Content uploaded by Sergio Nasarre-Aznar
Author content
All content in this area was uploaded by Sergio Nasarre-Aznar on Feb 26, 2019
Content may be subject to copyright.
Legal housing reforms in Europe and in Spain as a
results of the international crisis 2007
Working Paper No. 2/2015
Author
Sergio Nasarre-Aznar
Universitat Rovira i Virgili
sergio.nasarre@urv.cat
This working paper corresponds to the pre-print of the article published at the Revue de Droit
Bancaire et Financière. Suggested citation: Nasarre-Aznar, S. ‘Legal housing reforms in Europe and
in Spain as a results of the international crisis 2007’. Revue de Droit Bancaire et Financière, No.
2/2015.
© S. Nasarre-Aznar
S. NASARRE-AZNAR
LEGAL HOUSING REFORMS IN EUROPE AND IN SPAIN
AS A RESULTS OF THE INTERNATIONAL CRISIS 20007
UNESCO Housing Chair – Working Paper No. 2/2015
2
Legal housing reforms in Europe and in Spain as a
results of the international crisis 2007
Sergio Nasarre-Aznar
Abstract. This paper covers the causes and the consequences of the worldwide
mortgage crisis of 2007 in the field of housing law. The identification of reckless
mortgage lending and mortgage securitization as the main causes of the crisis and
its spread throughout the rest of the world have reoriented housing law and
jurisprudence towards the increase of consumer protection in the field of mortgage
loans, both in Europe as well as in Spain. The efficacy of other reforms relating to
housing, such as the regulation of rating agencies at EU level or the law of leases in
Spain have, on the other hand, been more controversial.
Keywords: housing, mortgage, lease, tenancy, tenure, crisis, evictions, foreclosure,
homelessness, consumers, securitisation, GSEs, rating agencies.
1. The 2007 international crisis: from “home as an asset” to “home as a basic
need”
Seven years into the current systemic worldwide crisis, it is evident that housing has taken and
continues to take a central role in it.
At the beginning, the main causes for the collapse of the system were the massive widespread of
homeownership combined with the moral hazard that entails every mortgage securitisation process
1
.
Housing has, nevertheless kept the status of a protagonist within this context till this very day. In the
US, the crisis led to an unemployment rate of 10% in 2009 (double the usual rate)
2
and, until 2011,
as many as 2.7 million evictions had been carried out amongst those families that had bought their
home between 2004 and 2008
3
. Numbers are also dramatic in several EU countries.
This situation has caused numerous changes in both EU as well as individual Member States’
legislation, particularly in those jurisdictions that were most negatively affected
4
. The reason for this
1
See more details at NASARRE AZNAR, Sergio, ´A legal perspective of the origin and the globalization of the current
financial crisis and the resulting reforms in Spain`, in. PADRIAC, Kenna (Ed.), Contemporary Housing Issues in a
Globalized World, Ashgate Publishing, 2014, pp. 37-50.
2
See http://data.bls.gov/timeseries/LNS14000000 (last checked on 4-9-2013).
3
BOCIAN, D. et al., Lost ground 2011. Disparities in Mortgage Lending and Foreclosures, Center for Responsible
Lending, 2011. Available at http://www.responsiblelending.org/mortgage-lending/research-analysis/lost-ground-
2011.html. Last checked on 14-6-2013.
4
Some of them even expressly forced by the so-called “EU Troika” (European Union, European Central Bank and
International Monetary Fund), such as in Greece (Greece: Memorandum of understanding on specific economic policy
conditionality, 2-5-2010, available at http://peter.fleissner.org/Transform/MoU.pdf) and in Portugal (Portugal:
S. NASARRE-AZNAR
LEGAL HOUSING REFORMS IN EUROPE AND IN SPAIN
AS A RESULTS OF THE INTERNATIONAL CRISIS 20007
UNESCO Housing Chair – Working Paper No. 2/2015
3
is twofold: States aimed, first of all, to palliate the negative consequences of the crisis, in particular,
the loss of the family home (this was achieved, for instance, through the means of moratoria in
mortgage enforcements, especially for the most vulnerable; this is the case for Spain with a
moratorium from 2012 to 2015) and secondly to introduce legal, structural and financial changes that
could prohibit the repetition of such events. The reaction at EU level was the Mortgage Credit
Directive 2014/17/EU
5
, which is explained in more depth elsewhere in this issue.
The Directive itself reads that “The financial crisis has shown that irresponsible behaviour by market
participants can undermine the foundations of the financial system, leading to a lack of confidence
among all parties, in particular consumers, and potentially severe social and economic
consequences”. In any case, this is a process that started with a conception of “home as a financial
asset” (to be mortgaged, to be securitised) but which ended with the understanding of “home as a
basic need” (i.e. something that could not be easily relinquished by households).
This is why it is vital to understand how the current international mortgage crisis originated, and
eventually spread to the rest of the world, not only from a strictly economic perspective
6
but also
from a legal one i.e. which key factors in the US mortgage and financial system allowed, or even
favoured, the realisation of this phenomenon. A repeat of this crisis may only be avoided if those
factors are properly identified and addressed.
Basically, the US mortgage market (both granting and refinancing laws) has been developing for
decades in a de-regulated context which even excluded basic norms that are present in any modern
system of land credit
7
such as an efficient system of land registration, a strong banking system and a
structured system of mortgage securitization. These three axes are central in understanding how such
a big housing and mortgage boom was originated during the last decades preceding 2007, the year
when the bubble eventually burst.
Thus, reference is being made to the situation in the US of the certainty of land ownership and any
consequent charges (i.e. the strength of the loan collateral and of mortgage securities), the banking
system (ie. structured banking systems in Europe -Landschaften in 18th Prussia, the Crédit Foncier
de France in 1852 and the Banco Hipotecario in Spain in 1872- have been crucial to properly
develop the covered-bonds system) and the framework of the mortgage securitization process
(without strong mortgage securities -i.e. a system depending more on deposits- there is high risk for
negative consequences given rise by the lending long-borrowing short phenomenon).
The situation of those three elements in the US at the time when the crisis started was (an still is) as
follows:
a) Land Registry. The US lacks a unified and federal Land Registry.
