What happens if the borrower does not pay the mortgage debt I bought?

You can start mortgage enforcement proceedings to collect against the property used as collateral, within the timelines and procedure set by the Civil Procedure Act and the Mortgage Act.

What is the difference between buying a mortgage and buying a property?

Buying the mortgage (the debt) gives you the right to collect and, if you cannot collect, to enforce. You do not own the property from the outset. Buying the property (at auction or directly) gives you ownership immediately, subject to registration formalities and possible occupants.

Does the mortgage collateral always cover the full debt?

Not necessarily. If the property value has fallen since the mortgage was granted, the auction may not cover the total debt. In that case a residual balance may remain, although Spanish legislation has introduced liability limits in certain circumstances.

What is dación en pago and how does it affect the investor?

Dación en pago is an agreement by which the borrower hands over the property to the creditor in exchange for cancelling the debt. If the borrower proposes this, the investor who bought the debt can accept: they receive the property and the debt is cancelled, avoiding court proceedings.

Do I need to be a company to buy mortgage debt?

It is not mandatory, but many sizeable deals are structured through a company for tax and liability reasons. For smaller or medium amounts, a private individual can buy directly. Consult a tax adviser before structuring the deal.

Buying discounted mortgage debt

How buying discounted mortgage debt works in Spain: what an unpaid mortgage loan is, how the collateral is valued, how mortgage enforcement works and what potential return it can offer.

What discounted mortgage debt is

A mortgage loan is a credit backed by a property. If the borrower stops paying, the bank has the right to enforce the mortgage: to ask the court to sell the property at auction to collect the debt. That process can take a long time and the bank often prefers to sell the debt before reaching the end of the proceedings.

When the bank sells that unpaid mortgage loan to a third party, it does so at a discount: the buyer pays less than the face value of the debt. In return, they are subrogated to all the creditor's rights, including the right to enforce the mortgage. That is buying discounted mortgage debt.

Why the bank sells rather than enforces

Mortgage enforcement is a lengthy process. From when the bank starts the judicial proceedings to when the auction takes place and the bank gets paid can take one to several years. During that time, the unpaid loan consumes regulatory capital and generates provisions. Selling the debt at a discount gives immediate liquidity and cleans the balance sheet.

Reduces bad-debt provisions, which impact the income statement.
Frees up regulatory capital (Basel III requires capital against risk assets).
Externalises management and judicial risk to a specialised investor.
Converts a problem asset into liquidity in a much shorter timeframe.

How the collateral is valued

The mortgage collateral is the central element of the analysis. Its value determines the cushion between what you pay for the debt and what you can recover. To value it correctly several factors must be considered.

Official appraisal: the value stated in the mortgage deed. It may be out of date relative to the current market.
Current market value: the price at which similar properties actually sell in the area. The most useful reference.
Cadastral reference value: an administrative reference from the Ministry of Finance, used to calculate some taxes.
State of the property: renovated, in poor condition or under construction significantly changes the real value.
Prior charges: if there is a senior mortgage predating yours, that debt ranks ahead of you for collection.

How mortgage enforcement works

If the borrower does not pay, the creditor (now you, as the buyer of the debt) can start mortgage enforcement proceedings. The process is governed by the Civil Procedure Act and the Mortgage Act. In broad terms, the creditor files the enforcement claim, the court notifies the borrower, the asset is attached and the auction takes place on the BOE Portal.

If no one bids at auction or the price is low, the creditor can request the award of the asset for a percentage of the appraised value under the LEC. At that point you have the property, though possibly with the borrower or third parties still inside, and you will need to pursue eviction.

Discounted mortgage debt example

A fund buys from a bank a mortgage loan with 110,000 euros of outstanding principal, secured on a flat in a Spanish city with a market value of 130,000 euros. The purchase price is 65,000: a 41% discount on the nominal and 50% on market value. The borrower keeps not paying. The fund starts enforcement. After the court process, the auction ends with an award at 70,000 euros. The fund recovers 70,000 having invested 65,000. The return is modest in this scenario, before legal costs. In other scenarios the outcome can be better or worse.

What happens if the borrower pays

When you buy mortgage debt you do not necessarily want to enforce: you want to collect. If the borrower is willing to negotiate, you can reach an agreement: a haircut (you forgive part of the debt in exchange for the borrower paying the rest), a refinancing (you give them more time or change the terms) or simply payment of what is owed.

For the borrower, negotiating with the new creditor can be a better outcome than enforcement, which leaves a negative record and may result in a residual debt if the auction price does not cover the total. For the investor, a friendly resolution is faster and avoids court costs.

Main risks

Court timelines: mortgage enforcement can take one to three years depending on the court and complexity.
Property occupancy: if the occupant must be evicted, months and costs are added.
Prior charges: a senior mortgage you did not detect can wipe out your margin.
State of the asset: the property may have been damaged or deteriorated, reducing its real value.
Borrower negotiation: if the borrower neither pays nor negotiates, the judicial route is unavoidable.

Where we fit in

At InvertirDeuda we send you, for free, information on discounted mortgage debt: the collateral, the state of proceedings, known charges and the discount against market value. You and your adviser assess whether the deal makes sense.

Frequently asked questions

What happens if the borrower does not pay the mortgage debt I bought?: You can start mortgage enforcement proceedings to collect against the property used as collateral, within the timelines and procedure set by the Civil Procedure Act and the Mortgage Act.
What is the difference between buying a mortgage and buying a property?: Buying the mortgage (the debt) gives you the right to collect and, if you cannot collect, to enforce. You do not own the property from the outset. Buying the property (at auction or directly) gives you ownership immediately, subject to registration formalities and possible occupants.
Does the mortgage collateral always cover the full debt?: Not necessarily. If the property value has fallen since the mortgage was granted, the auction may not cover the total debt. In that case a residual balance may remain, although Spanish legislation has introduced liability limits in certain circumstances.
What is dación en pago and how does it affect the investor?: Dación en pago is an agreement by which the borrower hands over the property to the creditor in exchange for cancelling the debt. If the borrower proposes this, the investor who bought the debt can accept: they receive the property and the debt is cancelled, avoiding court proceedings.
Do I need to be a company to buy mortgage debt?: It is not mandatory, but many sizeable deals are structured through a company for tax and liability reasons. For smaller or medium amounts, a private individual can buy directly. Consult a tax adviser before structuring the deal.