Following the enactment of Law no 41/2007, of 7 December, the development of the Reverse Mortgage (“Hipoteca Inversa”) has been affected by the current situation in the real estate sector in Spain and by the international credit crunch.
The Reverse Mortgage is a product created in order to promote economic growth and reactivate the real estate sector by getting the cash value of the regular dwelling by paying rent to a protected collective group, such as people over 65 years of age, or those affected by a severe or major dependence. However, unfortunately these goals are not being attained, due to the current situation of the real estate market, the continuous depreciation of the value of the residential market and the increased life expectancy. All of these factors make it difficult and limit the granting of loans guaranteed with mortgages of these characteristics.
In addition to the aforementioned difficulties, we should also refer to the customary clause generally included in this type of financing, by which the banks cannot request the repayment of the loan granted, until either the property that is mortgaged as the guarantee is sold, or until the owner or the last of the beneficiaries of the loan dies. This customary clause merely makes it more difficult to grant this kind of financing for the banks which are facing a great level of uncertainty when it comes time to being able to establish the estimated date on which they will be able to recover the amount which they have paid out.
Furthermore, it is also a customary practice to establish a period following the death of the debtor, in which the heirs of the mortgaged property can decide whether to make the payment of the debt assumed by the deceased debtor, either by means of the sale of the afore-mentioned property, or as an alternative, in the event that they agree not to sell the property, they can proceed to pay up the amount due by the deceased debtor to the financial entity. This could also entail a novation of the period of repayment and of the terms and conditions of the financing granted to the deceased debtor. Regardless of the foregoing, we should also say that even if the period of time agreed upon for the repayment of the loan is established in the deed, the banks can encounter other additional problems related to the inheritance, such as the validity or non validity of the Last Will which could be denounced by one of the heirs. This would result in a delay in the creditor’s pretensions to collect the debt until this controversy is decided and settled.
In addition, there are other risks related to the mortgage market, such as those related to the specific value of the appraisal of a property on the date the mortgage was granted and its possible depreciation when the debt expires. This circumstance could even lead to a situation in which the value of the deceased debtor’s assets are not enough to cover the total amount owed to the bank, with the additional disadvantage that in this case, the creditor entity could only proceed against the debtor’s patrimony. The entity could not proceed, not even in a subsidiary manner, against the patrimony of the heirs.
Together with the foregoing, we should also highlight the fact that in most of the cases, the interest on these loans is calculated based on a fixed interest rate and not on a variable one, which together with the uncertainty and random nature for determining the expiration date of these loans, would make it difficult for the banks to grant loans of these characteristics, because they cannot determine the possible variable increase in the interest rates during the term of the contract.
All of the foregoing, together with the international credit crunch, impedes the achievement of the effects and goals sought by the Reverse Mortgage.