8
Some of the existing
ones have rules coming from the 18th century while the offices that resemble the European Land
Registries the most are the County Recorders. Their geographical scope is each county or county
equivalent
9
, taking into account the fact that there are 3,143 counties o county equivalents in the
Memorandum of understanding on specific economic policy conditionality of 3-5-2011, available at
http://economico.sapo.pt/public/uploads/memorandotroika_04-05-2011.pdf ; last checked on 14-6-2013).
5
OJEU L 60/34, 28-2-2014.
6
Many publications have been already devoted to this. A search at Amazon USA of books on “financial crisis” since
mid-2007 shows a result of about 800 books, being a bestseller “Reckless Endangerment: How Outsized Ambition,
Greed, and Corruption Led to Economic Armageddon” of Gretchen Morgenson and Joshua Rosner, New York, 2011,
Times Books
7
NASARRE AZNAR, Sergio, La garantía de los valores hipotecarios, Marcial Pons, Madrid, 2003, pp. 29 to 50.
8
The temptatives by the National Conference of Commissioners on Uniform State Law and the American Law Institute
have been fruitless so far.
9
In some countries, such in Louisiana, there are no counties but parishes and in Alaska there are boroughs.
S. NASARRE-AZNAR
LEGAL HOUSING REFORMS IN EUROPE AND IN SPAIN
AS A RESULTS OF THE INTERNATIONAL CRISIS 20007
UNESCO Housing Chair – Working Paper No. 2/2015
4
US
10
. This geographical diversity is reproduced in the way in which these mechanisms are ruled and
operated, which in turn renders registrations or searches within those county-based registries
inefficient (in terms of both cost and time) and unreliable
11
. Some authors consider that these county
registries are “a terribly cumbersome, paper-intensive, error-prone, and therefore costly process for
transferring and tracking mortgage rights”
12
. Although their goal is to notify third parties (especially
those that aim to make profit and are in good faith), a range of limitations reduce their efficacy, such
as different systems of notice
13
or their use in the mere collection of documents rather than titles,
which are, moreover, based on the person rather than the property
14
. In addition, many counties have
not computerized their registries, meaning that lenders must start their search from the name of the
last person who would have enjoyed a valid title on the property and eventually carry a reverse-
search up to the name of the borrower (who should be the current owner of the property) in order to
verify whether he would have acquired the property legitimately from a third party. Ultimately, the
lender would have to trace back until the identification of a valid root of the title in question. A
second search would then involve the verification of whether any of the former owners of the
property had sold or charged the property to a third party before the current owner, thereby
eliminating any possibility that any third party would have any preference or privilege over the right
on which the land would be registered
15
. All in all this is a cumbersome process that does not seem
suitable enough to continuously transfer millions of mortgages in a short period of time in order to
securitise them.
b) The American banking system. Its traditional structure is rather weak
16
, as it is very
atomized and its operations are not diversified enough (either financially or geographically), up to
the point that the lending long, borrowing short crisis of the last 1980s and first 1990s caused the
winding up of 2,000 lending institutions
17
. The three Government-Sponsored Enterprises or GSEs
(see Figure 1) were created precisely in order to avoid the important dependence of those institutions
on deposits –thereby in the vicissitudes of the local economy– by centralising the mortgage
securitization process through the massive acquisition of mortgage loans. These loans would
subsequently be grouped and ultimately issued at international level. Since the end of 2007 to April
2010, 129 US banks and Savings and loans (S&L) have been wound up along with 26 credit
cooperatives between April 2007 and September 2009
18
. FRANKEL
19
affirmed that the US financial
10
A quick search in Google of the term “county recorders” (done on 2-8-2014) showed a long list of those county
recorders, each one with their own web page, their own requirements for the elaboration of copies, publicity of the
records, etc.
11
PETERSON, Christopher L., “Foreclosure, subprime mortgage lending, and the mortgage electronic registration
system”, University of Cincinnati Law Review, Vol. 78, 2010, p. 1405.
12
SLESINGER, Phyllis K. and MCLAUGHLIN, Daniel, “Mortgage Electronic Registration System”, Idaho Law
Review, Vol. 31, 1995, pp. 805 and 808.
13
Some US states are “notice states” as they require that the third acquirer is in good faith and for profit, that is, that he
does not have constructive notice of the previous existence of the mortgage. In some states it is also accepted the so-
called inquiry-notice that is, that the acquirer knows by any extra-registral way the existence of a previous mortgage.
And finally, in some others exist the race-notice, that is, the acquirer without registral or extra-registral notice registers
even before the previous mortgagee (PETERSON, “Foreclosure...”, p. 1394).
14
Most county registers have two index: one with the list of the name of all those who have registered a title in a certain
time-frame and another with the name of those who have received a title and have registered it.
15
Ver el procedimiento en PETERSON, “Foreclosure, ...”, pp. 1365 and 1366.
16
Even during the old good times, between 1921 and 1928, 5.055 banks wound up, while between 1929 and 1932,
wound up 5,761 more.
17
SEIDMAN, William, “The world financial system: lessons learned and challenges ahead”, History of the eighties –
Lessons for the future, Federal Deposit Insurance Corporation, Vol. II, 16-1-1997, pp. 55 to 58.
18
Source:
http://en.wikipedia.org/wiki/List_of_acquired_or_bankrupt_United_States_banks_in_the_late_2000s_financial_crisis
(visited, 2-8-2014).
S. NASARRE-AZNAR
LEGAL HOUSING REFORMS IN EUROPE AND IN SPAIN
AS A RESULTS OF THE INTERNATIONAL CRISIS 20007
UNESCO Housing Chair – Working Paper No. 2/2015
5
system based on innovation, competitiveness, transparency and control (by the SEC, as regulator of
the market), according to the facts, has failed and must be reconsidered.
