Over the last several weeks, there have been several crisis points reached. Some large some small but all telling of the growing dilemma within the EU. In Spain, not only have there been huge protests over the austerity cuts in many cities across the country, but for the last several weeks the police have refused to help the bankers with the thousands of repossessions of homes in foreclosure. To the people in the USA it may seem strange, but repossessions work differently in Spain. When a person falls so far behind in payments their home is repossessed, as in the USA the police provide assistance to the mortgage holder to take possession. However, it does not stop there. Once you are forced out, you are still obligated to pay the mortgage you could not pay. In response to this, several older retired people with no children and no where else to go have committed suicide. At first, after several of these incidents the government of Spain put a moratorium in place for a couple of weeks. During this period, we assume, they convinced the police to assist once again. Then they resumed as before. One of the last was an old retired couple who committed suicide together. Dying, inside the home of their retirement dreams, the night before it was to be repossessed. In a city, considered one of the playgrounds of the rich, Marbella on the Gold coast of southern Spain.
There is now a new twist on the mortgage crisis in Spain. One that may contribute to the end of the European Union as we know it. On Friday 15 March 2013, the European courts ruled the repossession process in Spain abusive of Human Rights.
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This ruling happened due to a repossession of a simple home valued at 139,000 Euro. Sounds like a very small sum of money, in truth however, it has an impact on a more than 187 Billion Euro problem. As I previously stated the law on home repossession works differently in Spain than in the USA. In the USA when a person can no longer pay for their home and it goes into repossession, the normal course of events goes from there to bankruptcy and the person is relieved of their obligations to the lender. Of course, they no longer have a home but they are free from the payments as well. In Spain, the process, previous to this ruling, has been more egregious. When the home owner can’t pay, the lender repossesses the home and the person is out on the street. The home owner though is not relieved in anyway of the obligation to pay the debt to the lender. Not only that, under current Spanish law now ruled abusive, if the home owner is unable to repay the debt before they die, the obligation is passed on the the surviving family. This usually means that the children are then obligated to repay the debt. If there aren’t any surviving children, another family member becomes obligated, including parents, brothers, sisters or anyone the court deems suitable. It is punishable under the fraud laws to evade the debt.
In the case of the loan that brought this to court, the home owner had bought the home on a variable interest rate depending upon the base rate to the bank. When they purchased the home the rate was 4.75%, which at the time was reasonable, when the crisis hit under the terms of the variable rate mortgage the rates went to 18.9%. Nearly four times the previous rate and the value of the home dropped by fifty (50%) percent. This left the home owner unable to sell the home and unable to pay the loan.
If this had been a case of one loan, it is a tragedy. Since this situation involves several hundred thousand loans in the same situation, it is a national crisis, worth more than 187 Billion Euros. The court has instructed the Spanish Government to resolve the problem, the court has prevented future repossessions until it has been resolved and signaled it would be illegal to proceed without a resolution.
Spain has a population of approximately 46 million people. That is a population roughly equivalent to the combined total of California and Arizona combined. Like both of those states, Spain had been seen as an ideal retirement area, nice Mediterranean climate, prior to the crisis a lower cost of living than many EU countries and many large English speaking ex-pat communities. Spain also has a large percentage of retired older Spanish. Spain is one of the Mediterranean countries noted for longevity. Many Britons and Germans saw Spain as their perfect place for retirement. Many sold their homes in the colder climates of northern Europe and moved to the welcoming sun in Spain. Now they have seen the homes value fall by at least 50% sometimes more, virtually wiping out their savings. Those who moved on fixed incomes and took cheap variable rate mortgages are now facing ruin.
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The question facing Europe remains. The Spanish banks have been bailed out. Bailed out with these outstanding loans on the books as it stood under law at the time. No one knows what will happen next, do they bail the banks out again? Do they change the law to be similar to the one in the USA, to provide relief for the home-owners? What will happen to the houses?
Finally, in Europe the general feeling is not if, but when the Euro will collapse. It is spoken of in hushed terms by leaders and in open conversation among the citizens, especially in Spain. The impact is not truly known. It has been an experiment. One that may at a minimum cost many their savings or fortunes. In the long run it may collapse the world economy. That is the problem: no one knows, so fear is the order of the day.
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