While the changes to Spanish law governing mortgage foreclosures are ostensibly favorable to borrowers, Moody's Investors Service believes they are credit neutral for Spain’s residential mortgage-backed securities (RMBS).
The European Union’s Court of Justice ruled on March 14 that the current legislative approach to mortgage foreclosure in Spain is out of sync with the EU laws designed to protect consumer rights.
In short, Spanish homeowners are not given enough recourse to challenge a foreclosure, even in instances where they argue that the terms of the mortgage itself were unfair. Spain began incorporating the EU decision into its foreclosure laws at the end of 2012 and is expected to complete the process over the next few months.
Spain is going to clearly define “unfair terms” as part of these changes, which will help Spanish judges determine whether a mortgage was defective from the start. The new law will set other limits as well that are generally favorable to borrowers — such as barring creditors from foreclosing before the third unpaid installment or levying a default interest rate of over 12%.
Still, Moody's believes this will not help or hurt outstanding RMBS in the country. The agency gives a few reasons. One is that “the government’s eventual definition of unfair mortgage terms will likely reduce the number of borrowers eligible for a stay in the foreclosure process,” the agency said. A second is that recovery rates are already negligible in Spain. In addition, Spanish banks typically wait for at least the third unpaid installment to begin the foreclosure process. And finally, Moody's pointed out that a moratorium on evictions in the country has been in place since November 2012.