Blog post copyrighted © 2018. Plagiarism will be criminally prosecuted.
By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Lawyers
2nd November 2018
Spain’s Supreme Court has managed single-handedly to freeze over Spain’s entire mortgage market. Lenders have taken down from their websites mortgage loan offers, as reported by the media, and it is currently not possible to apply for a mortgage loan until the matter is solved, one way or another.
The timing couldn’t be worst. Lenders, after a decade-long hiatus, were finally jumping back into the fray offering even 100 % mortgage loans given how the real estate market was clearly making a comeback in full force in 2018, spearheaded by off-plan properties.
This incredible blunder, which in any self-respecting private company would have led to massive layoffs, albeit as we are dealing with high-ranking public servants we must carry on and smile, was achieved on the release of a ruling that made lenders responsible for paying Stamp Duty in all mortgage loans with retroactive effects over the last 4 years. This would entail lenders needing to shell out an extra 14 billion euros. The news led to a massive sell-off of bank stocks making all bank indexes plummet into red across the board.
24 hours hadn’t even passed when the ruling was put on hold by the Supreme Court itself amidst the backlash generated by lenders, a force to be reckoned with in Spain. This latest action by the Supreme Court, one more in a long string of faux pas with bank-related rulings where billions of euros were at stake, has tarnished the prestige of the highest court in the land. Some are even openly questioning its independence from the banking lobby.
This ruling blatantly contradicts a prior ruling from earlier on this year which we commented in our blog post: Spain’s Supreme Court quashes borrower’s hopes on refunds for mortgage set up costs.
God forbid I defend lender’s interests, but in this particular case, the Stamp Duty Act had made it clear for over three decades that borrowers had to pay for this tax. Recent blurry rulings had left the door ajar for enterprising litigation lawyers (offering enticing no win, no fee) to bring into question who pays for Stamp Duty on mortgage loans: consumers or lenders. To me the question has always been clear; it should be consumers, following the law’s wording and the last thirty years of day-to-day practice.
Spain’s Supreme Court will be mulling over the next weeks whether consumers (borrowers) or else lenders should pay for Stamp Duty. Even in the event the Supreme Court backpedals and rules that it is lenders that should pay for it, let us not be naïve, lenders will surely pass on to consumers the increased costs this (reckless) ruling would surely bring. Not to mention tightening credit supply at a time when what we need most is the opposite; to pad and encourage a market recovery.
In any case, whatever the final outcome is on Monday 5th of November, the decision will spell serious trouble for the Supreme Court.
If it rules that consumers have to pay for Stamp Duty tax on mortgage loans, it will be seen as pandering to the interests of the powerful banking lobby and will further damage its credibility as an independent court.
On the other hand, if it rules that it is in fact lenders who should pay for this tax, it will create serious legal insecurity with retroactive effects. This in turn will immediately impact credit, increasing mortgage terms for borrowers, which indirectly will restrict credit overall. This is exactly the opposite of what is required to consolidate a full property market recovery that would create millions of jobs.
There is nothing investors and house buyers dislike more than uncertainty; specifically, legal uncertainty. The final decision will be a clear example of damned if you do and damned if you don't. The careless mismanagement of this whole matter is to blame for painting themselves into a corner. The President of the Supreme Court only found out about this key ruling through the press (sic). In the private sector, executives hand over their resignation over much lighter problems.
If laws need to be amended or repealed, then it is Congress that gets the job done enacting new ones. That is precisely the purpose on why we have a separation of three powers in a Democratic State (judiciary, legislative and executive branches). The judiciary should categorically under no circumstances be interfering changing decades-old laws through rulings, much less the highest court in the land which should embody at all times an exemplary conduct on which all lower courts should look up to as an example to follow.
In the meantime, all of us involved in the property & mortgage industry will hold with a bated breath on the final outcome. With any luck, it would be nice to have this matter solved before the Christmas break.
We already have enough on our plate with Brexit, thank you very much.
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