THE GOVERNMENT has countered the troika’s proposal for the seizure and sale of properties held against bad loans after a period of 18 months, stating that it wants to protect residential property dwellers.
In its economic adjustment programme for Cyprus, under the heading ‘Regulation and supervision for banks and cooperative credit institutions,’ the troika advised that “strong efforts should be made to maximise bank recovery rates for non-performing loans, while minimising the incentives for strategic defaults by borrowers.”
It proposed that “the administrative hurdles and legislative framework currently constraining the seizure and sale of loan collateral will be amended such that the property pledged as collateral can be seized and offered for sale within a maximum time-span of 1.5 years.”
In addition, “the procedures guiding the repossession of cash and other financial assets, which are not pledged as collateral and are held by defaulted borrowers outside the lending institution, should be appropriately accelerated; taking into account also the possibility of moving these assets within and outside the banking sector. The necessary legislative changes will be introduced by 31 October 2012.”
But the government wants to extend the period after which banks can seize and sell such properties, to five years. Moreover, it proposes that owner-occupied housing be exempted from any asset seizures.
That would still affect assets such as inherited property, second homes, or land plots.
A major sticking point with the troika is the latter’s proposal for a redefinition of banks’ non-performing loans (NPLs), which if accepted would cause Cyprus’ bailout figure to soar. Cyprus’ prospective lenders propose that “the Central Bank of Cyprus’ guidance on the classification of loans as non-performing be immediately amended to include all loans past due by more than 90 days.”
The government’s counter-proposal on seizures, part of its ‘file’ on credit institutions, was leaked to the media within hours of being handed to political parties.
Central Bank sources told the Mail the number of properties (homes) seized by banks over the last few years is statistically negligible.
That’s because the process ends up at the Land Registry Department, which typically informs a bank that due to its huge backlog it will take the bank a long time to gain possession of a property in question.
The same sources said that, under the government’s counter-proposal (prepared by the Central Bank), seizures would still end up at land registry, although “measures would be put in place to speed up the procedure.”
The government says it does not want to tamper with the existing system in a bid to protect home buyers.
INCREASED RISK FOR THOSE WITH NO TITLE DEEDS
UNDER the troika’s proposal, there would be an increased risk for all those people without title deeds losing their properties where developers who have non-performing loans (NPLs) lose their collateral and it goes to the banks.
An estimated 130,000 title deeds are pending.
But according to Dennis O’Hare, head and founder of the Cyprus Property Action Group (CPAG), there is more to it than meets the eye.
He said: “The troika doesn’t understand the situation. They are going about it in a similar way as they dealt with collateral in Spain and Ireland. There, the developers built properties with bank mortgages which they have been unable to offload. The key difference in Cyprus is that developers have taken out mortgages on properties and sold them to other people.”
O’Hare said that if a developer here goes bust, it is not just banks which stake a claim on the property: “Other creditors come out of the woodwork, like the Inland Revenue Department, the VAT Service, and so on.”
“At the end of the day, because of all these claims, the amount of debt on title deeds grows to about three to four times the value of the asset, including the bricks and mortar. With the troika’s proposal, since all the other claims would also have to be satisfied, at the end of the day the banks would get back only a small percentage of their investment.”
CPAG cites the ratings agency Standard and Poor’s noting that the bailout package from the EU being negotiated would be in excess of €15 billion, with €6.5 billion required for the banking sector, mostly for recapitalization.
“We are afraid that the ratings agencies don’t know the half of it,” CPAG says on its website.
O’Hare has this take: “Were the government to accept the troika’s proposal, it would expose the whole rotten system. And I believe that’s why they are trying to leave out owner-occupied lodging from bank seizures.”
LEGAL CONTRACTS SHOULD HAVE A REASONABLE TIME PERIOD
By Stefanos Evripidou
STAVROS Zenios, professor of finance at the University of Cyprus and member of the governing council of citizens’ action group ELEFTHERIA had this to say on the length of non-performing loans: “Legal contracts should have a reasonable time period during which they can be enforced.”
He highlighted that one of the indicators in a global study on competitiveness related to the inability to enforce legal contracts, resulting in Cyprus’ ranking low on the index.
“The idea of protecting someone’s primary residence is important, but after that, the legal contracts should have a way to be enforced as part of the rule of law,” said Zenios.
The former University of Cyprus rector referred to two proposals formulated by the newly-formed citizens’ action group ELEFTHERIA that would help create liquidity in the real estate market without creating another bubble.
“First, we need to establish the framework for real estate investment trusts (REIT), which is an investment vehicle used all over the world for investors to acquire property and then rent the property back to the users.
“This way, you attract capital in the real estate market. Also, when it’s an investment and not a loan, you can have a much longer horizon,” he said.
Zenios gave the example of a REIT buying a big factory from a corporation that cannot afford to put it on its balance sheet as a loan, but is still profitable enough to pay rent for it.
“So they sell the property and pay rent to use it. These vehicles (REITs) proved very resilient during the crisis,” he said.
A second proposal from ELEFTHERIA is to adopt the Irish model of a national asset management agency.
“We have to realise that the heart of the problem in Cyprus was a real estate boom of property that now has no resale value. You are still using taxpayers’ money but you are able to take all non-performing loans off the balance sheets of the banks, so the banks shrink. But whatever is left is healthy to finance profitable businesses,” said Zenios.
The finance professor said the agency starts off with a big balance sheet which it gradually brings down to zero by offloading the properties as quickly as possible.
He referred to the hierarchy of properties that exists in relation to non-performing loans: those who borrowed to purchase a primary residence; those who made investments they cannot afford, and the real estate developer who developed property she cannot really sell.
“You are not going to deal with all three problem in the same way with the same social sensitivity and economic consideration,” he said.
“The national bubble has burst. The taxpayer will lose. This (proposal) does not make the problem disappear but it helps the bank get its footing to help small and medium-sized enterprises and gives society more time to offload excess real estate,” said Zenios.
Concluding, he said: “For real estate that has potential, bring foreign investors to buy them and rent them back, for the rest, you need a national asset management agency.”