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A ray of hope for those collecting on bum mortgages

by Garland M Baker on March 10, 2008

Remember the days of skyrocketing real estate prices in Costa Rica? People thought then there was no end in sight — no limit on how high a piece of dirt could go. Real estate in the United States was crazy, too. Doomsayers here and there were friendless. No one would listen to their tales of a looming crises.

Everyone knows now that the doomsayers were correct. The bubble burst. Some of those who bought properties in Costa Rica are now hurting back home. As predicted, they cannot pay their obligations there or here. Adjustable rate mortgages were the devil’s work fueling the subprime mess.

Many sellers carried back mortgages on real estate here so they could get the highest price possible from buyers. Smarter sellers made all cash deals. The smart ones knew many buyers were shopping overly hungry in a vast supermarket and ready to over spend.

Some of those sellers with mortgages now have to face foreclosing on the buyers just as some of the financial institutions in the United States have to foreclose on their subprime loans.

There is a relationship. People in the United States were borrowing too much money because borrowing money was too easy. Easy come, easy go. In other words, buyers who borrowed easy money came here and paid big bucks for overpriced real estate.

Many real estate agents are in denial and jump to say that real estate is still selling like gangbusters because Costa Rica’s market is the world and not the United States. This is correct. Costa Rica’s market is the world, and there is a huge market of wealthy buyers in the world. However, real estate is no longer skyrocketing uncontrollably. Buyers are fewer and more cautious. Many of them are smarter than the frenzied buyers of only a few years ago looking for a good deal.
Financial institutions calculate risk and have legal teams to go after deadbeats. A poor seller who carried back a mortgage for an over zealous buyer does not have a legal team. They’re lucky if they have a decent lawyer. Some of the sellers took their loot and mortgage back to the United States thinking there would never be a problem collecting the debt.

Sellers who have buyers defaulting on a mortgage now have to decide what to do and how to go about collecting.

For those sellers, there is a little silver lining in the crisis. Debt collection has become its own law in Costa Rica instead of being parts of other laws like the civil code, the civil procedures code and the law of the judicial power. The new law No. 8624, called “Ley de Cobro Judicial” is a replacement for many antiquated procedures that bogged down the process allowing debtors to prolong debt collection and sometimes avoiding it all together.

The new law, published in La Gaceta Nov. 20, will take effect this May 20. A new specialized court will handle all collections eliminating different courts for amounts less than $1,200 and others for amounts over $1,200. Only a fax number or an e-mail address will be valid for notifications.

Under the new law, once a debtor answers a demand on him or her to pay, a hearing is set. At the hearing, the judge will analyze the paperwork and listen to witnesses. With the information at hand, the judge will make a verbal decision. This is in deep contrast to what happens today where a judge can take months — even longer — to make a decision. Many roadblocks a debtor could throw into the collection action will be a thing of the past.

The spirit of the law is to turn the current long procedural process requiring loads of paperwork into a verbal and fast judicial action.

This new law is also an opportunity for investors. There is profit in buying foreclosure real estate at auction.

Some of the rules have changed too. Deposits to participate in an auction are going to increase to 50 percent under the new law from the current 30 percent. When an auction is ready for the docket, three dates are set instead of just one. Under the old law, only one date was set. If the auction failed, it took months to get a new date.

The new law is more efficient. Three auction dates are set to deal with auctions when there is no winner. The first starts at 100 percent of the asset value. The second starts at 75 percent, and the third starts at 25 percent. If it happens there is no successful auction after three tries, the creditor will be forced to take the asset as payment of the debt.

Sellers who sold and gave buyers mortgages when Costa Rica boomed are not doomed. The new “Ley de Cobro Judicial” can help collect those mortgages and maybe even get the property back if the debtor does not pay. The new law is also a serious new resource for savvy investors.

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