree, the document presented by Mr. Miller raises more questions than it answers. For example, what will state attorneys general have to give up regarding future lawsuits or enforcement actions against the banks if they sign on to the settlement? Typically, such deals contain releases barring participants from bringing new but related cases.
As they negotiate with Mr. Miller, you can bet the banks will push for aggressive releases. But because these institutions underwrote many toxic loans in the boom, barring attorneys general from bringing actions against them for lending improprieties is no way to hold dubious actors accountable.
One attorney general, Eric Schneiderman of New York, is concerned about such releases. According to a person briefed on the discussions, Mr. Schneiderman has told Mr. Miller that he will not participate in a deal that would preclude his office from pursuing claims against the banks relating to their mortgage origination, securitization and marketing practices. Mr. Schneiderman declined to comment.
IT is also unclear whether the settlement would prevent borrowers or investors from bringing their own lawsuits against loan servicers — a terrible result. And the list of terms has only the briefest mention of restitution for borrowers who have been hurt by questionable loan servicing.
These borrowers are legion. Reparations should not be limited only to those who were removed from homes improperly. Consider four who are suing the Money Store, a lender and loan servicer. Their two cases contend that the Money Store levied improper legal fees while borrowers were in foreclosure; one case has been dragging on for 10 years, the other for eight.
According to court filings, one couple paid $1,125 in legal fees and expenses associated with two bankruptcy motions that were never filed. They also paid $4,418 for legal work said to have been done by an outside firm (which lawyers for the Money Store have not proved it paid).
Another borrower paid $1,750 for legal fees that the Money Store could not show were paid to the firm that supposedly did the work. And yet another borrower paid $5,076 in fees and expenses that do not appear to have been submitted to the outside firm charged with the legal work, according to court filings.
“We picked four plaintiffs out of the hat here, and all four of them had situations where thousands of dollars in legal fees were passed on to them but where the evidence indicates the law firms were never paid,” said Paul Grobman, a New York lawyer for the borrowers. He wants to know if the servicer kept the fees.
The lead lawyer representing the Money Store declined to comment.
Shoddy loan servicing has clearly done significant damage to borrowers. If a state settlement morphs into yet another gift to the banks, let’s hope that at least some attorneys general will take a different path.
Showing posts with label Mortgage. Show all posts
Showing posts with label Mortgage. Show all posts
03/03 Without Loan Giants, 30-Year Mortgage May Fade Away
March 3, 2011
By BINYAMIN APPELBAUM
WASHINGTON — How might home buying change if the federal government shuts down the housing finance giants Fannie Mae and Freddie Mac?
The 30-year fixed-rate mortgage loan, the steady favorite of American borrowers since the 1950s, could become a luxury product, housing experts on both sides of the political aisle say.
Interest rates would rise for most borrowers, but urban and rural residents could see sharper increases than the coveted customers in the suburbs.
Lenders could charge fees for popular features now taken for granted, like the ability to “lock in” an interest rate weeks or months before taking out a loan.
Life without Fannie and Freddie is the rare goal shared by the Obama administration and House Republicans, although it will not happen soon. Congress must agree on a plan, which could take years, and then the market must be weaned slowly from dependence on the companies and the financial backing they provide.
The reasons by now are well understood. Fannie and Freddie, created to increase the availability of mortgage loans, misused the government’s support to enrich shareholders and executives by backing millions of shoddy loans. Taxpayers so far have spent more than $135 billion on the cleanup.
The much more divisive question is whether the government should preserve the benefits that the companies provide to middle-class borrowers, including lower interest rates, lenient terms and the ability to get a mortgage even when banks are not making other kinds of loans.
Douglas J. Elliott, a financial policy fellow at the Brookings Institution, said Congress was being forced for the first time in decades to grapple with the cost of subsidizing middle-class mortgages. The collapse of Fannie and Freddie took with it the pretense that the government could do so at no risk to taxpayers, he said.