c) The weak legal framework of securitization. During these last years there has not existed
a single piece of legislation on securitization in the US, such as, for instance, the Pfandbriefgesetz
1899 in Germany. The US securitization has developed rather “freely” – a process which has been
facilitated by the patchy and incomplete legal framework dealing with the securitization which
basically relies exclusively on the free will of the parties who negotiate these contracts. Thus, in
order to allow the GSEs to buy the mortgages from originators and reduce their risk of insolvency
(i.e by taking the risk of mortgage default) a certain necessity arose to: i) standardize those
mortgages (i.e. to facilitate these transactions and subsequently their pooling through the issue of
mortgage-backed securities backed by the same GSEs), ii) reduce their level of quality in order to
generalize the loans (and thereby homeownership among the citizens) and, of course, iii) “relax” the
regulations in a way that millions of mortgages could be transferred without the need of using either
the traditional common law rules (e.g. sometimes, to transfer both the promissory note -the credit-
and the mortgage) or the described registration system (eg. the need to register each transfer in the
process from the borrower to the special-purpose vehicle which issued the MBS, which seemed to be
too rigorous for the financial industry). Something similar happened in the French securitization
market with the burdereau de cession
20
. The solution for this regulatory lacuna was meant to be
MERS
21
, a private-owned system of Land Registration ruled by the financial industry, which
favoured the so-called “robo-signing scandal” in 2011. Thousands of false documents purporting
promissory note transfers were, in fact, forged because MERS could only transfer the mortgage, but
not the promissory note. This in turn resulted in a situation where holders of the mortgages were
often denied the authorisation to enforce those mortgages against their debtors once these were
defaulted
22
. Just as the origination and transfer of mortgages became characterised by a strong sense
of uncertainty, the same could be said for GSEs, the “strong legal protection” of the rating agencies’
“opinions”
23
and, generally speaking, the constant de-regulation -until the Dodd-Frank Act 2011- of
the banking and financial system
24
.
Figure 1 illustrates the whole mortgage securitization process in the US, the origination and
globalization of the crisis and explains the roles of each participant.
19
FRANKEL, Tamar, “Regulating the financial markets by examinations”, in MITCHELL Lawrence E. and
WILMARTH, (eds.), The panic of 2008. Causes, consequences and implications of reform, Edward Elgar Publishing,
UK and USA, 2010, p. 219.
20
NASARRE AZNAR, Sergio. Securitisation & mortgage bonds: Legal aspects and harmonisation in Europe.
Cambridge, Gostick Hall Publications, 2004, pp. 50 to 53.
21
Vid infra. MERS itself acknowledges that was “created by the mortgage banking industry to streamline the mortgage
process by using electronic commerce to eliminate paper” (available at https://www.mersinc.org/about-us/about-us,
visited 2-8-2014).
22
See more details at NASARRE AZNAR,, ´A legal perspective…’, pp. 47 to 49.
23
See a critic of their work at PARTNOY, Frank, ‘Overdependence on Credit Ratings was a Primary Cause of the Crisis’
in MITCHELL, Lawrence E. and WILMARTH, Arthur E., Jr, The Panic of 2008. Causes, Consequences and
Implications for Reform. Edward Elgar, Cheltenham UK/ Northampton MA USA, 2010.
24
Vid infra. Alan Greenspan, president of the US Federal Reserve between 1987 and 2006 has always been standing up
for the financial de-regulation, which appointed him as one of the 25 responsible of the crisis in the “Time” list
(http://content.time.com/time/specials/packages/completelist/0,29569,1877351,00.html; visited 2-8-2014). This contrast
with the cover that “Time” dedicated to him in 15-2-1999 in which included him in a “Committee to save the world”. At
GREENSPAN, Alan, The age of turbulence, UK and USA, Penguin, 2008, pp. 524 and 528 he continues advocating,
even after the start of the crisis, the banking self regulation and persists in questioning that the Fed could work as a
regulator to stabilize the system, though he seems to admit mistakes in his line of reasoning.
S. NASARRE-AZNAR
LEGAL HOUSING REFORMS IN EUROPE AND IN SPAIN
AS A RESULTS OF THE INTERNATIONAL CRISIS 20007
UNESCO Housing Chair – Working Paper No. 2/2015
6
Figure 1. Origination and globalization of the 2007 mortgage crisis. Source: own elaboration
The granting of mortgage loans to people without assets, income or even a job (NINJA loans),
entailed a high credit default risk which none of the originators had wanted to bear. However, due to
the prevalent homeownership policies in place, they hired mortgage brokers to arrange as many
mortgage loan contracts as possible and since the remuneration of the latter depended on the number
of successful arrangements, reckless lending had been seriously incentivised.
In view of the precedents of the late 1980s and early 1990s that had witnessed the collapse of the US
banking industry (the aforementioned bankruptcy of 2,000 credit institutions), the US government
pushed forward the creation of three GSEs (Fannie Mae, Freddie Mac y Ginnie Mae) whose specific
function was precisely that of buying all the mortgages from originators as soon as they were
granted.
Nevertheless, the conveyance of hundreds of thousands or even millions of mortgage loans from
originators to only three GSEs (in addition to this “official” mortgage securitization market there
existed a private one, which since 2007 has become merely testimonial) could not be undertaken
easily due to the aforementioned underdevelopment of the US land registration system. Stakeholders
then invented MERS, although this, in turn, only generated further problems.
Moreover, the GSEs were not in a condition to bear the default risk of those millions of mortgages
themselves and they consequently perceived the need to securitize them and transform them into
securities that were capable -unlike the European covered bonds- to transfer the risk of default of the
mortgages to (international) investors. They therefore proceeded to issue mortgage-backed securities
(MBS) or even by structuring them by issuing collateralized debt obligations (CDOs) over pools of
MBS.
Needless to say, these MBS and CDOs had to be presented in the most attractive way possible since
international investors would be assuming the default risk (due to the pass-through system) of the
underlying securities (despite their division into tranches which, however, eventually revealed
S. NASARRE-AZNAR
LEGAL HOUSING REFORMS IN EUROPE AND IN SPAIN
AS A RESULTS OF THE INTERNATIONAL CRISIS 20007
UNESCO Housing Chair – Working Paper No. 2/2015
7
themselves insufficient in avoiding the writing down losses). Two main tools were used. First of all,
the “implicit backing” of the US Government, which was clearly insufficient
25
and, secondly, the use
of the private market institutions as “gatekeepers”. The latter were namely the three major rating
agencies (Moody’s, Standard & Poor’s y Fitch Ratings) which had, furthermore enjoyed immunity
from legal action since the early 1980s, although following the introduction of the Dodd-Frank Act
2011 this has been partially reduced. All of this ultimately led the US government to intervene in
Fannie Mae and Freddie Mac in 2004 in order to ensure their viability and those entities that relied
on the private ratings ended up lost millions of dollars, such as CALPERs ($800 million of losses in
2006 and 2007) that is currently (2014) suing Moody’s and S&P for misrepresentation
26
.
