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Rating agency Fitch became aware of a court case in which the judge denied the bank of its will to continue getting the mortgage after getting the house. If the appeal won’t reverse this ruling, it could be a precedent that could hurt the Spanish banking system.

Tracy Alloway reports:

In a Friday statement, the rating agency dealt with a recent ruling by a judge in the Spanish province of Navarra, which said that giving a mortgaged house back to a bank is sufficient to cancel mortgage debt, even if the house has negative equity (H/T mh arb). This is rather different to what normally happens in the Spanish system, with banks able to go after the assets of defaulted borrowers for up to 15 years.

So, if Spanish banks will have to settle on seizing the house, without having the ability to pursue the rest of the debt, this will significantly damage their finances. With Spain planning to nationalize the savings banks, the “cajas”, the damage to banks    will eventually hurt the sovereign as well.

Another anecdote is that the Spanish judge in this case said that the financial crisis, caused by financial malpractice, is to blame, and that the bank is morally repellent for asking more than the house for a payback.

This might have implication on the Euro in the long term,