From Fragmentation to Financial Integration in Europe
Chapter

Chapter 22. Mortgage Markets and Foreclosure Processes in Europe and the United States

Author(s):
Charles Enoch, Luc Everaert, Thierry Tressel, and Jianping Zhou
Published Date:
December 2013
Share
  • ShareShare
Show Summary Details
Author(s)
Michael Moore, Marta Rodríguez-Vives and Nolvia N. Saca-Saca 

The authors would like to thank the Legal Departments of the IMF and the European Central Bank (ECB) for guidance in the national mortgage law and foreclosure processes. They also thank Ad van Riet (ECB) and Alvaro Piris (IMF) for valuable comments. Remaining errors in the chapter are the sole responsibility of the authors.

Home mortgage defaults and foreclosures in Europe increased during the crisis, but remain well below those in the United States during the peak years of its mortgage crisis in 2009 and 2010. Stricter foreclosure processes in some European countries, as well as lenders’ having full recourse to borrower assets, seem to have kept defaults and foreclosures to lower levels than in the United States. Research on the U.S. crisis has shown that although the duration of foreclosure processes (which average about one year) and the fact that deficiency judgments are not generally pursued in the event of negative equity have been factors in higher overall default and foreclosure rates, they nevertheless have also contained the length of the mortgage crisis and the severity of its impact on the economy.

Foreclosure is a process that allows a lender to recover the amount owed on a defaulted mortgage by selling or taking ownership of the property securing the loan. This process is also known as repossession, particularly in Europe. There are two basic methods of foreclosure: judicial foreclosure requires the lender to go to court and receive a judge’s approval to foreclose a property; under nonjudicial foreclosure, the lender may sell the collateral (the property) or repossesses it without a judge’s approval.

There is increasing research on mortgage markets and the effects of home foreclosure processes across the United States, for which legal frameworks vary by state. The research is aided by detailed data on foreclosures by states and by zip codes (RealtyTrac and CoreLogic databases). The European Mortgage Federation (EMF) publishes an annual statistical study, Hypostat, but comparisons between housing and mortgage markets in Europe and the United States are difficult. By contrast with the United States, the research and information for European countries is limited, especially data on repossessions, which are not systematically compiled and published. To the best of the authors’ knowledge, the only Europe-wide exercises were conducted by the European Commission (2011) on mortgage default rates from 2007 to 2009, and a monographic study on nonperforming loans (NPLs) in the EU by the European Mortgage Federation (2011).

Early research compared housing finance developments (ECB, 2009) and dealt with the similarities and differences of housing markets and institutions across countries (Bardhan, Edelstein, and Kroll, 2011; Lea, 2010; EMF, 2007). This chapter seeks to (1) provide a comparative review of foreclosure processes for a selected sample of European countries and the United States;1 and (2) highlight that differences in mortgage laws and practices in a representative sample of mortgage markets may lead to different outcomes for mortgage default and foreclosures, and for the speed of resolving the mortgage crisis and reviving the housing market.

Mortgage Markets and House Price Dynamic

Housing markets are critical for any economy, but their role in the United States and in some European economies (e.g., Ireland and Spain) is significant. Several factors account for this importance, including the size of the sector, its contribution to economic growth, and its linkage to other sectors (banking, investors, and the government).2

Growing home prices in the United States, and in some countries in Europe in the early 2000s, prompted by high demand and liquidity, masked the unsoundness of many mortgages, specifically subprime mortgages in the United States, and loans given to real estate developers in Ireland and Spain. Foreclosure rates were very low during that period because borrowers who could afford the debt service would not walk away from the appreciated assets, while those who could not honor their debts would find it easy to sell their homes at a profit. This led banks to relax even further their lending standards, increasing mortgage finance and demand for housing and pushing home prices even higher.

Before the crisis, the number of homeowners in the United States increased steadily by about 1 million per year as a result of active policies, introduced in the mid-1980s and 1990s, favoring property ownership over renting; and Federal Reserve Board policies of cheap credit that began in the early 2000s. Home ownership rates thus increased from roughly 65 percent in the early 1990s to more than 69 percent by 2004. As house prices began to fall from their record peaks in mid-2006, and mortgage delinquencies and foreclosures started to climb, the conditions in the housing market become progressively worse with serious negative effects, incidence of default, and prevalence of negative equity. As a result, the home ownership rate declined to its long-term level of 65 percent.

By contrast, in Europe, the tenure status (owning versus renting) differs across the region, partly for historical and cultural reasons, but more significantly, because of varying tax treatment of ownership, different mortgage interest rates, and differences in disposable income across the region. On the one hand, in countries like Germany, the home ownership rate is 43 percent because homeowners have not benefited from subsidies provided in other European countries, for example, the Netherlands and Spain. Instead, housing policy in Germany is largely oriented toward the rental social housing sector, with lower emphasis on home ownership (Bardhan, Edelstein, and Kroll, 2011). Moreover, the underlying capital for mortgages is tied to covered bonds that include strict requirements for loan-to-value (LTV) ratios, interest rates may vary only within fixed limits, and loans are full recourse. German house prices remained stable for a long period before the crisis, and during the crisis house prices increased (see Table 22.1). On the other hand, Cyprus, Greece, Ireland, Italy, Portugal, and Spain have home ownership rates of more than 70 percent, followed by moderate rates in the United States and the United Kingdom of about 66 percent (Figure 22.1).

Table 22.1Housing Price Dynamics for Selected Countries(percentage change)
CountryAccumulated change, 2000–07 (unless otherwise indicated)Accumulated change, 2007–12 (unless otherwise indicated)
Cyprus122.1 (2006–07)−0.2
Denmark84.2−23.2
Germany−3.313.2
Greece86.9−28.3
Ireland105.0−97.7
The Netherlands44.7−12.2
Portugal14.23.6
Spain135.7−38.9
United Kingdom2130.4−21.7
United States57.0−20.7
Sources: European Central Bank (ECB) Statistical Data Warehouse (based on national data) except for the United States. Data for European countries are the annual residential property price index statistics, with base year 2007. Back data for Spain and Ireland are ECB estimates. Data for the United States are the composite home price, with 2000:Q1 = 100, from the Economic Research Division of the Federal Reserve Bank of St. Louis. For the United States, housing prices started to recover during 2012; through 2011, the accumulated decline in housing prices was 26.11 percent.

For Cyprus, house prices started to fall in 2009, after a sharp increase of 17 percent in 2007–08. Other data sources (Haver Analytics) show an accumulated change of -12.5 percent for 2007–12.

For the United Kingdom, the Economist (“Searching for solid ground,” August 18, 2012) estimated a more moderate drop in prices, −10.2 for 2007–12, because the housing market in Britain is heavily reliant on London and the southeast..

Sources: European Central Bank (ECB) Statistical Data Warehouse (based on national data) except for the United States. Data for European countries are the annual residential property price index statistics, with base year 2007. Back data for Spain and Ireland are ECB estimates. Data for the United States are the composite home price, with 2000:Q1 = 100, from the Economic Research Division of the Federal Reserve Bank of St. Louis. For the United States, housing prices started to recover during 2012; through 2011, the accumulated decline in housing prices was 26.11 percent.

For Cyprus, house prices started to fall in 2009, after a sharp increase of 17 percent in 2007–08. Other data sources (Haver Analytics) show an accumulated change of -12.5 percent for 2007–12.

