Spain’s Parliament rejected a law that would have eased the effect of mortgage foreclosures for as many as 300,000 homeowners who have lost their properties.

The Galician National Block, known as the BNG in Spain, had asked legislators to amend the law to allow mortgage holders to walk away from their debt by handing over the keys to their properties. It also would have permitted homeowners to delay mortgage payments beyond stipulated deadlines and to consent to partial debt write-offs. Lawmakers rejected the proposals, Parliament said on its website late last night.
Under Spanish law, if a foreclosed property is sold for less than the outstanding mortgage on the asset, the bank can claim the difference from the borrower. Lenders can make a claim against all of a borrower’s present and future assets and earnings.
The number of foreclosed properties in Spain has climbed tenfold in three years as unemployment reached 21 percent of the working population, the highest in the European Union, according to Idealista.com, the country’s largest property website. Home prices fell for the 12th straight quarter in the three months through March and have dropped 15 percent from the peak three years earlier, the National Statistics Institute said today.
Idealista advertises more than 30,000 foreclosed homes worth 4.6 billion euros ($6.6 billion) on behalf of 40 Spanish banks and savings banks. That’s up from just 3,000 in June 2009, according to the company’s website.
Social Problem
“We are talking about a social problem of the highest order,” Francisco Xesus Jorquera, a BNG lawmaker, said by telephone from Madrid yesterday before the vote. “It’s a debate that must take place as there is social outcry for the mortgage law to be reformed.”
As many as 300,000 homes were foreclosed in Spain between 2008 and 2010, according to the text of the proposal.
Spain’s Parliament has created a committee to study possible changes to the country’s mortgage rules and whether the current law allows for abusive practices, the assembly said on its website on June 8. The commission has until December to present a report on its findings.
“If banks had to assume losses that would result from pardoning mortgages granted during Spain’s real-estate boom, the Spanish financial system would collapse,” said Jesus Encinar, founder and chief executive officer of Idealista.com.
The housing boom that ended in 2008 left Spanish banks with 315.8 billion euros in loans related to real-estate activities in the fourth quarter of 2010, according to the Bank of Spain. That’s after they were forced to take on properties and land in return for canceling debt to bankrupt developers.
If the law was modified to allow homeowners to hand over their keys and walk away from their debts, it would hurt banks’ balance sheets and force them to raise their lending costs for new mortgages as well as force mortgage holders to take out costly insurance to cover the risk of non-payment, Encinar said.