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Congressional Committee refuses 'keys back' mortgage reform

Source: El Pais - Mon 1st Aug 2011

A Congressional committee reviewing the Spanish mortgage system has rejected proposals that would allow defaulting borrowers to cancel their debt by handing back their house keys, something commonplace in the USA.

The commission did however make proposals that would see greater regulation within the industry - particularly concerning how the value of properties is arrived at - agencies which have been accused of working alongside banks to inflate house prices.

Earlier this month the government passed a decree which intends to address the plight of evicted debtors by protecting more of their wages from being claimed by banks, and changes the way debt is calculated once a foreclosure has taken place.

Currently, if a bank manages to sell a foreclosed home, that amount is reduced from the outstanding debt. However, in today's market it is commonplace for there to be no interest in the property, which means that the bank then takes over the house for 50% of the value, and wipes the amount off the remaining debt - leaving the borrower still owing. The new legislation raises the proportion the bank now has to pay in the event of non-sale to 60%.

The Spanish Banking Association says that this measure would damage the country's low-interest-rate mortgage system: even now, as loan-shy banks raise rates, they can still be below 3%, with repayment periods of up to 40 years and no mandatory mortgage default insurance.

The Association claims that if such as measure were to be approved it would mean banks granting fewer, smaller and more costly loans to be repaid over a shorter time. This would result in almost 98% of mortgage-holders who do make their payments on time being penalised.

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