Amongst those investors many were European banks, mainly German, French and British, suffered
estimated losses (in 2009) of $2.7 trillion
27
at the start of the crash in 2007. Until then, the mortgage
securitization system had guaranteed the flow of trillions of dollars from the rest of the world into the
funding of mortgages granted to US citizens. This “house of cards”, however, fell when originators
stopped refinancing existing mortgage loans (particularly those sub-prime mortgages, ie. those with a
loan-to-value ratio superior to 80%) due to the dramatic fall in housing prices. Paying current debts
with new debts (refinancing) is an essential part of the consumerist system of the US, that is
controlled by other three big companies (TransUnion, EquiFax and Experian).
The sudden cease of refinancing caused many mortgage defaults and following the chain of the
credit default risk, financial loses were neither shouldered by the originators nor by special-purpose
vehicles but they were ultimately paid by MBS investors themselves. British banks lost $31.8 billion,
two major Swiss banks lost $62.3 billion and three major German ones lost additional $41.1 billions
just until the end of 2008 due to causes that are directly attributable to the US sub-prime crisis
28
.
The sudden drop in the value of MBS (“writing down” loses) halted their demand in the international
market, thereby ending the source of income of GSEs and the buying of mortgages from originators
that were suddenly faced with a liquidity crisis. Major mortgages insurances, such as AIG
29
, wound
up, thus causing more mortgage loan defaults, increased market overheating, deeper housing price
drops, more “walkers” (borrowers in negative equity – i.e. borrowers who owed more than the value
of their properties- who defaulted payment, even though they could afford to repay them, due to the
possibility of finding a cheaper property in the neighbourhood), and increased weaknesses in the
outstanding MBS and CDOs which commenced the spiralling down of the worldwide crisis.
2. Reaction at EU level
Prior to 2007, the EU was reluctant on regulating anything in relation to mortgages (even to housing
in general) in Europe.
25
See NASARRE AZNAR,. Securitisation & mortgage…, pp. 39 to 49.
26
See http://www.bloomberg.com/news/2014-04-09/s-p-moody-s-say-calpers-looking-for-ratings-scapegoat.html (visited
22-7-2014).
27
INTERNATIONAL MONETARY FUND, Global Financial Stability Report (GFSR), April 2009, p. 11 (available at
http://www.imf.org/external/pubs/ft/gfsr/2009/01/pdf/text.pdf, visited 30-10-2014).
28
COX, Jason, FAUCETTE, Judith and VALENZUELA LICKSTEIN, Consuelo, Why Did the Credit Crisis Spread to
Global Markets?, 2010, p. 18.
29
Since 2008 to December 2012 was recapitalized by the US Government (See
http://www.aigcorporate.com/GIinAIG/owedtoUS_gov_new.html# ; visited 4-10-2013).
S. NASARRE-AZNAR
LEGAL HOUSING REFORMS IN EUROPE AND IN SPAIN
AS A RESULTS OF THE INTERNATIONAL CRISIS 20007
UNESCO Housing Chair – Working Paper No. 2/2015
8
Thus, despite the constant efforts, since the 1960’s, at creating a eurohypothec (a common mortgage
for Europe)
30
little development was achieved at EU level. This is even more relevant when
considering that 51% of the EU GDP is composed by mortgage loans, which makes it difficult to
understand the idea of “common internal market” if harmonization or, at least, convergence relates
only to the other 49%. The Green Paper on EU mortgage loans in 2005
31
asked countries and
stakeholders about the idea of the eurohypothec with massive positive answers. Following the White
Paper 2007
32
, all the goals to be achieved by the eurohypothec were present but the institution itself
was paradoxically and unjustifiably abandoned
33
.
Since then, seven years of discussions in relation to the mortgage market seem to have ended up in
the “de-caffeinated” Mortgage Credit Directive 2014/17/EU which has little to do with the
harmonization or convergence of mortgage markets in Europe and more to do with consumer
protection, a traditional field of legislation developed by the EU.
In this light, the Directive focuses on several issues, most of them “inspired” in the “Spanish case”
(its profound economic crisis). In reality the effectiveness of this Directive depends on the Member
States’ implementation of certain key aspects such as:
a) Arts. 7 to 9. The standard of behaviour of lenders who must act: “honestly, fairly, transparently
and professionally, taking account of the rights and interests of the consumers”. This clause begs
a series of questions. First of all, is this behaviour going to create a conflict of interest for
professional lenders? To which extent are they compelled to disclose the information they would
have acquired regarding the mortgage product? Are not professional lenders always going to act
according to their own interests –they are there to make profit at the end of the day- rather than
the consumers’?
b) Also, if this is required expressly to mortgage lenders, how have they behaved until now? Their
staff’s remuneration system should encourage this behaviour and they should additionally
possess and keep an up-to-date and appropriate level of knowledge and competence “in relation
to the manufacturing, the offering or granting of credit agreements”. This might run against the
policies of some mortgage lenders around Europe that used to prefer marketing-oriented
professionals to lawyers or economists
c) Arts. 10 to 16 address the advertising, marketing and pre-contractual information. This, in fact,
should not be not misleading although there is no obligation to insert clear-cut sentences to
inform about the risk of contracting a mortgage, such as “Contracting this mortgage will cause
you to lose your property and part of your other assets”. In addition to this, and following the
“EU-legislative style”, the Directive provides a list of minimum pre-contractual information that
should be provided to mortgage consumers, though the efficacy of this is questioned even by the
experts
34
. These articles also limit the attachment of financial products to mortgages, a practice
which has become very common in Spain since 2008 particularly through credit default-swaps
30
See more details on this project and how it evolved since then at
http://housing.urv.cat/en/cover/research/project/eurohypothec/ (visited 21-10-2014).
31
Green Paper on Mortgage Credit in the EU. COM(2005) 327 final, Brussels, 19-07-2005.
32
White Paper on the Integration of EU Mortgage Credit Markets, COM(2007) 807 final, 18-12-2007.
33
About the eurohypotehc, see NASARRE AZNAR, Sergio, “The Eurohypothec and the Eurotrust: the answers to the
goals of the EC White Paper 2007 on the Integration of EU Mortgage Credit Markets”, in SJEF VAN ERP et al. (coord.),
The future of European Property Law, Sellier, 2012, pp. 79 to 122.