For the United Kingdom, the Economist (“Searching for solid ground,” August 18, 2012) estimated a more moderate drop in prices, −10.2 for 2007–12, because the housing market in Britain is heavily reliant on London and the southeast..

Figure 22.1Percentage of Owner-Occupied Households for Selected Countries1

(Percentage of total end-2010, unless otherwise stated)

Source: European Central Bank Statistical Data Warehouse (based on national data).

1 Data for Cypress (2010), Ireland (2010), and the United States (2011) are from the European Mortgage Association. Data for Germany, the Netherlands, Portugal, and the United Kingdom refer to 2011; and Denmark to 2012.

Developments in housing markets have been shown to play an important role in episodes of financial instability. The link between housing bubbles and the emergence of financial crisis has become an important topic in the literature and for policymakers. The global financial crisis started with U.S. subprime mortgage market crisis in 2008, which in turn put an end to the housing prices appreciation in many countries in Europe.3 House prices started to decline in 2008, particularly, in Ireland, Spain, and the United States.

Origin and End of Two Bubbles

The precrash bubble saw households borrowing excessively in the United States, but also in some European countries. Figure 22.2 displays at the aggregate level the evolution of stocks of debt relative to GDP for different sectors (see also Cour-Thimann and Winkler, 2012), and reveals a different picture for the euro area than for the United States regarding the indebtedness of households in relation to other economic sectors. In the United States, the household sector accumulated a higher stock of debt relative to other sectors before the crisis, which contrasts with the euro area experience, with its relatively less indebted household sector, despite an increase of about 15 percentage points since 2000.

Figure 22.2Debt-to-GDP Ratio by Sectors

(Percentage of GDP)

Sources: Euro Area Accounts (European Central Bank and Eurostat); National Economic Accounts (U.S. Department of Commerce, Bureau of Economic Analysis); and U.S. flow of funds accounts (U.S. Federal Reserve).

Note: NFC = nonfinancial corporation. Debt is defined as loans, debt securities, and insurance reserves, net of loans granted within the same sector at market value. Government debt reported in the figure is thus different from the Maastricht definition of government debt. Latest observation: 2012:Q4.

Because the indebtedness of households is highly dominated by the evolution of the housing market, published figures show a significant heterogeneity at the country level. Figure 22.3, panel 1, shows a group of countries that substantially increased their debt levels, starting from relatively low ratios of residential mortgage to GDP (about 30 percent) in the early 2000s, particularly Ireland (to over 90 percent), and Spain and Portugal (to about 65 percent) in 2009; and Cyprus from about 6 percent in 2000 to 71 percent in 2011. Other countries with traditionally high residential-mortgage-debt-to-GDP ratios also increased their mortgage debt substantially, with their peaks ranging from 85 percent of GDP in the United States in 2007 to more than 100 percent in Denmark and the Netherlands in 2009.

Figure 22.3Residential Mortgage Debt in Selected Countries

(percentage of GDP)

Sources: For the U.S. data, Board of Governors of the Federal Reserve System, Economic Research & Data; and European Mortgage Federation Statistics.

Note: CY = Cyprus; DE = Germany; DK = Denmark; ES = Spain; FR = France; GR = Greece; IE = Ireland; IT = Italy; NL = the Netherlands; PT= Portugal; US = United States; UK = United Kingdom.

A second group of countries (Figure 22.3, panel 2), such as Greece and Italy, show relatively low indebtedness levels in 2011 despite the high homeownership ratios in those countries. The residential mortgage ratio has grown at a more moderate pace over the past decade, reaching values of less than 50 percent of GDP. Households in Germany reduced their residential mortgage debt levels as a share of GDP by about 8 percentage points between 2001 and 2011, despite an increase in homeownership rates from 40.3 in 1998 to 43.2 in 2011 (EMF, 2011), but these levels are still the second lowest in Europe, after Switzerland.

In the United States, an unprecedented rise in house price and sales transactions began in the late 1990s. This steady appreciation of home values, the main asset held by households, was seen as a basis for increasing consumption, the driving force of the U.S. economy. As Bardhan (2009) notes, this period saw the emergence of a number of facilitating conditions for supporting the housing bubble. First, historically low interest rates created a conducive financial environment for borrowing, while lax lending standards set up an accommodating institutional setting for subprime mortgages and other loans, involving little or no documentation and zero down payment requirements. Second, low interest rates, growing house prices, and expectations of growing appreciation of home values increased the appetite for investment in this sector (Bardhan, 2009). Similar facilitating conditions also emerged in Europe. Table 22.2 presents information on government policies for the sample of countries to explain that the strong increase in mortgage debt has been partly fueled by government policies and cheap credit in the United States and in some European countries, particularly the Netherlands, and to some extent, Spain, leading to high LTV ratios.4

Table 22.2Comparative Information on Housing Market Policies
Loan-to-value ratio (percent)Mortgage deductibilityGovernment guarantee or mortgage insuranceVariable or fixed ratesMortgage securitization or capital market role
Cyprus70–80NoBothLess developed
Denmark65 Maximum is 80 by law.YesNoVariableCovered bonds
Germany74 Maximum is 80NoNoVariable with fixed limitsCovered bonds
Greece67NoNoBothLess developed
Ireland100 +Yes (5 years)NoVariableSome, mortgage-backed bonds and securitization
The Netherlands80 + Maximum is 1061Yes, for new mortgages only if they are fully amortized in 30 years or less.Yes, government loan guarantees and assets backing debtFixedLess developed, and typically trade over the counter
Portugal80–90NoNoVariableSome, covered bonds (14.5€) and securitization (27.3€)
Spain70–80 Maximum is 100Only for low-income borrowersNoVariableCovered bonds (64€) and securitization (36€)
United Kingdom71 for home movers and 81 for first-time home buyers. Maximum is 110No2Insurance available for mortgagorsShort-term fixed then variableCovered bonds and securitization
United States80–90 Maximum is 100Yes2Multiple agencies involvedBothHighly developed
Sources: Exhibit 1 in Bardhan, Edelstein, and Kroll, 2011; European Mortgage Federation; IMF staff calculations; and Lea, 2010. The country-specific information provided by Constant Verkoren, Dermot Monaghan, Joaquin Gutierrez, and Uffe Mikkelsen for this table is gratefully acknowledged.

The policy in the Netherlands is to reduce the loan-to-value (LTV) ratio by 1 percentage point each year until the maximum LTV reaches 100 percent.

Capital gains tax limited.

Sources: Exhibit 1 in Bardhan, Edelstein, and Kroll, 2011; European Mortgage Federation; IMF staff calculations; and Lea, 2010. The country-specific information provided by Constant Verkoren, Dermot Monaghan, Joaquin Gutierrez, and Uffe Mikkelsen for this table is gratefully acknowledged.

The policy in the Netherlands is to reduce the loan-to-value (LTV) ratio by 1 percentage point each year until the maximum LTV reaches 100 percent.

Capital gains tax limited.

In Ireland and Spain, mortgage markets experienced credit-fueled construction booms. The Spanish housing market boom and house price increase began in the mid-1990s, stimulated by an expanding economy that benefited from the EU membership. But other factors also played a part, including an increase in the risk appetite of lenders who provided financing for much riskier loans on real estate development and construction of apartments and second homes, building up high borrower indebtedness. As prices began to turn in 2008, the conditions of the real estate market deteriorated substantially, leading to a significant overhang of properties. Because real estate development was a significant part of the economic boom, the distress in the real estate market significantly affected the economy, particularly employment and the financial sector.