“The politicians would like something that provides a deep and wide subsidy for housing that doesn’t show up on the budget as costing anything. That’s what we had” with Fannie and Freddie, Mr. Elliott said. “But going forward there is going to be more honest accounting.”
Some Republicans and Democrats say the price is too high. They want the government to pull back, letting the market dictate price, terms and availability.
“A purely private mortgage finance market is a very serious and very achievable goal,” Representative Scott Garrett, the New Jersey Republican who oversees the subcommittee that oversees Fannie and Freddie, said at a hearing this week. “No one serious in this debate believes our housing market will return to the 1930s.”
Still, powerful interests in both parties want the government instead to construct a system that would preserve many of the same benefits, with changes intended to minimize the risk of future bailouts. They say the recent crisis showed that the market could not stand on its own.
“The kind of backstop that we have now, if it didn’t exist, we would have had a much more severe recession and a much sharper fall in home values,” said Michael D. Berman, chairman of the Mortgage Bankers Association, which represents the lending industry.
Hanging in the balance are the basic features of a mortgage loan: the interest rate and repayment period.
Fannie and Freddie allow people to borrow at lower rates because investors are so eager to pump money into the two companies that they accept relatively modest returns. The key to that success is the guarantee that investors will be repaid even if borrowers default — a promise ultimately backed by taxpayers.
A long line of studies has found that the benefit to borrowers is relatively modest, less than one percentage point. But that was before the flood. Fannie, Freddie and other federal programs now support roughly 90 percent of new mortgage loans because lenders cannot raise money for mortgages that do not carry government guarantees.
One prominent investor, William H. Gross, the co-head of Pimco, the major bond investment firm, has estimated that he would demand a premium of three percentage points to buy such loans — a cost that would be passed on to the borrower.
Proponents of a private market want the government gradually to withdraw its support, allowing investors to regain confidence. They argue that interest rates would eventually settle into roughly the same patterns that held before the financial crisis.
Some supporters of government backing also like the idea, believing that it will demonstrate the need for a backstop.
“I myself am eager to see whether there needs to be a guarantee,” said Representative Barney Frank of Massachusetts, a crucial Democratic voice on housing issues.
Fannie and Freddie also make ownership more affordable by allowing borrowers to repay loans with fixed-interest rates over an unusually long period. A person who borrows $100,000 at 6 percent interest will pay $600 each month for 30 years, compared to $716 each month for 20 years.
The 30-year loan first became broadly available by an act of Congress in 1954 and, from then until now, the vast majority of such loans have been issued only with government support. Most investors are simply not willing to make such a long-term bet. They prefer loans with adjustable rates.
Alex J. Pollock, a former chief executive of the Federal Home Loan Bank of Chicago, said such loans would remain available in the absence of a federal guarantee, but they might be harder to find. And lenders might demand a larger down payment. Or a better credit score.
That would be a very good thing, said Mr. Pollock, now a fellow at the American Enterprise Institute.
Longer terms make ownership affordable only by increasing the total cost of the loan, because the borrower pays interest for a longer period. Moreover, Mr. Pollock noted that over the last several years, borrowers with adjustable-rate loans paid less as interest rates fell, while those with fixed rates kept paying the same amount for devalued homes.
“One of the reasons that American housing finance is in such bad shape right now is the 30-year mortgage,” he said, noting that such loans are not available in most countries. “For many people, it’s not at all clear that that’s the best product.”
Fannie and Freddie also allow a wide swath of the American public to borrow money at the same interest rates and on the same terms. Borrowers who did not meet their standards were forced to pay higher interest rates to subprime lenders, but the companies essentially persuaded investors to treat a vast number American families as if they were interchangeable.
They took messy bunches of loans, with risks as variable as snowflakes, and created securities of uniform quality, easy to buy and sell. The result was one of the most popular investment products ever created.
And in its absence, experts on housing finance say that fewer borrowers would qualify for the best interest rates.
Susan M. Wachter, a real estate professor at the University of Pennsylvania, said a new government guarantee was needed to preserve a homogenous market.
