The Lawbird Tribune

The (12 month) Euribor fell today to 3.085%, and will set the average for December at 3.4%.

The Euribor (ER) is the rate of interest at which banks lend to each other. It is the reference which most Spanish Lenders take to set the mortgages’ rate of interest. This rate is reviewable by your bank, depending on your Mortgage Deed, every six months or once a year. The European Central Bank (ECB), which sets European Monetary Policy for all EU members with the exception of the UK, has no direct control over the ER.

Post credit-crunch fear, shortage of liquidity in the markets, widespread bankruptcies and plummeting stock prices unseen since 1929’s infamous Wall Street’s Stock Market Crash has gripped banks with fear in the last quarter of 2008. This fear to lend to each other due to the mutual mistrust on one another’s writedowns has fuelled the ER hiking it to levels which were unprecedented historically.

In line with the US, the European Central Bank has lowered consecutively the interest rate which indirectly affects the ER. The Euribor rate reached an all time high on October 2008 peaking at 5.393%. To this you must add the differential on paying a mortgage which typically for a non-resident will be 1% on top of the Euribor rate. This caused a surge of mortgage defaults.

The reason being is that the ECB is lagging behind the United States Monetary Policy which has now set its interest rate at almost zero (0.25% to be exact) to hopefully fuel the ailing American economy. So the ECB has quite some catching up to do next year as its interest rate is currently held at 2.50%. Currently the Euribor rate for 12 months is set at 3.085%

In any case the continued policy of the European Central Bank to lower the interest rates over the last months will help to drive down the Euribor rate which is always news most welcomed by everyone, specially borrowers. Spanish banks will revise and adjust the Euribor rate which in turn will lower your monthly mortgage repayments. This normally happens in July.

For example, a typical mortgage of €300,000 revisable next July 2009 could drop by as much as €550 a month if the Euribor rate continues its downward trend and hits the 2% forecasted by financial experts by mid 2009.

So for all those that are struggling to pay their mortgage loan and are considering defaulting you should be aware of this significant drop in 2009. We suggest you find out at your bank when the Euribor rate will be adjusted for your own particular case and how much money you stand to save.

Gestión de Obras y Reformas, S.L., one of the numerous creditors of Spanish developer Aifos, has initiated before Málaga’s Mercantile Court number one a forced administration procedure as result of the money it is owed. In Spain companies undergoing a difficult financial situation can either initiate voluntarily an administration procedure or else one of their creditors may force it. The latter has been the case.

Aifos owes 850 million Euros (718 million GBP). It’s largest creditors are Banco Popular with 200 million Euros, followed by Banco Pastor with 33 million Euros. Another 96 companies form part of the creditors list to which AIFOS has been owing funds for the last 2 years.

AIFOS has currently employed 2,000 workers.

IMPORTANT: all our AIFOS clients have been sent a newsletter on this issue on Tuesday 25th of November. If you haven’t received yours or are unable to open the attachment please contact us.

Source: El Economista Financial Newspaper

For those unable to service their Spanish mortgage a dacion en pago (datio pro soluto), is one of the proposed solutions we highlighted on our previous article regarding bank repossessions. Antonio Flores also mentions it on a recent blog post.

In plain English, dacion en pago means handing over the keys to the bank, and in exchange the bank will discharge all mortgage debt not holding you liable in the future. They will also renounce pursuing the debt in your home country or elsewhere against any other assets you may hold. This solution of last resort puts an end to many people’s growing nightmare as the mortgage debt mounts up and becomes unbearable. On you defaulting a mortgage debt in Spain, the debt goes personally against you, not against the property itself. That is why many defaulting borrowers are realizing with shock that in despite of the lender having repossessed their Spanish property, they may chase you back in your home country or elsewhere for the outstanding debt. 

The dacion en pago involves you signing a deed at a Notary Public by which the bank commits itself not to chase you in the future for the debt and consider it discharged for good. The catch is that the property must not be in negative equity. This is actually more difficult than people think because due to the easy credit of the last years the loan-to-value of properties was very high, too high in fact, hence all the bank related problems we read on a daily basis with massive write downs carried out by Lenders. People borrowed far too much and now their properties may have fallen below their initial loan. If this happens, the lender will be reluctant to agree to this dacion en pago because the property will have no equity left. In this case if a solution cannot be reached the bank will repossess the property. Banks can sell the non-performing mortgage prior to it going to auction. Transfer Tax of 7% has to be paid on the value of the property as if it were a normal conveyance. Some banks will impose that this tax burden is borne by the borrower.