Similarly, in Ireland, the economic transformation of the economy that began in the mid-1990s led to economic growth based on an increase in competitiveness and real exports. By 2000, Ireland’s income per capita had reached the level of Western Europe, but the economy continued to grow at high rates, despite losses in competitiveness caused by a domestic price increase, driven by a second boom based on credit and construction (2000—07). With the rapid expansion of bank lending, house prices increased. Ireland’s housing prices rose substantially during both booms;5 but with the end of the building boom, the construction industry and the banking system were clearly in trouble. Accumulative housing prices declined by 49.5 percent between 2007 and end-2012.6

The situation has changed in recent years as a result of the burst of the housing bubble in many European countries, especially regarding the price of real estate developments. As shown in Table 22.1, prices in most of the selected countries are adjusting downward since their highest levels in 2007, with the notable exception of Germany and, to a lesser extent, Portugal, where prices are steadily increasing (in line with trends in large cities generally7 and also because of renewed interest in real estate as an investment option in times of crisis). The strongest corrections in nominal housing prices since 2007 are found in Ireland (a drop of about 50 percent); Spain (-28 percent); Greece (-22 percent); Denmark (-8.8 percent); the United Kingdom (-17.8 percent); and the Netherlands (-10.9 percent). This drop in real estate prices is mainly explained by lower national demand for acquisition of housing (attributable to a decrease in disposable income as a consequence of the economic slowdown) and an oversupply combined with less favorable fiscal incentives to homeowners and higher transaction costs (e.g., value-added taxes) in some cases.

The correction in house prices damaged the economic conditions of many countries8 and put pressure on their banking systems, particularly on banks that were highly exposed to the real estate market (e.g., Ireland, Spain, and the United States). House price drops, combined with lower real disposable incomes and higher unemployment rates, led to an increase in the number of loans in arrears, deteriorating the quality of banks’ loan portfolios and weakening their balance sheets to the extent that they faced potential failure and needed to be recapitalized.

In the United States, the delinquent mortgage loan rate increased from 1.31 percent in the fourth quarter of 2006 to 8.75 percent in the same quarter in 2009 (see Figure 22.4, panel 1). In addition, the foreclosure rate increased from about 1 percent in 2006 to more than 4.5 percent in 2009, and then started to decline (see Figure 22.4, panel 2).

Figure 22.4Percentage of Delinquent Mortgage Loans and Mortgage Loans in Foreclosure in the United States (Not seasonally adjusted)

Sources: Federal Reserve Bank of New York (panel 1); Mortgage Bankers Association National Delinquency Survey (panel 2).

In Europe, mortgage default rates and foreclosure data are not readily available for all the countries in the selected sample, but the European Commission (2011) collected default rates for the period 2007–09 (Table 22.3). In addition, EMF (2011) contains data on repossessions for some of the sample countries—Denmark, Spain, Ireland, and the United Kingdom—but with different periodicities and forms of presentation (ratios and numbers of repossessed properties), which are not comparable. These data constitute the only published cross-country data at the European level.

Table 22.3Evolution of Default Rates, 2007–09(percentage)
CountryDefault rate as of Dec. 31, 2007Default rate as of Dec. 31, 2008Default rate as of Dec. 31, 2009Accumulated increase 2007–09
Cyprus3.243.906.90Yes
Denmark0.120.260.55Yes
Germanyn.a.n.a.n.an.a.
Greece3.605.306.40Yes
Ireland1.211.443.60Yes
Netherlandsn.a.n.a.n.a.n.a.
Portugal1.301.501.70Yes
Spain0.722.382.88Yes
United Kingdom2.303.403.30Yes
Sources: European Commission, 2011, except for the United Kingdom. Data for the United Kingdom are from the U.K. Financial Services Authority.Note: n.a. = not available. Default rates refer to the volume of outstanding residential mortgage loans in default to the total volume of outstanding mortgage loans. Data provided as of September 2010.
Sources: European Commission, 2011, except for the United Kingdom. Data for the United Kingdom are from the U.K. Financial Services Authority.Note: n.a. = not available. Default rates refer to the volume of outstanding residential mortgage loans in default to the total volume of outstanding mortgage loans. Data provided as of September 2010.

Default rate methodologies generally use data on NPLs and unemployment rates as the main components of default rate predictions. However, according to some national statistics and the narrative in the newspapers, the rate of foreclosures in Europe has been much lower than in the United States, despite the high ratio of NPLs and unemployment in some European countries (see Appendix 22A). Some observers, as discussed below, have argued that different foreclosure outcomes are explained partly by variation in the mortgage legal framework across countries, as well as by other interventions that block lenders from starting foreclosure proceedings.

Differences in Mortgage Laws and Foreclosure Processes: An Overview of Selected European Countries and the United States

In practice, the mechanisms for the enforcement of mortgages differ significantly among countries, and international best practice has yet to emerge in this area.

Foreclosure Methods: Judicial and Nonjudicial

When a borrower becomes delinquent on a mortgage, three main factors in the country’s mortgage legal framework affect the probability and the speed of foreclosure or repossession of collateral against defaulted borrowers.

The first factor affecting the probability and timing of foreclosure is the method of foreclosure that is used. Some countries require the lender to go to court and receive a judge’s approval to foreclose on a property. This is known as judicial foreclosure. In a judicial foreclosure, the lender initiates legal action against the debtor in the courts. The court notifies the debtor with demand for repayment by a specific date to avoid foreclosure. If there is no payment, a judgment will be entered in favor of the lender, who will request that the property be auctioned off or repossessed by the bank. In other countries, the lender may sell the property without a judge’s approval if the mortgage contains a power-of-sale clause. This method is known as nonjudicial foreclosure. A judicial foreclosure, in general, takes longer because of the need for court hearings. Nonjudicial countries allow for private parties to divest the debtor of the title after appropriate notice and an opportunity to cure any arrears. The lender may use a notary or trustee to schedule the foreclosure auction.

The second main factor that affects the probability and speed with which a lender can foreclose on a property is redemption rights. A redemption right is the right of the borrower to redeem the property by paying off the entire balance of the mortgage. A redemption period is a period during which a borrower has redemption rights. If the redemption period precedes the foreclosure process, the right of the borrower to redeem during that time is known as an equitable redemption right. Such right might take the form of requiring the lender to wait, say, six months after the first serious delinquency before it can initiate the foreclosure process.

The third factor is the possibility of recourse or allowing lenders to pursue deficiency judgments. The EMF (2007) study on the efficiency of mortgage collateral found that borrowers remain liable for deficiencies in Belgium, France, Germany, Greece, Ireland, the Netherlands, Portugal, Spain, and the United Kingdom. The duration of the debtor liability was without limit in Belgium, Germany, Greece, and the Netherlands (EMF, 2007). In Germany, since 2008, borrowers may consider a petition for personal insolvency and, in that case, ultimately be discharged from paying the deficiency in full. Ireland introduced reforms in 2012–13 that would allow borrowers to seek relief for deficiencies as well.

