Seven years ago, Randall Hernández was directing a United Nations development program in the Caribbean province of Limón. He had a family and a political science degree from the University of Costa Rica under his belt.
It should not have happened to him. But it did.
Hernández’s home in the southeastern San José district of Zapote was taken from him through foreclosure.
“There’s a myth in judicial foreclosures,” Hernández said. “People think that only the poor have their house foreclosed on. That is the worst lie … Foreclosure could happen to anyone.”
In his case, Hernández bought the home in partnership with a work colleague. But the friend never made a single payment, and the weight of the entire mortgage fell on the then 27-year-old’s shoulders.
Soon, collection letters started arriving in the mail. The bank from which he got his loan even made intimidating phone calls to members of his family.
“The entire world has to realize that they are taking your house from you,” Hernández said, his words rushing with the speed of his painful memories. “The pressure that you feel is so great. … You can’t think with a clear head.”
Hernández was one case among 3,269 other foreclosures conducted by the state in 2001. The number of home foreclosures has fluctuated over the past 10 years, with the most recent data showing that 5,581 property owners lost homes in 2006.
Foreclosures made the news fleetingly this year when a new judicial collection law went into effect May 20. Supporters lauded the changes as making the collection process more efficient and effective. Instead of taking three to five years, a home foreclosure could be wrapped up in a month.
Opponents, however, say the new law favors creditors and leaves those struggling to pay off debt in the lurch. They also claim the law, which reorganizes the civil court system, places a heavier workload on the shoulders of fewer judges – a recipe for future complaints from those who have to deal with the new system.
Finding the Money
Potential home buyers in Costa Rica without cash in hand must apply for credit through a mortgage or the equivalent of a trust. Banks and other lending institutions determine which financial tool is best for their clients, though it should be noted that not all banks offer mortgages to foreigners.
Mortgages, while traditionally most common among borrowers, are considered more costly and involve more legal rigmarole than trusts.
Still, said TT legal columnist Henry Lang of law firm Lang & Asociados, trusts are not heavily regulated in Costa Rica. He places more faith in mortgages.
“The process is safe, but slow,” he said.
Borrowers need to be especially careful regarding how a trust is established, paying special attention to legal details and ensuring the trustee is a solid choice, Lang said.
Thomas Ghormley, owner and broker of the Century 21 office in Jacó, on the central Pacific coast, cautioned potential home buyers about the dangers of trusts.
“For the guy who doesn’t pay, it’s worse than a mortgage,” Ghormley said.
The moment a borrower is late on a payment, he explained, the property belongs to the lender, which is why Ghormley said banks prefer trusts.
Losing a Home, Step by Step
For many, buying a home symbolizes establishing roots and fulfilling a lifelong dream. Having that home torn away, whether done like a Band-Aid or a slow burn, is painful.
Banks and other lenders greet a missed monthly house payment with different tolerance levels. Some may give a grace period of up to three months, others only 30 days.
Once that period has passed, the lender notifies the regional civil court about the homeowner’s missed payments. The court then issues the borrower a written warning, advising the person to either pay up or face foreclosure.
Notifying the homeowner is not always easy, lengthening the process.
“Debtors have moved or hidden,” said Marco Antonio Jiménez, a notary familiar with the foreclosure process.
Once homeowners are notified of their imminent foreclosure, public auctions of the homes are published in the official government publication El Boletín Judicial.
Each property is subject to a maximum of three public auctions. A base price is usually set for the property in the mortgage or trust agreement. Any home that does not sell during three consecutive auctions is left to creditors.
Under the old judicial collection system, debtors could drag out an auction date by presenting written complaints about foreclosure terms, according to judges familiar with the cases.
People would claim the base amount set for the house was incorrect, for example, but never provide written proof to back their arguments. Each time a challenge surfaced, the foreclosure process would be delayed, sometimes up to four years.
“The old code gave (borrowers) a lot of chances to place nullity claims,” said Karol Solano, a judge who works with foreclosures in San José. “What (nullity claims) try to do is delay and delay the process of taking away their property.”
While buying time for the homeowner, it stalled the civil courts in a foreclosure quagmire.
The process has since changed with the passage of the new judicial collection law, explained Ricardo Barrantes, the coordinating judge for collection courts in Costa Rica. Civil courts now publish dates for a property’s three public auctions in a single edict.
Homeowners must support any of their written objections with legitimate proof. If the complaint is well founded, a judge will then ask the borrower to provide an oral argument to plead his or her case.
Should the borrower’s challenge fail, the public auction process continues. The house is put up for auction at the base price and the bidding begins.
If no one makes an offer in the first auction, a second auction is scheduled. This time the value of the property is cut by 25 percent. If the property does not receive any bids a second time, a third auction is planned in which the property will be sold at 25 percent of the base value.
Ten working days must separate each of the three auctions.
To give an example of how the process works, say a home has a base auction price of ¢10 million ($19,400). The starting bid in the second auction would be ¢7.5 million ($14,500) and, in the third, ¢2.5 million ($4,800).
Homes can receive not a single bid and be forfeited to lenders. In that case, the borrower is obliged to pay the rest of the debt owed. This means lenders can seize cars, furniture, other properties and even salaries, leaving some former homeowners with nothing.
“That is the problem,” Barrantes said.
The new law has made collecting on bad debt less of a headache for lenders. But some critics say the transfer of pain was too harsh for borrowers.
“It seems to me that some things got out of hand” (with the passage of the new law), said one former judge, who preferred not to be named.
Gerardo Parajeles, a superior civil court judge who helped draft the new collection law, disagreed.
“I would say that there’s confusion about this topic,” Parajeles said. “(The new legislation) creates or introduces a monitoring process that is not a novelty in modern law” – that of allowing lenders to collect on debt.
Reshuffling the Civil Courts
The new judicial collection legislation also reconfigures the civil court system. Before, all cases would be equally distributed among 12 civil courts, which are in turn broken into two divisions by quantity of debt owed.
Roughly 40 judges presided in the 12 courts. Now, all collection cases will be sent to two San José-based courts – dubbed Specialized Collection Courts – staffed by three judges and six legal aids.
Judicial collection cases make up about 85 to 90 percent of the work facing judges, according to a letter penned by a group of lawyers opposing the new system.
The letter proposes that placing a heavier work burden on fewer judges will decrease the courts’ quality of service.
“The specialized court … will not be able to satisfy the expectations generated among users, who, according to information appearing in the press, have been convinced that the Judicial Collection Law will magically solve all of the problems with judicial default,” the letter states.
Barrantes explained that the two courts are an initial step. More locations, judges and staff could be added in the future to meet increasing demand.
Finding a New Foundation
Meanwhile, people continue to face the reality of having their homes taken from them. Some, like Hernández, come away stronger because of their experience.
Hernández and his family have a new home in Montes de Oca, east of San José. He works in the Legislative Assembly. And he has a new hobby: brokering properties facing foreclosure.
A recovered man, Hernández created a blog (rematesjudicialescr.blogspot.com) about foreclosures and public auctions in Costa Rica. There, he publishes hot deals on the foreclosure market and posts updates to collection laws.
His goal is to connect homeowners facing foreclosure with interested, and sensitive, real estate buyers.
“From the social point of view, (foreclosure) is a catastrophe for the middle class,” Hernández said. But, “it’s a great opportunity as an investor.”