“There needs to be a systematic way of preventing” fragmentation, said Professor Wachter. “That’s what we need a bulwark against. Because if there isn’t, it will occur.”
The government seems least likely to maintain a final set of benefits — leniencies in loan terms that taxpayers effectively have subsidized for borrowers.
Fannie and Freddie slashed the requirements for down payments in recent years, saying that they were helping people with minimal savings become homeowners. Two-thirds of the borrowers whose loans were guaranteed by the companies from 1997 to 2005 made a down payment of less than 10 percent. But borrowers who invest less default more often. The Obama administration has said that it wants the companies to demand a minimum down payment of 10 percent.
A quirkier example is the ability to “lock in” an interest rate. Fannie and Freddie permitted lenders to make such promises at no risk because the companies had already obtained commitments from investors. In the companies’ absence, borrowers seeking rate locks may need to pay for them.
By BINYAMIN APPELBAUM
WASHINGTON — How might home buying change if the federal government shuts down the housing finance giants Fannie Mae and Freddie Mac?
The 30-year fixed-rate mortgage loan, the steady favorite of American borrowers since the 1950s, could become a luxury product, housing experts on both sides of the political aisle say.
Interest rates would rise for most borrowers, but urban and rural residents could see sharper increases than the coveted customers in the suburbs.
Lenders could charge fees for popular features now taken for granted, like the ability to “lock in” an interest rate weeks or months before taking out a loan.
Life without Fannie and Freddie is the rare goal shared by the Obama administration and House Republicans, although it will not happen soon. Congress must agree on a plan, which could take years, and then the market must be weaned slowly from dependence on the companies and the financial backing they provide.
The reasons by now are well understood. Fannie and Freddie, created to increase the availability of mortgage loans, misused the government’s support to enrich shareholders and executives by backing millions of shoddy loans. Taxpayers so far have spent more than $135 billion on the cleanup.
The much more divisive question is whether the government should preserve the benefits that the companies provide to middle-class borrowers, including lower interest rates, lenient terms and the ability to get a mortgage even when banks are not making other kinds of loans.
Douglas J. Elliott, a financial policy fellow at the Brookings Institution, said Congress was being forced for the first time in decades to grapple with the cost of subsidizing middle-class mortgages. The collapse of Fannie and Freddie took with it the pretense that the government could do so at no risk to taxpayers, he said.
“The politicians would like something that provides a deep and wide subsidy for housing that doesn’t show up on the budget as costing anything. That’s what we had” with Fannie and Freddie, Mr. Elliott said. “But going forward there is going to be more honest accounting.”
Some Republicans and Democrats say the price is too high. They want the government to pull back, letting the market dictate price, terms and availability.
“A purely private mortgage finance market is a very serious and very achievable goal,” Representative Scott Garrett, the New Jersey Republican who oversees the subcommittee that oversees Fannie and Freddie, said at a hearing this week. “No one serious in this debate believes our housing market will return to the 1930s.”
Still, powerful interests in both parties want the government instead to construct a system that would preserve many of the same benefits, with changes intended to minimize the risk of future bailouts. They say the recent crisis showed that the market could not stand on its own.
“The kind of backstop that we have now, if it didn’t exist, we would have had a much more severe recession and a much sharper fall in home values,” said Michael D. Berman, chairman of the Mortgage Bankers Association, which represents the lending industry.
Hanging in the balance are the basic features of a mortgage loan: the interest rate and repayment period.
Fannie and Freddie allow people to borrow at lower rates because investors are so eager to pump money into the two companies that they accept relatively modest returns. The key to that success is the guarantee that investors will be repaid even if borrowers default — a promise ultimately backed by taxpayers.
A long line of studies has found that the benefit to borrowers is relatively modest, less than one percentage point. But that was before the flood. Fannie, Freddie and other federal programs now support roughly 90 percent of new mortgage loans because lenders cannot raise money for mortgages that do not carry government guarantees.
One prominent investor, William H. Gross, the co-head of Pimco, the major bond investment firm, has estimated that he would demand a premium of three percentage points to buy such loans — a cost that would be passed on to the borrower.