Research in the United States has shown that recourse decreases the probability of default, and that this is an important factor that lowers the default rate in some countries, for example, in Europe, where mortgage recourse acts as a strong disincentive to default, even in cases of negative equity. As Feldstein (2008) noted, the creditors’ “ability to go beyond the house to other assets or even future salary is a deterrent in Europe.”

Foreclosure Processes in Selected European Countries

For Europe, the majority of countries follow a judicial foreclosure process. The exception is the Netherlands, which follows an expedient nonjudicial foreclosure process primarily handled by a notary. Countries in which the collateral deed must be made enforceable through a judicial decision include Denmark, Germany, Greece, Ireland, and the United Kingdom, as well as other countries not included in the sample, such as Austria, Finland, Hungary, Poland, and Sweden. Countries that use a notary deed allow private parties to divest the debtor of title after appropriate notice. In many countries, there is some judicial oversight of this process, such as through valuation and hearings; thus, the system is mixed. In Spain, for example, both judicial and nonjudicial methods exist. The nonjudicial process was simplified in 2012 through a legislative change.

In most European countries, lenders adopt a range of measures aimed at helping the borrower before resorting to foreclosure. These measures range from a compulsory official summons to a more detailed conciliatory procedure. Countries in which the legal obligation is limited to a summons include Denmark; Greece (3 days); Italy; and Spain (10 days). However, the usual practice in Europe is that the borrower is granted a number of supplementary warnings, and months elapse before the enforcement procedure is started. For example, in Greece, in practice, six to nine months pass before foreclosure is started (EMF, 2007). Law 3869/2010 on Debt Arrangements for Over-Indebted Individuals and Other Rules, as amended and currently in force, provides for a precourt settlement process between creditors and debtors with permanent inability to pay back debts, followed by a judicial validation of the settlement within two months of filing the petition, then by a judicial hearing within six months of filing the petition. Throughout this process, the debtor is protected from any foreclosure measures, while, in any case, the court is obligated to decide on reasonable installments to be paid by the debtor. Moreover, Greek law also provides that the primary residence of any debtor is protected against any foreclosure measures. This provision was initially enacted in 2011 and has been extended until December 31, 2013.9

In other countries (Germany, Ireland, and the United Kingdom), lenders must follow more detailed procedures. In Germany, the procedure includes the following steps:10 First, a lender may initiate foreclosure proceedings if the debtor is in arrears for at least two consecutive loan installments (arrears of at least 2.5 percent of the nominal loan amount). Second, since 2008, changes in the law concerning land charges (Grundschuld) lengthened the foreclosure process for new mortgages by barring contractual waivers of a preexisting, mandatory six-month waiting period before initiation of foreclosure proceedings. When the lender has an enforceable title, the lender can initiate a court-administered enforcement process.

In the Netherlands, a nonjudicial country, the lender has the obligation, based on a code of conduct, to grant the consumer a number of months before the enforced procedure is started (EMF, 2007).

According to Table 22.4, the duration of the foreclosure process varies across the sample countries, from about one year in the Netherlands, the United Kingdom, and the United States; to 16 months in Spain and Portugal; to 42 months in Ireland; finally to about 135 months in Cyprus.11

Table 22.4Methods and Timeframes of the Foreclosure Processes in Selected Countries
CountryMethod of foreclosure or repossessionRedemption period: measures taken before starting the enforcement procedure (limited to a summons or detailed procedure) and time frameTime frame of the foreclosure processRecourse or nonrecourse
CyprusJudicialDetailed procedures135 months1Recourse
DenmarkJudicialSummons; 3 days6 monthsRecourse; 20 years
IrelandJudicialDetailed procedures42 monthsRecourse
GermanyJudicialDetailed procedure; 6 months18–46 monthsFully recourse
GreeceJudicial2Legal obligation is limited to summons (3 days)312–36 months depending on the parties’ objection or nonobjection before the court.Recourse; 20 years
SpainJudicial and nonjudicial (by auction conducted by a notary public)Summons (demand for payment)16 to 24 months, depending on the courts4Recourse
The NetherlandsNonjudicialNotification512 monthsRecourse
PortugalJudicialSummonsOn average, 16 monthsRecourse
United KingdomJudicialDetailed procedures;3 to 6 months8–12 monthsRecourse; 6–12 years
United StatesMix of judicial and nonjudicial depending on the stateRedemption period; typically 6 monthsAverage period in judicial states is 400 days; average in nonjudicial is 270 days, including the redemption period.Many states are de jure recourse; but de facto, the U.S. states are nonrecourse
Sources: Authors’ compilation from consultations with the IMF and ECB Legal Departments; EMF, 2007; Lea, 2010; national mortgage laws; and RealtyTrac website.

Lea (2010) and confirmed by the Memorandum of Understanding. It follows from the Cypriot Memorandum of Understanding that adjustments are necessary to Cypriot legislation in connection with the seizure and sale of collateral, to ensure that, at least for primary residences, the process can be completed within 2.5 years of the initiation of relevant legal proceedings.

However, the Greek Code of Civil Procedure (Article 904 par. 2(d) & Article 918 par. 2(c)) also provides for the possibility of basing the foreclosure on a document issued by a public notary.

However, Law 3869/2010 on Debt Arrangements for Over-Indebted Individuals and Other Rules, as amended and currently in force, provides for a precourt settlement process between creditors and debtors with permanent inability to pay back debts, which may extend the redemption period to six months.

According to Banco Novagalicia, the repossession process is getting longer, from 12 months in 2009 to 16 months in 2012.

If the borrower fails to meet the monthly mortgage payment, the bank automatically obtains the right to repossess the home. After notifying the mortgagee, the bank can evict the borrower from the home within two months and organize a public sale of the property (Brounen, 2011).

Sources: Authors’ compilation from consultations with the IMF and ECB Legal Departments; EMF, 2007; Lea, 2010; national mortgage laws; and RealtyTrac website.

Lea (2010) and confirmed by the Memorandum of Understanding. It follows from the Cypriot Memorandum of Understanding that adjustments are necessary to Cypriot legislation in connection with the seizure and sale of collateral, to ensure that, at least for primary residences, the process can be completed within 2.5 years of the initiation of relevant legal proceedings.

However, the Greek Code of Civil Procedure (Article 904 par. 2(d) & Article 918 par. 2(c)) also provides for the possibility of basing the foreclosure on a document issued by a public notary.

However, Law 3869/2010 on Debt Arrangements for Over-Indebted Individuals and Other Rules, as amended and currently in force, provides for a precourt settlement process between creditors and debtors with permanent inability to pay back debts, which may extend the redemption period to six months.

According to Banco Novagalicia, the repossession process is getting longer, from 12 months in 2009 to 16 months in 2012.

If the borrower fails to meet the monthly mortgage payment, the bank automatically obtains the right to repossess the home. After notifying the mortgagee, the bank can evict the borrower from the home within two months and organize a public sale of the property (Brounen, 2011).

In Europe, Ireland and Spain deserve more exhaustive analysis because housing markets were critically important in both of these economies in the precrisis period, and their financial systems were seriously affected by the collapse in the housing market. The two countries have very different foreclosure frameworks. Ireland has one of the most borrower-friendly foreclosure legal frameworks, particularly since the introduction of the Land and Conveyancing Reform Act of 2009, while Spain has one of the most stringent in Europe. Boxes 22.1 and 22.2 present the foreclosure frameworks of Ireland and Spain, respectively.