34
See BEN-SHAHAR, O. and SCHNEIDER, C. E. The failure of mandated disclosure, “The Chicago Working Paper
Series Index”, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1567284 (visited 22-10-2014), p. 64, who
affirms that the compulsory disclosure of pre-contractual information “is a history of failure”. See also MAROTTA-
WURGLER, F. Will Increased Disclosure Help? Evaluating the Recommendation of the ALI’s, “Principles of the Law of
Software Contracts”, 78 (1) University of Chicago Law Review 165, 2011, available at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2497163 (visited 22-10-2014).
S. NASARRE-AZNAR
LEGAL HOUSING REFORMS IN EUROPE AND IN SPAIN
AS A RESULTS OF THE INTERNATIONAL CRISIS 20007
UNESCO Housing Chair – Working Paper No. 2/2015
9
contracted with consumers
35
. The Directive also incorporates the ESIS document, which is a
standardized template that provides pre-contractual information. This is, however, quite limited
as it does not allow by itself a proper, easily understandable comparative among different bank or
product offers.
d) Art. 18. Creditworthiness assessment of the mortgage consumer is, for those countries in which
this has not been the rule for years or has been applied very flexibly (such as Spain), the most
important provision in the Directive: the consumer may be requested to provide information and
this can also be obtained by lenders from private/public databases (art. 20). If there is a “negative
prospect” or else the debtor is unable to be rated, the lender must refuse the granting of credit.
The effects of this rule are, to my view, twofold. First of all, it is foreseen to avoid further NINJA
mortgages and this will probably be successful if the information available is good and
transparent enough. It must also be said, however, that such preventive measures would hardly
be sufficient in avoiding a systemic crisis (rebus sic stantibus) such the current one, that is,
recent sharp increases in the number of mortgages in arrears and evictions are rather more related
to systemic problems such as a high increase of the unemployment rate or the weakness of the
Welfare State. Secondly, this rule will not allow numerous households to access homeownership.
This is not expected to have many negative consequences in countries where a well-developed
tenancy market is in place (eg. Germany or Austria), but it possibly could in countries that due to
their decisive shift toward home ownership during the last decades -such as the Mediterranean
ones- have seen their rental markets go into considerable decline. Even in the current scenario,
“only” 6% of Spanish residential mortgages are in default
36
and a vast majority of retirees are
homeowners (with well-paid mortgages) or highly protected tenants (ancient LAU 1964) who
have additionally come to their sons’ and daughters’ rescue where the latter started facing
economic difficulties or were even threatened with eviction
37
.
e) Consumers should be informed gratuitously (art. 8) although assessment is onerous (and, in
accordance with the Directive, should entail more liability on the lender). Art. 19 requires the
property valuation to be both professional and independent.
f) Art. 25 could have had a bigger impact in some countries (eg. Germany) if it would have been
stricter and more straightforward in establishing a binding right of mortgage consumers to reduce
their debt whenever they wished (which should have been a limitation of the principle of pacta
sunt servanda in favour of consumers). However, it leaves Member States the possibility of
establishing this right (either through the contract or by law) along with any compensation for the
lender in case it suffered losses due to the (total or partial) early repayment.
g) Art. 28 establishes just weak and general provisions, leaving it up to the individual States to
decide:
a) when mortgage enforcements can start, despite the big disparity that exists in
Europe: particularly between the 84 days in Denmark up to the 10 years in
Cyprus.
b) the regulation in relation to default interest rates. In fact it has been recently
limited in Spain to 3 times the legal interest rate i.e.12% for 2014. This appears to
be a rather questionable approach to consumer protection since default interest
rates compensate damages suffered by lenders following default in the loan
repayment by the debtor and damages, following the general principle of restitutio
35
NASARRE AZNAR, Sergio. ‘Malas prácticas bancarias en la actividad hipotecaria’, Revista Crítica de Derecho
Inmobiliario, nº 727, 2011, pp. 2673 ff.
36
Census on living conditions of 2011 of INE (National Statistics Institute)
37
According to FUNDACIÓN ENCUENTRO, Informe España, 2013, p. 226, available at http://www.fund-
encuentro.org/informe_espana/indiceinforme.php?id=IE20 (visited 16-5-2014), in 2013, 5.5% of the expenses of the
elderly were dedicated to their children and grandchildren, 40.4% of the former used their retirement pension to help
relatives and friends and 1/5 of all unemployed people live on the pension of an elderly relative.
S. NASARRE-AZNAR
LEGAL HOUSING REFORMS IN EUROPE AND IN SPAIN
AS A RESULTS OF THE INTERNATIONAL CRISIS 20007
UNESCO Housing Chair – Working Paper No. 2/2015
10
in integrum, should be evidenced by the victim without legal constrains (ie. a
similar measure would not be accepted in case of compensation for damages of a
car accident).
c) the regulation of the datio in solutum in the field of defaulted mortgage loans.
Datio in solutum means the possibility for the debtor to unilaterally force the full
extinction of the loan debt at any time by delivering the mortgaged property back
to the lender. There may exist two means through which such policy could be
implemented: the "soft" one which entails that parties may agree upon this when
the mortgage is created or else when it would be about to be enforced; and the
"hard" one, by which the debtor could do it without the need of any prior
agreement with the lender since he would be entitled to do so by the law. There
are risks in accepting a “hard” datio in solutum, as this could imply negative
consequences for the mortgage market
38
particularly in respect of prospective
mortgagors (it would become both more difficult and more expensive to be
granted a mortgage even if certain groups would have already been barred
homeownership access)
39
.
Even in this latter field of consumer protection, mortgage relationships were, until 2007, expressly
excluded from major Directives, such as the Directive 2008/48/EEC
40
on consumers’ credits or
Directive 2011/83/UE, 25 October
41
, while Directive 93/13/EEC
42
on consumers protection left it up
to the Member States whether to extend its protection to mortgagors or not and several jurisdictions,
in fact, opted for the latter.
However, the UCTIS Directive (85/611/EEC; 2009/65/EC
43
) might be considered an exception to
this trend. According to the Basel criteria, covered (mortgage) bonds benefit from privileged
weightings only if they fulfil certain requirements. This does not mean that EU has really
implemented the concept of “euro-securitization” of mortgages (see figure 2), which, to my opinion,
could be the ultimate goal to achieve a proper “internal financial market”
44
.