Proponents of a private market want the government gradually to withdraw its support, allowing investors to regain confidence. They argue that interest rates would eventually settle into roughly the same patterns that held before the financial crisis.
Some supporters of government backing also like the idea, believing that it will demonstrate the need for a backstop.
“I myself am eager to see whether there needs to be a guarantee,” said Representative Barney Frank of Massachusetts, a crucial Democratic voice on housing issues.
Fannie and Freddie also make ownership more affordable by allowing borrowers to repay loans with fixed-interest rates over an unusually long period. A person who borrows $100,000 at 6 percent interest will pay $600 each month for 30 years, compared to $716 each month for 20 years.
The 30-year loan first became broadly available by an act of Congress in 1954 and, from then until now, the vast majority of such loans have been issued only with government support. Most investors are simply not willing to make such a long-term bet. They prefer loans with adjustable rates.
Alex J. Pollock, a former chief executive of the Federal Home Loan Bank of Chicago, said such loans would remain available in the absence of a federal guarantee, but they might be harder to find. And lenders might demand a larger down payment. Or a better credit score.
That would be a very good thing, said Mr. Pollock, now a fellow at the American Enterprise Institute.
Longer terms make ownership affordable only by increasing the total cost of the loan, because the borrower pays interest for a longer period. Moreover, Mr. Pollock noted that over the last several years, borrowers with adjustable-rate loans paid less as interest rates fell, while those with fixed rates kept paying the same amount for devalued homes.
“One of the reasons that American housing finance is in such bad shape right now is the 30-year mortgage,” he said, noting that such loans are not available in most countries. “For many people, it’s not at all clear that that’s the best product.”
Fannie and Freddie also allow a wide swath of the American public to borrow money at the same interest rates and on the same terms. Borrowers who did not meet their standards were forced to pay higher interest rates to subprime lenders, but the companies essentially persuaded investors to treat a vast number American families as if they were interchangeable.
They took messy bunches of loans, with risks as variable as snowflakes, and created securities of uniform quality, easy to buy and sell. The result was one of the most popular investment products ever created.
And in its absence, experts on housing finance say that fewer borrowers would qualify for the best interest rates.
Susan M. Wachter, a real estate professor at the University of Pennsylvania, said a new government guarantee was needed to preserve a homogenous market.
“There needs to be a systematic way of preventing” fragmentation, said Professor Wachter. “That’s what we need a bulwark against. Because if there isn’t, it will occur.”
The government seems least likely to maintain a final set of benefits — leniencies in loan terms that taxpayers effectively have subsidized for borrowers.
Fannie and Freddie slashed the requirements for down payments in recent years, saying that they were helping people with minimal savings become homeowners. Two-thirds of the borrowers whose loans were guaranteed by the companies from 1997 to 2005 made a down payment of less than 10 percent. But borrowers who invest less default more often. The Obama administration has said that it wants the companies to demand a minimum down payment of 10 percent.
A quirkier example is the ability to “lock in” an interest rate. Fannie and Freddie permitted lenders to make such promises at no risk because the companies had already obtained commitments from investors. In the companies’ absence, borrowers seeking rate locks may need to pay for them.
27/10 In Spain, Homes Are Taken but Debt Remains
By SUZANNE DALEY
Published: October 27, 2010
MADRID — Manolo Marbán, 59, is still living in his house in Toledo and going to work in the small, pink-and-aqua pet grooming shop he bought here in 2006, when he got swept up in Spain’s giddy real estate boom.
But Mr. Marbán does not own either anymore. The bank foreclosed on both properties last April, and he is waiting for the courts to issue the eviction notices. For most Americans facing foreclosure, that is the end of it. But for Mr. Marbán and thousands of others here, it is just the beginning of their troubles. When the gavel falls on his case, he will still owe the bank more than $140,000. “I will be working for the bank for the rest of my life,” Mr. Marbán said recently, tears welling in his eyes. “I will never own anything — not even a car.”