Ready access to credit in Ireland fueled a housing boom that led to very high levels of mortgage debt by households, increasing LTV ratios to more than 100 percent. Mortgages were the largest household liability by far, and a significant component of Irish bank lending (68 percent of Irish household debt). From 2000 to 2008, residential mortgage debt increased from 30 to more than 90 percent of the GDP (Figure 22.3, panel 1). After reaching a peak in early 2007, house prices fell by more than 50 percent at end-2012, with more than 200,000 borrowers holding debts exceeding the value of their homes. Partly the result of high unemployment (15 percent), about 144,000 mortgages were in arrears at end-2012, of which 94,000 were in arrears by more than 90 days, and a further 40,000 mortgages were restructured (Goodbody, 2012).

Despite the high level of mortgage loans in arrears,12 the number of foreclosures was very low—only about 0.25 percent. Reasons for this include the following:

Box 22.1Does Ireland’s Foreclosure Framework Need Further Reforms to Address Mortgage Market Distress?

The introduction of the Land and Conveyancing Reform Act of 2009, and subsequent rules, restricted the ability of lenders to repossess collateral against defaulted borrowers who took out mortgages before December 2009. Lenders were required to first obtain a Well-Charging Order and Order of Sale before obtaining an order of repossession. The lender must then apply to the High Court or the Circuit Court (Order for Sale Execution) to arrange for the sale by public auction. These factors led Fitch to increase their estimate of the time of foreclosure to 81 months from 42 months.

In February 2010, Ireland’s central bank instituted further procedural measures that resulted in additional delays. The regulator required that all banks, buildings societies, and financial institutions refrain from repossession proceedings for at least a year from the date of the borrower’s first payment arrears. The central bank’s Code of Conduct on Mortgage Arrears (CCMA)1 set out the framework that lenders must use when dealing with borrowers in mortgage arrears or in pre-arrears. The CCMA requires lenders to handle all such cases sympathetically and positively, with the objective at all times of helping people to meet their mortgage obligations. Under the CCMA, lenders must operate a Mortgage Arrears Resolution Process (MARP) when dealing with arrears and pre-arrears customers. The five steps of the MARP are communication, financial information, assessment, resolution, and appeals. If these five steps have been exhausted and the lender intends to repossess a home, they must then adhere to the MARP rules governing repossession proceedings.

Additionally, the 2009 act created a gap in the legislation for repossession of the collateral. In July 2011, a High Court Judge found that if a loan went into default, but demand for full payment was not made until after December 1, 2009, the lender could not apply for repossession.

Lenders may bring cases of repossession to the Circuit Court or to the Higher Court, but the court proceeding takes a number of years as the result of adjournments and subsequent appeals, with significantly high costs for the lender. Prolonged and costly foreclosure on mortgage collateral gives rise to moral hazard and tends to be associated with a slower recovery in the property markets (Frantantoni and Moore, 2013).

At this writing, a 2013 bill amending the Land and Conveyancing Law Reform Act 2009 is pending that should restore the availability of summary repossession proceedings for mortgages created before December 2009 (except for cases already pending in court).

Source: Mortgage Arrears Resolution Process (MARP) and Land and Conveyancing Reform Act of 2009.1 Code of Conduct on Mortgage Arrears (www.centralbank.ie/publicinformation/Documents/2013%20CCMA.pdf).

First, legal and regulatory restrictions hampered the ability of lenders to collect on defaulted mortgage loans.13 Second, although loans are full recourse, borrowers had limited capacity to make up any deficiency between the value of the loan and the collateral; therefore, lenders sought to restructure loans, which, in the near term, results in lower loss recognition, but defers the associated problems of high mortgage debt and poor asset quality for banks.

Box 22.2The Spanish Mortgage Law

Under Spanish mortgage law, among the most stringent in Europe, borrowers in default are liable, with all their present and future assets, for the debt. The creditor retains the right over assets, including principal residence, and the debtor’s future income (notwithstanding certain exceptions) until the debt is settled.

The banks normally have the possibility of accelerating the maturity of the loan. Mortgage loans usually include a clause providing for the early termination of the mortgage contract based on, among others, nonpayment of a single installment.

Insolvency proceedings are not widespread in Spain for cultural reasons and institutional inefficiencies. Spain has traditionally had one of the world’s lowest business bankruptcy rates (Garcia-Posada, 2013). In 2012, a protection scheme for main residence mortgagors was adopted, which included a code of good practices to which financial institutions may voluntarily adhere, and more flexible foreclosure proceedings; the scheme also allows for the transfer of the principal residence in lieu of payment (dación en pago), cancelling the secured debt in full on certain conditions (see Banco de España, 2012, for further details).

The Spanish legal framework for housing foreclosures and evictions was changed, in part, as a follow-up to a ruling of the European Union Court of Justice (March 14, 2013). The court considered that the Spanish legal framework does not comply with EU consumer protection rules because it restricts a judge’s ability to suspend foreclosure proceedings while deciding whether the terms of a loan are abusive.

A new law (Law 1/2013) amending the Spanish legal framework was approved May 14, 2013. The law includes a prohibition on initiating foreclosure proceedings before three loan installments are unpaid, a suspension of foreclosure proceedings if such proceedings are based on abusive clauses in the secured loan contracts, and a two-year moratorium on evictions “vulnerable” families from their main residences in case of foreclosure.

In contrast to the United States, most Spanish mortgage contracts do not include the possibility of cancelling the remaining debt after applying the funds from the auction of the collateral property in the foreclosure procedures. This situation leaves many mortgagors highly indebted even after they have been divested of their property. The new amendment to the Spanish foreclosure framework does not change this in general terms, but it is aimed at moderating the burden of the foreclosure proceedings by (1) limiting default interest expenses and costs; (2) cancelling all remaining debt if the sale of the collateral does not cover the debt, but the debtor has no other assets but manages to pay 65 percent of the remaining debt in 5 years or 80 percent in 10 years; (3) introducing the transfer of the principal residence in lieu of payment (dación en pago) for certain extreme cases, as explained above; (4) stopping repossession if the judge determines that there is an abusive clause until another court determines whether this is the case; and (5) establishing new requirements to ensure the independence of appraisal companies.

Vulnerable households have to meet the following criteria, among others: (1) total household income must be less than three to five times the IPREM (Indicador Publico de Renta de Efectos Multiples), depending on other circumstances (based on the current indicator, three times the IPREM is €1,596 a month); (2) there has been a significant alteration in the household’s economic circumstances in the previous four years (defined as debt service as a percentage of income having increased 1.5 times); (3) debt servicing is more than 50 percent of the family unit’s income; and (4) the secured loan was granted to purchase the mortgaged main and only residence.

Note: The comments on Box 22.2 from Ignacio Sánchez-Román and Luis Tovar French of the Legal Department of the ECB are gratefully acknowledged.

This contrasts with the regulatory treatment for a nonperforming mortgage in the United States, where loss recognition occurs much earlier. Banks are legislatively required to suspend any accrual of interest income after the mortgage is 90 days in arrears and must charge off principal down to the realizable value of collateral after 180 days in arrears.14 The result has been that the absolute level of NPLs peaked much earlier and at a lower level in the credit cycle (see Fratantoni and Moore, forthcoming, for more details).

