'Vulture' funds and mortgages: risks and opportunities

Spanish entities that sell mortgage portfolios have increased to ‘vulture’ funds, which has triggered interest in the possibilities that mortgages have to exercise the right of withdrawal and settle their mortgage at a much lower value

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Vulture funds are very fashionable lately. They are nothing more than venture capital funds that, for speculative purposes, invest in public debt of companies or states that are weak, in which there is predictability of financial recovery, which means a hopeful horizon of future profitability. After its start in the United States in 2008, with the subprime mortgage crisis , they have been making their way into the real estate market, also in Spanish, in search of new investment opportunities.

One of the purposes of these opportunistic funds is to buy mortgage loans on real estate, for low value, to banks, with large discounts on their value (between 20% and 50% of their nominal value), becoming They are the new creditors of the aforementioned loans. And then, what happens with the mortgaged?

Given the credit, it is advisable to proceed to the notification that this transfer operation has been carried out in order to avoid possible problems, since the debtor could make the payment of his debt to the bank instead of to his new creditor, the investment fund, which, according to our right, the debtor would be released from its obligation to pay, and the investment fund would not see its credit properly satisfied.

For its part, the debtor may settle and extinguish his debt by paying the new creditor an amount lower than originally owed, but equal to the amount paid by the vulture fund , plus the costs that would have been incurred and interest on the price from the day that the litigious credit was satisfied, and this under the right of retraction that article 1535 of the Spanish Civil Code postulates. However, in order for this benefit that the Law grants to the debtor to be operative, it is an indispensable requirement that we find ourselves before a litigious credit . That is, that debtor and creditor are in court in the courts for the credit in question, with opposition made by the debtor. The second requirement is to do it in the appropriate term, which the law establishes in a scant nine calendar days since the new creditor claims the debt.

A litigious credit is one that, having been judicially claimed the declaration of its existence and enforceability by its owner, is contradicted or denied by the defendant. The character of “litigious” is lost as soon as the sentence that declared its certainty and enforceability is firm, or as soon as the process ceases in some other way, as is, for example, the transaction between the parties.

A credit, according to some courts, may be considered “litigious” from the date of settlement to answer the claim.

Notwithstanding the above, not all credits that meet the above requirements will be considered “litigious”. In this sense, our Civil Code exempts from these assumptions the assignment or sales made to the co-heir or co-owner of the assigned right, to the creditors in payment of their credit, and to the possessor of the property subject to the litigious right that is transferred.

Consequently, the possibilities that the mortgaged one has to benefit from a sale of portfolios to a “vulture” fund and settle its mortgage debt at a lower value than the one that contracted it are really small.

The truth is that in the current context of financial crisis has increased exponentially the number of Spanish banks that decide to sell portfolios of mortgage-backed loans to these investment funds and these have burst with entrepreneurial impetus in search of attractive leaks in the credits of banks that in turn need to get rid of them given the difficulty of charging that lurks. The benefit that the banking entity obtains through this type of operations are the provisions derived from the sale of the portfolio of assets, while the investment funds, for their part, buy those toxic assets for low prices with a logical profit motive. , hoping to obtain high profitability.

In short, investment funds in litigious loan portfolios are configured as a financing vehicle for banks, and favor economic growth, but at the same time that the debtor is in danger of being released from its debt by paying an amount minor, coinciding with the price at which the litigious asset in question was sold, plus the costs and interests, under the aforementioned legal umbrella.