The real estate market is a dynamic entity that transforms in parallel with societal changes and the expectations of its participants. However, many of the rules and laws designed to shape and regulate the efficient functioning of this market tend to lag behind. This disparity occasionally generates significant problems, as has occurred with the regulations on transparency and consumer protection for mortgage loans, in force since 1994. The economic crisis that began in 2008 exposed the weaknesses of an operating model and legislation that, despite its relative age, had functioned successfully for many decades, providing millions of Spaniards with access to homeownership. In fact, even today, 30% of Spanish families have an active mortgage loan, which they tend to meet punctually and with determination, reflecting the strong commitment of families to fulfill the obligations arising from one of the most important decisions of our lives: buying a home.
However, following the outbreak of the crisis, existing regulations have been subject to various judicial interpretations and political statements, leading to increasing litigation and a high degree of legal uncertainty. Although the system of mortgage and personal guarantees had to be preserved, to mitigate and eliminate current legal uncertainty and adapt aspects that may have become outdated, it was necessary to adapt the rules of the mortgage market beyond the transposition of a European Directive that Spain should have implemented two years ago.
In this regard, the new Law Regulating Real Estate Credit Contracts, which is to be debated in the Senate and subsequently approved in Congress during March, represents a step forward in the process of clarifying and processing mortgages. It provides greater security to the market and enhances the information system. Above all, it is a law that aims to protect consumers above any other consideration and shields banks and their clients from disparate and often inconsistent judicial decisions.
Many of the aspects regulated in this new Law tend to reinforce the security of banking clients without significant cost to the system. In this sense, the promotion of a rigorous solvency and financial knowledge assessment, to be carried out by banks and notaries respectively, on their clients, should be applauded. Similarly, the transparency it inspires by limiting clauses, commissions, and the tying of products specific to the negotiating bank should also be applauded.
However, the Law contains other elements that, while maintaining the spirit of client protection, could have a significant economic impact on many of the agents involved and may even produce undesirable effects. In this regard, it is worth highlighting the risk that could arise regarding the availability of fixed-rate mortgage credit, due to the notable limitations that the regulation imposes on the compensation derived from clients’ right to early repayment of their mortgage loan.
The Real Estate Credit Law is expected to be approved in Congress in March 2019, at a time when the real estate sector shows strong dynamism, not only due to very favorable economic conditions but also as a result of the constant professionalization of the sector and the solidity of the banking industry, which is much more capitalized, solvent, and responsible than in the past, and above all, much more prudent.
However, as the law is a living instrument, it will be necessary to assess in the future whether reinforcing client guarantees and protection is compatible with the continued dynamism of credit and to refine, when necessary, those aspects that may cause undesirable side effects.
Ultimately, it is essential that the adopted changes do not prevent the mortgage market from fulfilling its primary function: financing home purchases for the largest possible number of people under the best possible conditions. This is a determining factor for economic development and the well-being of citizens in our country.
Juan Carlos Delrieu, Director of Strategic Planning at AEB