The weaker options available to lenders in Ireland to collect on defaulted mortgages have led to increasing levels of strategic default, that is, default by borrowers who have a greater capacity to pay but choose not to. Strategic default increasingly reflects the ability, conferred by the long delays in the foreclose process, of the borrower to live in the house for extended periods without payment. Based on averages, this time in Ireland is more than double the time in Spain and Portugal and four to five times longer than in Denmark, the Netherlands, the United Kingdom, and the United States.

By contrast, Spain has one of the most stringent repossession laws in Europe, and strategic default occurs much more infrequently. About 450,000 properties were foreclosed between the bursting of the property bubble in 2008 and end-2012. Repossession as a consequence for default on mortgages helps to explain why the rate of default on mortgages has remained considerably lower (less than 4 percent of mortgage loans are more than 90 days in arrears; IMF, 2013). However, the May 2013 amendments to the Spanish mortgage law (see Box 22.2) aim to mitigate the perceived bias toward the lender in the use of repossessions.

Foreclosure Processes in the United States

For the United States, the foreclosure framework is set out in state law.15 About 24 states require that lenders pursue defaulting borrowers through a judicial proceeding involving the courts, and many states stipulate a nonjudicial process. In a few states, both means are available, and lenders often choose foreclosure through a nonjudicial process, also known as a foreclosure by “power of sale,” which allows the bank to initiate a foreclosure sale of the collateral (the property) without court approval. The average period for completing a foreclosure was 414 days at end-2012, up from 348 days at end-2011. The shortest period was observed in Texas (90—113 days) in a nonjudicial process, excluding the redemption period, which is typically 180 days; comparably short periods were also observed in two judicial states—Delaware (145 days) and Virginia (146 days). The longest periods were all in judicial states (New York at 1,089 days, New Jersey at 987 days, and Florida at 853 days, according to RealtyTrac).

By reputation, home mortgage debt in the United States is nonrecourse—if the borrower defaults, the lender gets the home as collateral but cannot pursue the borrower for any deficiency between the home’s value and the remaining debt. However, lenders do have the ability to pursue deficiency judgments in 41 of the 50 states. But in practice, lenders do not pursue deficiency judgments because the added recovery of value beyond the value of the collateral does not support the effort to collect (Ghent and Kudlyak, 2009).

Measures to Prevent or Delay Foreclosure Processes

The recent financial and economic crisis has brought about, on both sides of the Atlantic, a proliferation of measures implemented to protect households from the risks of foreclosure repossessions because their ability to make payments has been reduced considerably since 2007—08. In theory, debtors and creditors have incentives to prevent foreclosure.

Loss-Mitigation Tools

Loan modification is by far the main foreclosure prevention measure. Loan modification involves changing the terms of the mortgage contract so as to lower the borrower’s monthly payment and, in some cases, to also lower the principal owed. This is typically implemented by creditors when payment difficulties are deemed temporary and the loan is viable in the long term.

European Commission (2011) lists the different possibilities of loan modifications at the country level for Europe. Without being exhaustive, the guiding principle is to foster the restructuring of the mortgage debt by courts under certain conditions, especially the circumstances of the debtor, such as unemployment. Alternatives to loan modification have been used recently (European Commission, 2011). Among the measures that allow households to stay in their properties are the following:

  • Under reconciliation procedures, based on the good faith principle, creditors should explore acceptable solutions for debtors shortly after arrears occur and before starting any foreclosure process. A partial repayment strategy is the usual form.

  • When the debtor’s financial difficulties are more severe, but still short-term, there is the possibility of forbearance, which allows a grace period during which the creditor agrees not to foreclose and the debtor agrees to a mortgage repayment plan to fulfill its obligations by the end of the forbearance period (Gerardi and Li, 2010).

  • Another possible alternative to foreclosure is a mediation or arbitration process, which is a neutral setting in which the parties, creditors and debtors, negotiate and identify cost-effective solutions.

There are other alternatives, but these oblige the household to abandon the property:

  • One possibility is the short sale, in which the debtor is allowed to sell the property, and any outstanding amount due after the sale is either forgiven or renegotiated by the creditor.

  • The other possibility is the donation of the property in payment (lieu of payment). In this case, the creditor is obliged to accept delivery of the guarantee of the mortgage by the debtor to settle the debt.

Government Intervention

Active public policies to avoid foreclosures in the United States and Europe since the surge of foreclosures in 2007–08 differ by country. In the United States, the government, in cooperation with the industry and related associations, has sponsored several programs to modify the conditions of loans. These programs provided incentives in the form of subsidies to debtors, creditors, and intermediaries for loan modification in the Making Home Affordable framework (see Fratantoni and Moore, 2013, for more details). European Commission (2011) provides a good overview of practices by European policymakers regarding public rescue schemes. The experiences differ across countries and comply with the state aid rules to avoid distortions in an economic union. The policy responses include granting public loan guarantees, the possibility to sell the home to a publicly sponsored association or other fund, financial relief for unemployed homeowners, and temporary tax relief. All of these are typical mitigating actions recently implemented in several European countries as protection schemes for debtors.

For instance, Ireland and Portugal16 illustrate the logic of these programs. The CCMA and MARP in Ireland and the recent law in Portugal (Law No. 58/2012, of November 9, 2012) created protection schemes for residential mortgage loan debtors in special economic need, valid in principle until December 31, 2015. The programs provide options for the restructuring of debts, including grace periods, extension of payment deadlines, spread reductions, and the granting of additional loans. It is also possible to transfer the mortgaged asset to the credit institution or to a real estate home leasing investment fund (Fundo de Investimento Imobiliário para Arrendamento Habitacional) as a means of paying the entire debt, in which case the borrower may become entitled to lease (mortgage to rent) and, later on, to repurchase, the mortgaged asset or exchange it for a less valuable real estate asset (trade-down mortgages).

How Does Recent Literature Evaluate the Different Foreclosure Processes and the Policies to Delay Them?

Empirical research for the United States shows a very strong negative correlation between actual foreclosure and whether the state requires judicial foreclosure. States that require judicial foreclosure had a rate of foreclosure per owner during 2008 and 2009 that was 3 percentage points lower than states without judicial foreclosure (Mian, Sufi, and Trebbi, 2011). The authors also estimated the causal effect of differences in foreclosure state laws on foreclosure rates and other economic outcomes. They found that states with nonjudicial foreclosure laws are twice as likely to foreclose on delinquent homes and those foreclosures negatively affect house prices and real activity. By contrast, another line of research argues that judicial foreclosure results in high costs from delaying foreclosure; and Gerardi, Lambie-Hanson, and Willen (2013) find that judicial foreclosure alters the timing but not the number of foreclosures. The conclusion is that anti-foreclosure laws are not actually fixing the underlying problem, but instead are delaying the inevitable in many situations (Gerardi, Lambie-Hanson, and Willen, 2013).

In general, judicial foreclosures take longer than nonjudicial foreclosures. This fact, and the many policies put into effect in 2008 to prevent homeowners from being evicted from their homes, generated extensive literature on the unintended effects of these laws and policies, which were meant to help homeowners, but, according to this research, they may actually be actively hurting housing markets. This research has shown that foreclosure prevention efforts are neither necessary nor a sufficient condition for keeping people in their homes. This research found that the likelihood of a delinquent homeowner averting foreclosure is remarkably small, making programs that attempt to prevent foreclosure mostly futile (Adelino, Gerardi, and Willen, 2009).