38
NASARRE AZNAR, ‘Malas prácticas…”, p. 2712 to 2715.
39
More expensive mortgage loans, no special interest of current debtors to repay their loans, defaults even when debtors
can still pay (walkers), 20% LTV of non-fundable resources to be given by debtor prior to get the mortgage; etc. All
these are effects in the 11 non-recourse (no universal liability of the debtor for the mortgage) States in the United States.
40
Directive 2008/48/EC of the Europen Parliament and of the Council, of 23 April 2008, on credit agreements for
consumers and repealing Council Directive 87/102/EEC. OJ nº L 133/66, 22-05-2008.
41
OJ L 304/64, 22-11-2011.
42
Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts. OJ nº L 095, 21-04-1993.
43
Council Directive 85/611/EEC of 20 December 1985, OJ nº375, 20-12-1985 and Directive 2009/65/EC of the
European Parliament and of the Council of 13 July 2009, OJ nº L 302, 17-11-2009..
44
See more details on the eurohypothec, the eurotrust and the eurosecuritization at NASARRE AZNAR, “The
Eurohypothec …”, pp. 112 and 113.
S. NASARRE-AZNAR
LEGAL HOUSING REFORMS IN EUROPE AND IN SPAIN
AS A RESULTS OF THE INTERNATIONAL CRISIS 20007
UNESCO Housing Chair – Working Paper No. 2/2015
11
Figure 2. The eurosecuritization process, through the eurohypothec and the eurotrust. Source: own
elaboration.
On the contrary, in the field of mortgage financing, the single relevant step towards the control and
clarification of its legal framework was the EU Regulation 1060/2009, on rating agencies (amended
in 2013)
45
albeit at a very limited extent. The Regulation states that: “Credit rating agencies are
considered to have failed, first, to reflect early enough in their credit ratings the worsening market
conditions, and second, to adjust their credit ratings in time following the deepening market crisis”.
Main causes for this are identified: conflicts of interest, quality of credit ratings, lack of transparency
and internal governance of credit agencies as well as lack of surveillance of activities carried out by
rating agencies. As a result, the Regulation requires that the credit rating agencies’ activities are
guided by the principles of: “integrity, transparency, responsibility and good governance in order to
ensure that resulting credit ratings used in the Community are independent, objective and of adequate
quality”. However, when it comes to address the issue of agencies’ liability for non-compliance, the
Regulation leaves this matter to be completely determined according to national laws
46
. It is
indicative that no case such as CALPERs
47
in the US, has taken place at European level.
45
Regulation (EC) 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating
agencies, OJ nº L 302, 17-11-2009 and Regulation (EU) 462/2013 of the European Parliament and of the Council of 21
May 2013 amending Regulation (EC) 1060/2009 on credit rating agencies. OJ nº L 146, 31-05-2013.
46
See its Explanatory Memorandum, nº 69.
47
California Public Employees' Retirement System ("CalPERS") v. Moody's Corp., CGC-09-490241 (Super. Ct. Cal., SF
County). See some details at http://www.bermandevalerio.com/cases/featured-cases?pid=47&sid=171:calpers-v-moodys
(visited don 22-10-2014).
S. NASARRE-AZNAR
LEGAL HOUSING REFORMS IN EUROPE AND IN SPAIN
AS A RESULTS OF THE INTERNATIONAL CRISIS 20007
UNESCO Housing Chair – Working Paper No. 2/2015
12
3. Reaction at Spanish level
Spain has been adversely affected by the crisis with its unemployment rate in 2013 reaching the level
of 25.6%. Youth unemployment stood at a staggeringly higher 54.4%. In fact Spain has been ranked
as the second-worst performing Member State behind Greece
48
.
Quite surprisingly, however, in June 2014, mortgage delinquency rates totalled up to “only” 6.1%
49
.
In comparison, during the same period, other Member States such as Ireland had reported nearly
double this rate. Reports have shown that results are even worse in Cyprus, in which 50% of
mortgages were defaulted. The mortgage default rate in Spain is deemed to be low due to the
mortgage debt restructuring between lenders and borrowers. These restructuring programmes could
either be forced by lenders or else agreed by the free will of the parties involved. Another
attributable cause can be the tax evasion ratio which in 2012 amounted to 24.6% of the GDP
50
(an
increase of 6.8% since 2007), one of the highest rates in Europe
51
. Tenancies are generally not
considered to be an alternative to homeownership (and probably neither will they become so,
subsequent to the 2013 reform
52
): Spain has the lowest share of tenant-occupied housing in Western
Europe (just 12%), which affects both the quality as well as the affordability of the current rented
stock
53
. And it must be considered that a healthy housing tenancy market is necessary for a well-
functioning housing market or, in other words “the state of development of rental markets as a
genuine alternative to home-ownership stands out as a particularly relevant institutional factor
shaping the outcome of the housing market and playing a balancing role and alleviating house price
pressures”
54
.
Approximately 151,000 actual evictions of (defaulted) mortgagors from first residences have taken
place from 2010 to 2013, while, in the same period, there were at least 136,000 tenant evictions. The
homelessness phenomenon has been substantially palliated through close relative’s voluntary or
compulsory (arts. 143 and 144 Spanish Civil Code) solidarity (27.9% of the elderly hosts their sons
48
According to Eurostat (http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Unemployment_statistics) in
April 2013 Greece scored the highest unemployment rate of EU-27 (27%) followed by Spain.
49
According to Asociación Hipotecaria Española, Tasa de dudosidad del crédito inmobiliario. 2º trimestre de 2014
[October 2014], 3.
50
An important part of it is linked to real estate transactions during the housing boom period. See as an example the
phenomenon “dar el pase” (http://www.lavozdigital.es/cadiz/prensa/20070109/temas/contra-fraude-fiscal-
pone_20070109.html; checked on 1-6-2013). It consists in organising successive transactions in which the ones in the
middle are not recorded nor controlled but only the last one. Another “bad praxis” was to include in notarial deeds a false
low price of the sale (to pay less taxes and fees) and to pay the rest directly in cash to the seller (black money) even
within the notary public premises. A first try to solve this was Act 36/2006, 29 November, on measures to prevent tax
fraud (BOE no. 286, 30 November 2006); the law clearly acknowledged that real estate transactions were an important
sector of tax evasion. That reform not only arrived late (2006 was the last year of the Spanish housing boom) but also
was insufficient as another recent piece of legislation has been passed (Act 7/2012, 29 October (BOE 30-10-2012, no.
