Campaigners in Spain hailed a rare legal victory over the country’s banks and government when Europe’s highest court struck down a draconian foreclosure law that had come to symbolise the brutal fallout from the eurozone’s debt crisis.Was This a Good Ruling?
The decision by the European Court of Justice will give Spanish courts new powers to delay or freeze the eviction of home buyers who have fallen behind on their mortgage payments. It will add to rising public pressure on the government in Madrid to change a tough mortgage regime that has allowed banks to evict tens of thousands of struggling homeowners.
Spanish lenders have repossessed almost 400,000 houses and offices since the start of the crisis in 2007, sparking angry protests and a broad popular backlash. In some instances, home buyers were reported to have committed suicide days or even hours before their eviction date.
Anti-eviction campaigners have collected almost 1.5m signatures to force parliament to debate a change in the law. The initiative seeks to end the current legal situation in which banks can demand full repayment of a mortgage even after it repossesses a house.
Ada Colau, a spokeswoman for the Platform of Mortgage Victims, said the court ruling left Spain’s government with “no other option than to change the mortgage law”.
The ruling handed down by the ECJ dealt with the case of Mohamed Aziz, who in 2007 took out a mortgage of €138,000 from Catalunyacaixa, a lender that was later nationalised. He stopped paying his instalments the following year, and was eventually evicted from his home in 2011.
Mr Aziz argued his eviction was illegal because the original mortgage agreement was unfair, and should have been annulled. He pointed out the contract allowed the bank to take away his home after just one failure to pay an instalment, and provided for a default interest rate of 18.75 per cent.
Regular readers I am a big proponent of walking away if the situation presents itself (click on link for numerous articles). But what is the situation here?
The situation is people paid silly prices for merchandise of dubious value. They also did so knowing there was not an option to walk away with no recourse.
I can sympathize with preposterous default interest rates of 18.75%, but I wonder what interest rate Mr. Aziz can afford to pay. I suspect Aziz can afford to pay 0% and nothing on principal.
With that in mind, this EU ruling is likely to keep people in their homes interest free (and payment free) for years. Is that a good thing? For who?
It is certainly a good thing for the likes of Mr. Aziz. It is a horrendous thing for taxpayers who will ultimately have to pick up the tab for everyone in this situation. It will also encourage everyone in a similar situation to stop paying their bills whether they can afford to or not.
In the US, banks knowingly entered into such contracts. In Spain they didn't, and that is probably why Spain's housing bubble was even bigger than the bubble in the US.
Spain's banking insolvency issue is going to get a lot worse. Those who were prudent will soon be majorly-screwed to help bail out those like Mr. Aziz who overpaid.
All things considered, this was not a good ruling. Nonetheless, expect socialists to cheer it. Also expect the prudent to pay through the nose to bail out not only the banks, but those foolish enough to throw caution to the wind.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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