According to this research, there is room for moral hazard, because borrowers do live rent free during the period in which a loan is in foreclosure, and delays in the foreclosure process promote this behavior. Zhu and Pace (2011) investigated the influence of foreclosure delays on borrowers’ default behavior and concluded that the longer the delay, the higher the benefit one could obtain from default, given that during the duration of the foreclosure the defaulting borrower could legally remain in the property without making payments. Rational borrowers make their default decisions based on the expected value of default. Everything else being equal, the longer the expected period of foreclosure, the higher the expected benefit from default, and the more valuable the default option becomes.

Lessons and Conclusions

The elements that have contributed to the different default and foreclosure rates, and the severity and length of the mortgage crisis, are related to lack of diversification, or excessive reliance on the housing markets in the United States and in some European countries, particularly in Ireland and Spain, but they are also related to the legal framework and foreclosure practices in each country.

The experiences of Ireland and Spain confirm the argument discussed in the literature on the U.S. foreclosure process. Specific mortgage laws and practices may lead to different outcomes in mortgage default and foreclosures, and the speed of resolving the mortgage crisis and recovery of the housing market. Delays in the foreclosure process create moral hazard that leads to increases in default rates because borrowers obtain free rent during the period the lender forbears on collection or that a loan is in the foreclosure process.

In Europe, mortgage defaults and home foreclosures seem to be more related to borrower credit quality than to the value of the collateral property, given that in all the countries in the sample, the mortgages are recourse, and in some of the countries (Spain and the Netherlands) foreclosure processes are very much tilted against the interests of the borrowers. Thus, households have very strong incentives to avoid foreclosure. By contrast, in the United States, given that mortgages are both de jure and de facto nonrecourse, the value of the collateral plays an important role in the decision to foreclose. Borrowers in the United States have stronger incentives to default when they have negative equity. Nevertheless, U.S. lenders’ limited prospects for collecting anything beyond the value of the collateral promotes earlier loss recognition, which has led to a quicker recovery of credit markets.

Appendix 22A
Table 22A.1Nonperforming Loans as Percentage of Gross Loans1
Country200720082009201020112012
Cyprus3.43.64.55.69.610.7
Denmark0.31.23.34.13.74.2
Germany2.72.93.33.23.0
Greece4.657.710.414.417.2
Ireland0.62.6910.819.624.8
Netherlandsn.a.1.73.22.82.73.1
Portugal2.83.64.85.27.59.8
Spain20.93.45.15.87.67.1
United Kingdom 30.91.63.54.04.04.0
United States1.435.44.94.13.9
Sources: Data for Ireland for 2010–12 are from the Central Bank of Ireland. World Bank and IMF. Note: n.a. = not available.

Nonperforming loan definitions and measurements differ across countries, making data comparability difficult.

Data as of June 2012.

Figures for the United Kingdom are based on the consolidated global operations of domestically controlled banks reporting in the United Kingdom, so may not be representative of the financial soundness of the subgroup of banks that account for the bulk of retail activity in the United Kingdom. Other sources (Bloomberg, L.P.) report much higher figures for major U.K. banks.

Sources: Data for Ireland for 2010–12 are from the Central Bank of Ireland. World Bank and IMF. Note: n.a. = not available.

Nonperforming loan definitions and measurements differ across countries, making data comparability difficult.

Data as of June 2012.

Figures for the United Kingdom are based on the consolidated global operations of domestically controlled banks reporting in the United Kingdom, so may not be representative of the financial soundness of the subgroup of banks that account for the bulk of retail activity in the United Kingdom. Other sources (Bloomberg, L.P.) report much higher figures for major U.K. banks.

Table 22A.2Rate of Unemployment in Selected Countries
Country2006200720082009201020112012
Cyprus4.74.03.85.66.47.912.1
Denmark3.93.83.56.17.57.67.6
Germany10.28.87.67.77.16.05.5
Greece8.98.37.79.412.517.524.2
Ireland4.54.76.412.013.914.614.7
Netherlands4.43.63.13.74.54.45.3
Portugal7.78.07.69.510.812.715.7
Spain8.58.311.318.020.121.725.0
United Kingdom5.45.45.67.57.98.08.0
United States4.64.65.89.39.68.98.1
Source: IMF, World Economic Outlook database.
Source: IMF, World Economic Outlook database.
References

    Addison-SmythD.and K.McQuinn2009Quantifying Revenue Windfalls from Irish Housing MarketResearch Technical Paper 10/RT/09 (Dublin: Central Bank and Financial Services Authority of Ireland).

    AdelinoManuelKristopherGerardiand PaulWillen2009Why Don’t Lenders Renegotiate More Home Mortgages? Re-defaults, Self-Cures, and SecuritizationPublic Policy Discussion Paper No. 09-4Federal Reserve Bank of Boston.

    Banco deEspaña2012Financial Regulation Economic Bulletin Q1 April pp. 14752.

    BardhanAshok2009Housing and the Financial Crisis in the US: Cause or Symptom?Vikalpa The Journal for Decision Makers Vol. 34 No. 3 p. 1.

    BardhanAshokRobert H.Edelsteinand Cynthia A.Kroll2011The Financial Crisis and Housing Markets, Worldwide” in Global Housing Markets: Crises Policies and Institutions ed. by AshokBardhanRobert H.Edelsteinand Cynthia A.Kroll (Hoboken, New Jersey: John Wiley & Sons).

    BrounenDirk2011House Prices and Market Institutions, the Dutch Experience” in Global Housing Markets: Crises Policies and Institutions ed. by AshokBardhanRobert H.Edelsteinand Cynthia A.Kroll (Hoboken, New Jersey: John Wiley & Sons).

    CalomirisC.and E.Higgins2011Policy Briefing: Are Delays to the Foreclosure Process a Good Thing?Shadow Open Market Committee Economic Policy for the 21st CenturyMarch.

    Central Bank of Ireland2012Residential Mortgage Arrears and Repossessions Statistics (2012–2013).”

    Cour-ThimannP.and B.Winkler2012The ECB’s Non-Standard Monetary Policy Measures: The Role of Institutional Factors and Financial StructureOxford Review of Economic Policy Vol. 28 No. 4 pp. 765803.

    EllisLuci2008The Housing Meltdown: Why Did It Happen in the United States?BIS Working Papers No. 259 (Basel: Bank for International Settlements).

    European Central Bank (ECB)2009Housing Finance in the Euro AreaOccasional Paper No. 101 (Frankfurt).

    European Commission2011National Measures and Practices to Avoid Foreclosure Procedures for Residential Mortgage Loans. Accompanying Document to the Proposal for a Directive of the European ParliamentWorking Paper No. 357 (Brussels).

    European Mortgage Federation2007Study on the Efficiency of Mortgage Collateral in the European Union (Brussels).

    European Mortgage Federation2011Study on Non-Performing Loans in the EU (Brussels).

    FeldsteinMartin2008How to Help People Whose Home Values Are Underwater—The Economic Spiral Will Get Worse unless We Do Something about Negative EquityWall Street JournalNovember18.

    FooteC.L.K.SGerardiL.Goetteand P.S.Willen2009Reducing ForeclosuresPublic Policy Discussion Papers No. 09-2Federal Reserve Bank of Boston.

    FrameScott2010Estimating the Effect of Mortgage Foreclosures on Nearby Property Values: A Critical Review of the LiteratureEconomic ReviewFederal Reserve Bank of Atlanta.

