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Carmen Aranda, Deputy Director of the Master's Degree in Banking and Financial Regulation, University of Navarra
On dation in lieu of payment
Under current mortgage law, the existence of a security interest in a contract at loan does not eliminate liability staff. Consequently, the lender may proceed against the borrower as long as the contracted debt (principal and interest) is not fully satisfied. The Minister of Economics, Luis de Guindos, went to congress not to announce a reform of the law, but to offer financial institutions tax incentives in the event that they waive this right. The news programs of all the radio and television channels reflected yesterday that the "opinion of the street", in its majority, supports the dation as a means to solve mortgage debts, claiming to the Government a firmer step in this sense.
Citizens put forward two arguments. First, the banks themselves in the deed of loan recognize that the value of the property (appraisal) is higher than the principal. Therefore, they must be consistent with this and assume the losses; if not, why is it included in the deed, what is it used for? The appraisal is useful for estimating the amount of capital requirements and provisions that, according to the rules of the financial regulator, all entities are obliged to provide at agreement credit . The loan has less collateral (more risk) the lower the value of the collateral in relation to the principal granted (coverage ratio or loan-to-value). The higher the risk, the greater the provision that the financial institution must make. In addition, loans are securitized and sold in the form of fixed-income bonds. The price of this financial product also depends on the level of risk associated with it. And loan-to-value is also the variable on reference letter (although not the only one) used by rating agencies to rate the risk of mortgage securitization funds.
The second argument is directed at the spirit of the criteria for granting loans. Risk analysis has always been a judgment on the creditworthiness of the borrower, i.e., it has been linked to the analysis of the person; to the who. test is the very use of language: someone who "has credit " has always been someone who is capable and trustworthy. That is precisely what financial institutions have historically analyzed: whether Mr. and Mrs. Garcia-Rodriguez, for example, would have the capacity first and the intention later to refund the loan they requested. Both have always been necessary. The clients argue that from the person has gone to the thing and that the decision criterion is now the percentage of the appraised value over the principal. The necessary condition has become sufficient.
It is quite possible that certain shenanigans in the industry facilitate an interpretation like the one my fellow citizens (and even some judges) are making. However, if there is an ex post change in the interpretation of contracts, and the way of allocating risks is changed, what consequences can be expected? The retroactive application of the general application of the gift is equivalent to granting today a "free" option to the borrowers of all the mortgage contracts in force; the option to choose between the repayment of the debt or the submission of the property in guarantee. An American-style option for 20, 30 or even more years, which they would logically exercise depending on the evolution of the real estate market. A very valuable option because of the high volatility of the underlying (the real estate market) and its long deadline maturity. A "free" option because, as it is granted a posteriori, it is not taken into account in the price of loan. And let's not think only of the housing market, but also of the office market, factories, etc.
Obviously we can change the rules of the game, but it has to be done a priori. And if we decide that the risk of loss of collateral value must now be borne by the financial institutions, there will be changes in the market. Banks could decide not to grant any more mortgage loans, or they could be much more expensive. So, what would happen, how would it affect, especially now, our Economics, and our country risk? The topic is not trivial. Therefore, the Minister of Economics appeals to the common sense of financial institutions to alleviate specific situations, but the Government cannot, should not, go beyond that.