261): a “former unknown” way of fraud was to convey the properties not directly conveying them but through the
transfer of securities; now this praxis is taxed as if the property had been conveyed directly.
51
See SARDÀ, Jordi., La economía sumergida pasa factura. El avance del fraude en España durante la crisis, 2014,
available at http://cd00.epimg.net/descargables/2014/01/29/323fc63650907548f7491c007d999b03.pdf (visited16-5-
2014).
52
See below.
53
See more details, under a European perspective, at NASARRE AZNAR, Sergio, “The efficiency of the law of urban
leases in Europe”, European review of Private Law, 2014, in press.
54
CUERPO, C. et al., Rental Market Regulation in the European Union, EU Commission, DG-Economic and Financial
Affairs, Economic Papers 515, April 2014, p. 1.
S. NASARRE-AZNAR
LEGAL HOUSING REFORMS IN EUROPE AND IN SPAIN
AS A RESULTS OF THE INTERNATIONAL CRISIS 20007
UNESCO Housing Chair – Working Paper No. 2/2015
13
and daughters, eg. after the latter’s eviction
55
) and the vigorous activism of NGOs and the action of
the Public Administration.
From the legal perspective crucial changes have taken place in relation to housing. However, whilst
legislative action only materialised in 2011, part of the judiciary had already started reacting to bad
banking practices (eg. interest rate swaps with consumers). Moreover, some have deemed these
reforms insufficient in protecting mortgage consumers or tenants. This caused the rise of the so-
called “Robinprudence”, ie. judicial decisions with lack or feeble legal basis (eg. decisions based on
grounds of equity or general principles of law that, however, clearly contradict the content of the
legislative enactments as against the raking of sources laid down in art. 1 of the Spanish Civil Code)
that decide to protect the weak party under mortgage or lease or related contracts. Dozens of
judgments can be counted from 2010 until 2014 (see one of the most recent at Commercial Court
San Sebastián 2-10-2014
56
, declaring abusive ie. void a first demand personal guarantee as the judge
deemed it excessively burdensome on the guarantor to pay before the debtor, which is, not
surprisingly, a common consequence of agreeing upon a first demand guarantee) and their final
decisions differ from the result that would be expected for usual mortgage foreclosure or tenant
evictions under Spanish contractual, procedural and property laws. This is stirring a certain feeling of
uncertainty among key stakeholders (lenders, landlords) leading to potentially devastating results eg
reduced international confidence in Spanish banks -which might involve a deeper liquidity crisis-
and, in turn, stricter requirements to get a mortgage loan or even a lease for people prospecting to
gain access to housing
57
.
In relation to enacted laws two main reforms have taken place both in the field of mortgage law as
well as in that of leases
58
:
a) Act 1/2013
59
reformed the law on mortgages in relation to first residences of natural persons.
Quite paradoxically, however, Spanish last mortgage market reform prior to the one in 2013
consisted in Act 41/2007
60
which did not include any measure to prevent the crisis but to boost
it
61
. Anyway, art. 3.1 Act 1/2013 compels all public notaries to underline in the same mortgage
deed, the fact that the relationship would be created over a dwelling which is used as residence.
This creates the iuris tantum presumption that if a dwelling is marked as “residence” in its
mortgage deed, it is also presumed to be a “residence” at the time it is foreclosed due to a default
under a mortgage. The consequences of being considered a “(first) residence” under Act 1/2013
are many, including: a) default interest rate cannot exceed 3 times the legal interest rate (ie. in
2014 they cannot be more than 12; art. 3.2 Act 1/2013); b) as a result of a mortgage enforcement
procedure, judicial costs for the debtor cannot exceed 5% of the claimed amount (art. 7.4 Act
1/2013); c) in case of default, there is a forced decrease of the remaining debt if the residence’s
forced sale is not enough to cover the whole debt (art. 7.5 Act 1/2013); d) if there are no bidders
in the public auction after a mortgage enforcement on a residence, the credit institution can take
the property in exchange of 70% (unlike only 50% if it is not a residence) of the theoretical value
of the property (arranged in the mortgage deed when the mortgage was granted) (art. 7.10 Act
55
FUNDACIÓN ENCUENTRO, Informe, pp. 227 and ff.
56
To be found at Tirant on Line TOL4.521.858.
57
See more details at NASARRE AZNAR, Sergio, “Robinhoodian courts’ decisions on mortgage law in Spain”,
International Journal of Law in the Built Environment, in press (2015).
58
NASARRE AZNAR, Sergio, ´A legal perspective…pp.63-65. See also for the new Catalan intermediate tenures in this
same issue GARCÍA, R.M, LAMBEA, N. and MOLINA, E., The new intermediate tenures in Catalonia to facilitate
access to housing.
59
Act 1/2013, 14th May. BOE nº 116, 15-05-2013.
60
Act 41/2007, 7th December. BOE nº 294, 08-12-2007.
61
Eg. trough the regulation of the reverse mortgage, while it did not foresee any measure to protect mortgage consumers
(NASARRE AZNAR, Malas prácticas…, p. 2705.
S. NASARRE-AZNAR
LEGAL HOUSING REFORMS IN EUROPE AND IN SPAIN
AS A RESULTS OF THE INTERNATIONAL CRISIS 20007
UNESCO Housing Chair – Working Paper No. 2/2015
14
1/2013). In addition to this, art. 8 Act 1/2013 extends the protection of RDL 6/2012 (eg. forced
debt-restructuring, forced delays in payments and forced datio in solutum) to a wider class of
debtors who would be in need of avoiding the mortgage foreclosure of their residence.
b) Act 4/2013
62
reformed the Spanish law on urban leases (LAU 1994
63
). Although containing some
interesting additions (eg. introduction of the rehabilitation for rent ie. instead of paying a rent the
tenant is allowed to stay in exchange of rehabilitating the property), this reform has substantially
reduced the stability of tenants. For instance, there has been a reduction of the compulsory
minimum duration of the contract from five to three years and a removal of both the legal right of
pre-emption for tenants as well as the referenced prices during the period of protection. Reduced
stability for tenants combined with a considerable lack of flexibility (e.g. no partial unilateral
sub-letting allowed) and hardly any guarantees for landlords are likely to increase the
attractiveness of renting as a form of housing tenure for families.