    FratantoniMichaeland MichaelMoore forthcoming “The U.S. Mortgage Crisis—Are There Lessons for Policymakers?IMF Working Paper (Washington: International Monetary Fund).

    Garcia-PosadaM.2013Insolvency Institutions and Efficiency: The Spanish CaseBanco de España Working Paper No. 1302February8.

    GerardiK.S.L.Lambie-Hansonand PaulWillen2013Do Borrower Rights Improve Borrower Outcomes? Evidence from the Foreclosure ProcessJournal of Urban Economics Vol. 73 pp. 117.

    GerardiK.S.and W.Li2010Mortgage Foreclosure Prevention Efforts” Federal Reserve of Atlanta Economic Review No. 2/2010 (Atlanta, Georgia).

    GhentAndra C.2012The Historical Origins of America’s Mortgage LawsSpecial Report Research Institute for Housing AmericaOctober. http://www.housingamerica.org/RIHA/RIHA/Publications/82406-11922-RIHA-Origins-Report.pdf.

    GhentAndra C.and MariannaKudlyak2009Recourse and Residential Mortgage Default: Theory and Evidence from U.S. StatesFederal Reserve Bank of Richmond Working Paper No. 09-10July7 (Richmond, Virginia).

    Goodbody2012Irish Economics & Financials: Household Debt the Housing and Mortgage MarketsNovember.

    Goodbody2013Economic First GlanceJune21.

    Goodman2010Dimensioning the Housing CrisisFinancial Analysts Journal Vol. 66 No. 3 pp. 2637.

    International Monetary Fund (IMF)2013Spain: Financial Sector Reform—Second Progress ReportIMF Country Report 13/54 (Washington).

    HerkenhoffK.and L.Ohanian2012Foreclosure Delay and U.S. UnemploymentFederal Reserve Bank of St. Louis Working Paper 2012-017AJune.

    KobieT.F.and S.Lee2011The Spatial-Temporal Impact of Residential Foreclosures on Single-Family Residential Property ValuesUrban Affairs Review Vol. 47 No. 1 pp. 330.

    KimballZ.and PaulWillen2012US Mortgage and Foreclosure LawThe New Palgrave Dictionary of Economics edited by StevenDurlaufand Lawrence E.Blume Online edition.

    KiffJohnand VladimirKlyuev2009Foreclosure Mitigation Efforts in the United States: Approaches and ChallengesIMF Staff Position Note No. 09/02 (Washington: International Monetary Fund).

    LeaMichael2010International Comparison of Mortgage Product Offerings Research Institute for Housing America (Washington: Mortgage Bankers Association).

    MianAtifAmirSufiand FrancescoTrebbi2011Foreclosure, House Prices, and Real EconomyNBER Working Paper No. 16685 (Cambridge, Massachusetts: National Bureau of Economic Research). http://www.nber.org/papers/w16685.

    MorrisR.C. RodriguesBrazF. deCastroS.JonkJ.KremerS.LinehanM. R.MarinoC.Schalckand O.Tkacevs2009Explaining Government Revenue Windfalls and Shortfalls: An Analysis for Selected EU CountriesECB Working Paper No. 1114 (Frankfurt: European Central Bank).

    StevensonS.2011The Dynamics of the Irish Housing Market” in Global Housing Markets: Crises Policies and Institutions ed. by AshokBardhanRobert H.Edelsteinand Cynthia A.Kroll (Hoboken, New Jersey: John Wiley & Sons).

    ZhuS.and KelleyPace2011The Influence of Foreclosure Delays on Borrower’s Default Behavior” paper presented at the 46th Annual American Real Estate and Urban Economics Association ConferenceDenver, ColoradoJanuary 7–9.

The selected sample includes Cyprus, Denmark, Germany, Greece, Ireland, the Netherlands, Portugal, Spain, the United Kingdom, and the United States. Other countries (France and Italy) are included in a few figures and tables for comparison with the main sample.

In Ireland and Spain, for example, government finances were overreliant on property. In Ireland, tax revenues increased by 10 percent per year from 2002 to the end of the housing boom in 2007; as a consequence, the tax structure shifted toward a cyclical source of revenues, most of which was real estate related. In 2006, Ireland reported a budget surplus of 3 percent and a government-debt-to-GDP ratio of 25 percent. Both figures were the second highest in the euro area (Addison-Smyth and McQuinn, 2009). In Spain, the contribution of property transactions to tax revenues during 1999–2007 amounted to about 1.5 percent of GDP, of which about 0.4 percent of GDP related to increases of value-added tax receipts and 0.8 percent of GDP related to increases in property transfer and stamp duty taxes (Morris and others, 2009).

An exception is Germany where housing prices continue rising strongly.

There are other reasons for the increase in mortgages, including increases in disposable income and growth in residential property prices and house transactions, combined with demographic factors. Additionally, there have been supply-side factors, such as high increases in construction in some countries, like the remarkable case of Spain. The number of housing starts in absolute value in Spain during the period 1999–2008 was 6 million, which contrasts, for example, with France, which started 3.9 million houses during the same period. However, when looking at 2008—11, Spain had adjusted its supply more than other countries, with 0.6 million house starts, as compared with the 1.1 million houses started in France for the same period.

From 1994 to 2006:Q3, house prices in Dublin increased by 580 percent, from an average of €80,000 to €550,000 (Stevenson, 2011).

Similar to the estimate in the Economist, “Searching for Solid Ground,” August 18, 2012.

Housing prices in big cities like London, New York, and Paris respond to global market conditions and are still rising.

For example, in Spain at the peak of the cycle (2006—07), residential investment accounted for 9.3 percent of GDP, and 13.5 percent of the workforce was employed in the construction sector.

The comments on Greece, provided by Anna Damaskou and Asimina Koutsoukou from the Legal Department of the ECB, are gratefully acknowledged.

The information on Germany, provided by Maike Luedersen of the Legal Department of the IMF, is gratefully acknowledged.

An ECB (2009) study finds that the average duration of foreclosure procedures in Europe is 24 months, although it varies significantly across countries, ranging from a minimum of 2 months (Finland) to a maximum of between 56 months (Italy) and 132 months (Cyprus). In Italy, however, according to the Ministry of Justice, the average length of the legal procedure leading to repossession was about three years in 2011.

About 25 percent of total mortgage were either in arrears or restructured at the end of 2012 (Goodbody, 2013).

The lender must not apply to the courts to commence legal action for repossession of collateral until every reasonable effort has been made to agree on an alternative arrangement. If the borrower is cooperating with the lender, the lender must wait at least 12 months from the date the arrears were classified as a MARP case (31 days after the first missed repayment) before applying to the courts.

The “charge off’ is only on the bank’s financial accounts and does not result in debt forgiveness to the borrower; the bank is still expected to pursue all avenues to collect the loan, including through repossession of the collateral.

According to RealtyTrac, the foreclosure process varies somewhat from state to state and depends primarily on whether the state uses mortgages or deeds of trust for the purchase of real property. Generally, states that use mortgages conduct judicial foreclosures, using the court system to execute the foreclosure; states that use deeds of trust conduct nonjudicial foreclosures using an out-of-court procedure defined by state law.

This information was provided by Gustavo Botelho Maria da Graça Peres of the Legal Department of the ECB.

    Other Resources Citing This Publication