The real estate and banking excesses in Spain were a lot like those in the United States. Construction boomed, prices rose at an astonishing pace and banks gave out loans just as fast, often to customers like Mr. Marbán, who used the equity in his house to finance a mortgage for his shop. But those days are over. Spain now has the highest unemployment rate in the euro zone — 20 percent — and real estate prices are dropping. For many Spaniards, no longer able to pay their mortgages, the fine print in the deals they agreed to years ago is catching up with them.
Not only are Spanish mortgage holders personally liable for the full amount of the loan, but throw in penalty interest charges and tens of thousands of dollars in court fees and people can end up, like Mr. Marbán, facing a mountain of debt. Bankruptcy isn’t the answer, either. Mortgage debt is specifically excluded here.
“Effectively, you can never get rid of this debt,” said Ada Colau, a human rights lawyer who works for Plataforma, a new advocacy group formed both to give legal advice to homeowners and to push for reform of the country’s foreclosure laws. “Other countries in the European Union also have personal debt mortgages, but you can go to the courts and get relief. Not in Spain.”
Several opposition parties in Parliament have been pressing for amendments to the country’s foreclosure laws, including letting mortgage defaulters settle their debts with the bank by turning over the property. But the government of José Luis Rodríguez Zapatero has opposed such a major change in lending practices. Government officials say Spain’s system of personal guarantees saved its banks from the turmoil seen in the United States.
“It is true that we are living a hangover of a huge real estate binge,” said Marcos Vaquer, who was the under secretary of the Housing Ministry until a government reshuffle last week. “And it is true that far too many Spaniards have excessive debt. But we have not seen the problems of the U.S. because the guarantees here are so much better.”
Immigrants who moved to this country in the boom years and were the first to lose their jobs in the downturn, like Jaime Abelardo, have been the most severely affected so far. Mr. Abelardo arrived in Barcelona from Ecuador in 1999 with the promise of a job in a warehouse. A few years later, he could afford to bring his family over and buy a tiny apartment. Or so he thought. But within two years, he was laid off. He blames himself for not having been more cautious. Still, he cannot get over the figures printed on the dog-eared papers he has received from the bank.
They say he now owes nearly 260,000 euros, almost $360,000, which includes about 77,000 euros to cover all court costs, including the bank’s, his lawyer said. He bought the apartment for less than that — about 220,000 euros, he thinks, though many aspects of the deal were never clear to him. His wife has left him. His unemployment payments are about to run out. He would like to go back to Ecuador with his four children, but he does not have enough money. “I’m thinking about shooting myself,” he said.
An estimated 1.4 million Spaniards are facing potential foreclosure proceedings, according to Spain’s consumer protection association, known as the Adicae. Recent figures from the courts show that the numbers are rising fast. In 2007, there were just 26,000 foreclosures. Last year, there were more than 93,000. Early indications suggest that they will be higher again in 2010.
A recent Standard & Poor’s report found that 8 percent of Spain’s housing is now worth less than the value of the mortgage and with prices continuing to fall, experts believe, that figure could rise to 20 percent.
Advocates say that Spain’s foreclosure procedures tilt far too much in favor of the banks, virtually guaranteeing the mortgage defaulters will end up owing large amounts after they lose their homes. Banks have the right to auction houses in foreclosure and, if no buyers appear, as is often the case these days, the bank can take ownership of the house for 50 percent of its value, according to the estimate either at the time of purchase, or at the current time, depending on what is specified in the mortgage. The banks then have 15 years to go after the homeowner. And if the banks initiate proceedings at any point, the clock starts ticking again, experts say. In the meantime, the bank can charge interest on that debt.
Montse Andrés Sabaté, a lawyer with Ausbanc, a consumer association that specializes in banking services, says that the banks usually charge 5 or 6 percent, but sometimes much more. “We’ve seen 18 or even 19 percent,” Ms. Andrés said.