So if you are finding trouble keeping up with your mortgage repayments or you reasonably foresee you may fall in arrears soon and your property is still in positive equity you may suggest this option to your lender. However, it’s only up to the bank to decide on whether they are willing to accept it or not. Some banks are reluctant yet others will consider it although a specific case-by-case study will be required.  

The bank will evaluate if this option is in line with its best interests and will determine the amount of equity left in the property commanding an updated appraisal if necessary. If the numbers stack up, they will accept it. You will both sign the deed at a Notary’s and that will be the end of the matter. We advise you to hire a lawyer to make sure your debt will be totally discharged; besides you will need an impartial translator acting for you.
 
It’s a win-win for both parties really. The borrower is free at last and has managed to secure successfully his assets abroad from the lender or any law firm or debt collection company they may hire to pursue the outstanding debt. The lender on the other hand will now own the property outright and will have successfully waived a lengthy and expensive court procedure (repossession) without having to apply provisions to the Bank of Spain to make up for this dubious loan. These provisions set aside by banks are being looked upon closely by credit-rating agencies post credit crunch.

As read on the Sur newspaper, more than 9,000 landlords have adopted in their tenancy contracts the Arbitrage System which allows eviction associated costs to be cut down significantly. Malaga is the Andalousian province in which this practice has been most successful. More than 8.980 Tenancy Agreements uphold the arbitrage system should one of the parties breach the contract i.e. non-payment.

This system was created back in 2004 and allows to significantly reduce both the associated expenses as well as the necessary eviction time compared to a normal court procedure (which normally averages at least 10 months). However, this system only works if both parties, tenant and landlord, abide the mandatory Arbitral Award something which does not always happen as non-paying tenants may only buying time with no real intention of paying the arrears.

The Arbitral Court guarantees that the case will be examined within 30 days, often even less. The main advantage would be the swiftness in which the arbitral award is obtained. This is particular important in cases in which the landlord offsets the rent against his mortgage repayments.

To apply for it is only necessary to request it in one of the 120 real estate agencies of Malaga province which are homologated by the Arbitral Court or simply including it as a clause in the Tenancy agreement waiving the ordinary court procedure. It only costs 42 Euros plus a further 300 Euros in case of a protracted conflict. A normal court procedure would have an average cost of at least 2.300 Euros. The second advantage would be the considerable amount of money it saves the landlord.

Another option available to the Landlord is to hire a Rental Insurance which cover the event of the tenant defaulting until he is effectively vacated from the property. These insurance companies will request the tenants’ payslips to ascertain their financial ability.

More information on the subject can be found on our article Landlord: Keys to Successful Rental Income

Thirteen local councils in Málaga province will revise and update the cadastral values (valor catastral) of properties within their limits, translating into increases which range from 80% to 300%. It is expected that the increase for residential properties will be no more than an average of 150%.

The increase in cadastral value is quite significant, as this figure is a benchmark which is used in calculating various taxes in Spain, such as IBI Tax, IIVT (or Plusvalía Municipal Tax), Wealth and Income Tax and the dreaded Inheritance Tax.  The cadastral value, which is generally well below the true market value of real estate, is regularly updated every decade or so, as not to significantly detach the taxable values from those of the market. The single most important factor that raises or lowers the cadastral value is the appreciation or depreciation in value of the land.

In the Málaga province these updates were carried in general in the 80s and mid 90s. The municipalities of Alfarnate, Arenas, Atajate, Benamargosa, Benaoján, Cútar, El Burgo, Cuevas de San Marcos, Gaucín, Jubrique, Málaga (city) Totalán and Abdalajís Valley will all be updating the cadastral value of real estate in their territory.  In some of these towns the cadastral value hasn’t been updated since 1989 such as in El Burgo or Gaucín. IBI tax may well even triple in these municipalities as from next year.

Important cities in Málaga province such as Estepona or Vélez Málaga already updated their cadastral values last year. However many other towns will also have to update them soon, such as Marbella (unrevised since 1988), Alhaurín de la Torre (1996), Benahavís (1996), Campillos (1996), Cártama (2000), Manilva (1997), Rincón de la Victoria (1999), Ronda (1998) or Torrox (2000).

Most owners have IBI tax set as a standing order against their Spanish bank accounts. Make sure that you have enough funds in your bank account before this tax is due (normally between June and September). Regarding Property Income tax (Property Wealth Tax is due to disappear next year), your solicitor will let you know how much this figure is.