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98% of mortgages in Spain are current, what could America learn?

The Plaza Mayor in Salamanca, Spain. Photo by Raúl Hernández González.

Most Spaniards are current on their mortgage

As America struggles with foreclosures and defaults, there are now 6.5 million Americans who are over 30 days delinquent on their mortgage payments with analysts projecting this number will rise.

As a contrast, Yahoo Finance reports that 98% of mortgages in Spain are on time, so what is Spain doing that is so different than America?

In America, we all know that a foreclosure means a house goes back to the bank, the borrower is forgiven that debt in exchange for a massive credit score decline.

In Spain, when a home goes into foreclosure, not only is some or part of the debt still owed to the bank, but many mortgages allow for lenders to go after wages until the debt is fulfilled.

Two systems, two results

The two systems are drastically different yet yield completely different results. Would a harsh system like Spain’s help with the foreclosure numbers? It is highly unlikely, as the majority (not all) homeowners that go into foreclosure do so for legitimate reasons like being laid off. Penalties like this would easily stall the American housing sector.

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That said, are penalties high enough in America? Some politicians are hoping that a 20% down requirement on all new loans would incentivize homeowners to stay so as not to lose their investment, while critics believe that would drastically stunt sales.

So how could penalties change in America? Some support tightened lending and more regulatory oversight, while others note that foreclosures that severely damage credit also damages the ability to buy again and especially hurts the ability to rent, as credit is a primary qualifying criteria in most of America, meaning a foreclosure limits where one can live.

The Spanish system is too harsh, what can be done?

The Spanish system is obviously too harsh and would never work in America, but would requiring 20% down or other “tough” measures aid in limiting foreclosures? Not likely, as we have maintained that most delinquencies aren’t by choice and that if we see unemployment numbers go down, we’ll also see defaults drop.

Jobs = housing, and the Spanish system may have few delinquencies, but they also are a nation of many poor people, with this as one of the contributing factors.

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  1. David Pylyp

    July 23, 2011 at 2:07 pm

    Why would you feel that the inability to selectively walk away from debt is the exclusive right of America.
    We are all watching as your senate is considering this very feature
    imagine the finical landscape when the United States defaults.

    David Pylyp
    Accredited Senior Agent living in Toronto

  2. Nathan Gesner

    July 24, 2011 at 5:22 pm

    Why wouldn't it work in America? The whole point of higher penalties is that it forces the consumer to make wise choices. For example, if buyers were required to put 20% down – or even 10% – it will limit how much they can afford and they're much more likely to buy within their means. This will reduce the number of people buying white-collar homes on a blue-collar salary, and thereby reducing the number of defaults when times get tight.

    The American system is severely flawed and the author, along with the vast majority of Realtors, continue to dig us deeper by claiming there is no reason to require perspersonal responsibilitresponsibility as a major part of the solution.

  3. Michael

    July 25, 2011 at 9:11 am

    Many US states do allow for deficiency judgments; the ability, like Spain, to recovery money. However, the debt obviously becomes unsecured because the person no longer has a house: it's analogous to a large credit-card debt and can be discharged in bankruptcy.

    Despite an ability, it is rare for a bank to chase down a deficiency judgment because the debtor seldom has significant money: banks do better financially writing the debt off and using the loss to offset other gains for taxes.

    Many in the real-estate industry wisely believe deficiency judgments should be done away with, because they permanently inhibit the ability of a person to later purchase another house when their personal finances improve. This hurts the overall economy, as fewer buyers exist for an already severely wounded real-estate industry.

    The self-righteous "personal responsibility" (for people .. $20 trillion in bailouts for banks) should mind their own business. Bankers made bad loans which would have been sold for a few cents on the dollar to new lenders who would have renegotiated them for a small fraction of their face value. Instead, the government interfered on one side of a private contract — propping up banks with public money — and throwing the other party, the borrowers, under the bus.

    If banks wish to take their booty and "allow" people to walkaway — as if they'd had any choice but-for the bailouts — there's no reason anybody should listen to the hypocritical tea-party "free markets are great .. for them" crowd.

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