And then there is the matter of guarantors. Bankers pressed many homeowners to find guarantors at the time they took out the mortgages or when they began to struggle to make payments. Mario Gozálvez, a truck driver, asked his 23-year-old daughter to act as a guarantor when he used the equity in his Barcelona apartment to buy a truck three years ago. At the time, she did not even have a job and he thought of it as a silly formality. Now, she faces a lifetime of paying off his debts.
“She may not be able to inherit anything from her mother because the bank can seize it,” Mr. Gozálvez said. “No one explains this.”
Early in the crisis, experts say, the banks were lenient with immigrants who had no assets and accepted the property as payment for the loan. But some advocates say they are tougher now. Under the law, the banks have the right to collect a percentage of a debtor’s income if it is above $835 a month.
Santos González Sánchez, the chairman of the Spanish Mortgage Association, says it is the bank’s duty to try to collect. “This helps to explain why our financial entities have not gone bankrupt,” he said.
Personal liability mortgages are common in Europe. But advocates here say that aspects of Spain’s procedures — how quickly banks can foreclose, the interest rates they can charge and the repayment schedules they can demand — are particularly severe. This month, even Mr. Zapatero’s party joined in voting for a parliamentary motion to slow foreclosure proceedings.
Mr. Marbán knew he was in trouble within months of buying the pet store as his business began to taper off. To keep the bank from foreclosing, he gave it whatever he could scrape together. At one point, he sold his car at a huge discount to meet a payment. Eventually, he sold his wife’s gold bracelet.
But it was no good. He could never catch up on what he owed.
“It’s funny, when I finally lost the house, I started sleeping,” he said. “I cry sometimes, but at least I sleep now.”
Rachel Chaundler contributed reporting.
A version of this article appeared in print on October 28, 2010, on page A1 of the New York edition.
Published: October 27, 2010
MADRID — Manolo Marbán, 59, is still living in his house in Toledo and going to work in the small, pink-and-aqua pet grooming shop he bought here in 2006, when he got swept up in Spain’s giddy real estate boom.
But Mr. Marbán does not own either anymore. The bank foreclosed on both properties last April, and he is waiting for the courts to issue the eviction notices. For most Americans facing foreclosure, that is the end of it. But for Mr. Marbán and thousands of others here, it is just the beginning of their troubles. When the gavel falls on his case, he will still owe the bank more than $140,000. “I will be working for the bank for the rest of my life,” Mr. Marbán said recently, tears welling in his eyes. “I will never own anything — not even a car.”
The real estate and banking excesses in Spain were a lot like those in the United States. Construction boomed, prices rose at an astonishing pace and banks gave out loans just as fast, often to customers like Mr. Marbán, who used the equity in his house to finance a mortgage for his shop. But those days are over. Spain now has the highest unemployment rate in the euro zone — 20 percent — and real estate prices are dropping. For many Spaniards, no longer able to pay their mortgages, the fine print in the deals they agreed to years ago is catching up with them.
Not only are Spanish mortgage holders personally liable for the full amount of the loan, but throw in penalty interest charges and tens of thousands of dollars in court fees and people can end up, like Mr. Marbán, facing a mountain of debt. Bankruptcy isn’t the answer, either. Mortgage debt is specifically excluded here.
“Effectively, you can never get rid of this debt,” said Ada Colau, a human rights lawyer who works for Plataforma, a new advocacy group formed both to give legal advice to homeowners and to push for reform of the country’s foreclosure laws. “Other countries in the European Union also have personal debt mortgages, but you can go to the courts and get relief. Not in Spain.”
Several opposition parties in Parliament have been pressing for amendments to the country’s foreclosure laws, including letting mortgage defaulters settle their debts with the bank by turning over the property. But the government of José Luis Rodríguez Zapatero has opposed such a major change in lending practices. Government officials say Spain’s system of personal guarantees saved its banks from the turmoil seen in the United States.
“It is true that we are living a hangover of a huge real estate binge,” said Marcos Vaquer, who was the under secretary of the Housing Ministry until a government reshuffle last week. “And it is true that far too many Spaniards have excessive debt. But we have not seen the problems of the U.S. because the guarantees here are so much better.”