The Spanish traditional pendulum in relation to housing (consumers vs mortgage lenders and tenants
vs landlords) is today in opposite sides for homeownership and for leases. That is, on the one hand it
has to be seen whether more protection for mortgagors (including “Robinprudence”, compulsory
negotiation with vulnerable debtors since 2013, reinforced by Act 1/2013 and the prospective
implementation of Directive 2014/17/EU) is worth the increasing costs and difficulties in the access
to credit for prospective borrowers in need, whilst on the other, whether less protection for tenants
will increase the ratio of rented properties in order to allow the development of a true alternative to
homeownership and thereby allowing households to avoid overindebtedness.
4. Conclusions
Reckless mortgage lending, a deficient legal framework of the US mortgage market and the de-
regulation of the US mortgage securitization have been the main causes of the crisis and its
consequent spread throughout the rest of the world.
As a reaction, the legal framework related to housing, both in Europe as well as in Spain, have been
reoriented towards the increase of consumers protection in the field of mortgage loans.
The efficacy of other reforms relating to housing, such as regulation of rating agencies at EU level or
the law of leases in Spain reducing tenants’ protections have been more controversial.
62
Act 4/2013, 4th June. BOE nº 134, 05-06-2013.
63
Act 29/1994, 24th November. BOE nº 282, 25-11-1994.
S. NASARRE-AZNAR
LEGAL HOUSING REFORMS IN EUROPE AND IN SPAIN
AS A RESULTS OF THE INTERNATIONAL CRISIS 20007
UNESCO Housing Chair – Working Paper No. 2/2015
15
Bibliography
BEN-SHAHAR, O. and SCHNEIDER, C. E. The failure of mandated disclosure, “The Chicago
Working Paper Series Index”, available at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1567284 (visited 22-10-2014).
BOCIAN, D. et al., Lost ground 2011. Disparities in Mortgage Lending and Foreclosures, Center
for Responsible Lending, 2011. Available at http://www.responsiblelending.org/mortgage-
lending/research-analysis/lost-ground-2011.html. Last checked on 14-6-2013.
Cox, Jason, Faucette, Judith and Valenzuela Lickstein, Consuelo, Why Did the Credit Crisis Spread
to Global Markets?, 2010.
CUERPO, C. et al., Rental Market Regulation in the European Union, EU Commission, DG-
Economic and Financial Affairs, Economic Papers 515, April 2014.
FRANKEL, Tamar, “Regulating the financial markets by examinations”, in Mitchell Lawrence E.
and Wilmarth, (eds.), The panic of 2008. Causes, consequences and implications of reform, Edward
Elgar Publishing, UK and USA, 2010.
FUNDACIÓN ENCUENTRO, Informe España, 2013.
GREENSPAN, Alan, The age of turbulence, UK and USA, Penguin, 2008.
INTERNATIONAL MONETARY FUND, Global Financial Stability Report (GFSR), April 2009
(available at http://www.imf.org/external/pubs/ft/gfsr/2009/01/pdf/text.pdf, visited 30-10-2014).
MAROTTA-WURGLER, F. Will Increased Disclosure Help? Evaluating the Recommendation of
the ALI’s, “Principles of the Law of Software Contracts”, 78 (1) University of Chicago Law
Review 165, 2011, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2497163 (visited
22-10-2014).
NASARRE AZNAR, Sergio, La garantía de los valores hipotecarios, Marcial Pons, Madrid, 2003.
NASARRE AZNAR, Sergio. Securitisation & mortgage bonds: Legal aspects and harmonisation in
Europe. Cambridge, Gostick Hall Publications, 2004.
NASARRE AZNAR, Sergio. ‘Malas prácticas bancarias en la actividad hipotecaria’, Revista Crítica
de Derecho Inmobiliario, nº 727, 2011, pp. 2665-2737.
NASARRE AZNAR, Sergio, “The Eurohypothec and the Eurotrust: the answers to the goals of the
EC White Paper 2007 on the Integration of EU Mortgage Credit Markets”, in SJEF VAN ERP et al.
(coord.), The future of European Property Law, Sellier, 2012.
NASARRE AZNAR, Sergio, ´A legal perspective of the origin and the globalization of the current
financial crisis and the resulting reforms in Spain`, in. PADRIAC, Kenna (Ed.), Contemporary
Housing Issues in a Globalized World , Ashgate Publishing, 2014.
NASARRE AZNAR, Sergio, “The efficiency of the law of urban leases in Europe”, European
review of Private Law, 2014, in press.
S. NASARRE-AZNAR
LEGAL HOUSING REFORMS IN EUROPE AND IN SPAIN
AS A RESULTS OF THE INTERNATIONAL CRISIS 20007
UNESCO Housing Chair – Working Paper No. 2/2015
16
NASARRE AZNAR, Sergio, “Robinhoodian courts’ decisions on mortgage law in Spain”,
International Journal of Law in the Built Environment, (2015), in press.
PARTNOY, Frank, ‘Overdependence on Credit Ratings was a Primary Cause of the Crisis’ in
MITCHELL, Lawrence E. and WILMARTH, Arthur E., Jr, The Panic of 2008. Causes,
Consequences and Implications for Reform. Edward Elgar, Cheltenham UK/ Northampton MA
USA, 2010.
PETERSON, Christopher L., “Foreclosure, subprime mortgage lending, and the mortgage electronic
registration system”, University of Cincinnati Law Review, Vol. 78, 2010.
SARDÀ, Jordi., La economía sumergida pasa factura. El avance del fraude en España durante la
crisis, 2014, available at
http://cd00.epimg.net/descargables/2014/01/29/323fc63650907548f7491c007d999b03.pdf
(visited16-5-2014).
SEIDMAN, William, “The world financial system: lessons learned and challenges ahead”, History of
the eighties – Lessons for the future, Federal Deposit Insurance Corporation, Vol. II, 16-1-1997.
SLESINGER, Phyllis K. and MCLAUGHLIN, Daniel, “Mortgage Electronic Registration System”,
Idaho Law Review, Vol. 31, 1995.