Immigrants who moved to this country in the boom years and were the first to lose their jobs in the downturn, like Jaime Abelardo, have been the most severely affected so far. Mr. Abelardo arrived in Barcelona from Ecuador in 1999 with the promise of a job in a warehouse. A few years later, he could afford to bring his family over and buy a tiny apartment. Or so he thought. But within two years, he was laid off. He blames himself for not having been more cautious. Still, he cannot get over the figures printed on the dog-eared papers he has received from the bank.
They say he now owes nearly 260,000 euros, almost $360,000, which includes about 77,000 euros to cover all court costs, including the bank’s, his lawyer said. He bought the apartment for less than that — about 220,000 euros, he thinks, though many aspects of the deal were never clear to him. His wife has left him. His unemployment payments are about to run out. He would like to go back to Ecuador with his four children, but he does not have enough money. “I’m thinking about shooting myself,” he said.
An estimated 1.4 million Spaniards are facing potential foreclosure proceedings, according to Spain’s consumer protection association, known as the Adicae. Recent figures from the courts show that the numbers are rising fast. In 2007, there were just 26,000 foreclosures. Last year, there were more than 93,000. Early indications suggest that they will be higher again in 2010.
A recent Standard & Poor’s report found that 8 percent of Spain’s housing is now worth less than the value of the mortgage and with prices continuing to fall, experts believe, that figure could rise to 20 percent.
Advocates say that Spain’s foreclosure procedures tilt far too much in favor of the banks, virtually guaranteeing the mortgage defaulters will end up owing large amounts after they lose their homes. Banks have the right to auction houses in foreclosure and, if no buyers appear, as is often the case these days, the bank can take ownership of the house for 50 percent of its value, according to the estimate either at the time of purchase, or at the current time, depending on what is specified in the mortgage. The banks then have 15 years to go after the homeowner. And if the banks initiate proceedings at any point, the clock starts ticking again, experts say. In the meantime, the bank can charge interest on that debt.
Montse Andrés Sabaté, a lawyer with Ausbanc, a consumer association that specializes in banking services, says that the banks usually charge 5 or 6 percent, but sometimes much more. “We’ve seen 18 or even 19 percent,” Ms. Andrés said.
And then there is the matter of guarantors. Bankers pressed many homeowners to find guarantors at the time they took out the mortgages or when they began to struggle to make payments. Mario Gozálvez, a truck driver, asked his 23-year-old daughter to act as a guarantor when he used the equity in his Barcelona apartment to buy a truck three years ago. At the time, she did not even have a job and he thought of it as a silly formality. Now, she faces a lifetime of paying off his debts.
“She may not be able to inherit anything from her mother because the bank can seize it,” Mr. Gozálvez said. “No one explains this.”
Early in the crisis, experts say, the banks were lenient with immigrants who had no assets and accepted the property as payment for the loan. But some advocates say they are tougher now. Under the law, the banks have the right to collect a percentage of a debtor’s income if it is above $835 a month.
Santos González Sánchez, the chairman of the Spanish Mortgage Association, says it is the bank’s duty to try to collect. “This helps to explain why our financial entities have not gone bankrupt,” he said.
Personal liability mortgages are common in Europe. But advocates here say that aspects of Spain’s procedures — how quickly banks can foreclose, the interest rates they can charge and the repayment schedules they can demand — are particularly severe. This month, even Mr. Zapatero’s party joined in voting for a parliamentary motion to slow foreclosure proceedings.
Mr. Marbán knew he was in trouble within months of buying the pet store as his business began to taper off. To keep the bank from foreclosing, he gave it whatever he could scrape together. At one point, he sold his car at a huge discount to meet a payment. Eventually, he sold his wife’s gold bracelet.
But it was no good. He could never catch up on what he owed.
“It’s funny, when I finally lost the house, I started sleeping,” he said. “I cry sometimes, but at least I sleep now.”
Rachel Chaundler contributed reporting.
A version of this article appeared in print on October 28, 2010, on page A1 of the New York edition.
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