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Credible counter proposal needed on bank seizures

The government must formulate a credible counter-proposal, aimed at providing a safety net for genuinely hard-up, house-owners as well as those who have paid for their properties and have no title deeds.

THE GOVERNMENT obviously recognises the huge social problems that would be created by the troika’s proposal for the seizure and sale by the banks of properties used as security for non-performing loans (NPL). The troika suggested that after 18 months of the owner not making loan repayments, the property should be repossessed by the bank and sold. 

“There are some sensitive issues of mainly social nature for which the government has political positions,” said the government spokesman Stefanos Stefanou on Wednesday. He said these positions would be forwarded to the party leaders so the matter would be discussed at their scheduled meeting with President Christofias on Monday.

The Cyprus government is obviously worried that such a measure would result in hundreds, if not thousands, of families losing their homes. With more and more people out of work, there is bound to be an increasing number who would be unable to pay their instalments on housing loans. And with the recession set to continue for the next two years at least, such a measure would have devastating social consequences.

In the past, it took a bank between eight to 11 years to repossess a house for which the owner was not repaying the loan. Even if the court issued a repossession order, the case stalled at the Land Surveys Department which would take years to process it. If the troika proposal is imposed new legislation would have to be passed, speeding up the whole procedure, but it is more than likely that the political parties would try to delay approval.

The government’s counter-proposal is that the 18-month period suggested by the troika be extended to five years, while repossession of houses in which the owner was living would be ruled out. Troika technocrats will have a laugh when they see these counter-proposals, which essentially would be an admission by the government that it opposes the rule of law. How else could the suggestion that legal contracts regarding housing loans did not have to be honoured, be interpreted? The government is saying that a home-owner can refuse to repay his or her loan to the bank indefinitely and with impunity.

Nobody would like to see people who are hard up being thrown out of their homes, but the government’s position is a blatant show of disregard for the law, that would encourage cheating and dishonesty. If someone will face no consequences for not repaying a housing loan, why pay it? If it wants to protect home-owners from eviction it should come up with an arrangement, within the law. One suggestion was the setting up of a state company that would take over housing loans, but this would incur significant costs for the taxpayer.

As for the extension of the troika’s proposed 18 months, for the repossession of collateral on NPLs, to five years it is absurd. If someone is not repaying his loan on a holiday villa or if a business cannot meet its loan obligations for office premises or a high-street shop, why should the banks wait for five years to repossess? In a country with rule of law, legal contracts cannot be made invalid because of the government’s social policy, regardless of how worthy its objective might be.

There is another big social issue, relating to the troika’s proposal that nobody has touched – the tens of thousands of innocent property owners without title deeds. What would happen to them if the developer, who was paid in full for the property but re-mortgaged it, has NPLs and the bank, which holds the title deed, repossesses property?  Would the government sit and watch as an owner, who has done nothing wrong, is evicted from a house for which he has paid in full, because the developer cannot repay his bank loans?  There are over 100,000 people, the majority foreigners, without title deeds for properties they had bought and paid off. Would they be protected by the Cyprus government’s five-year proposal that would buy time for developers, in the hope they would eventually be able to repay their loans?

The troika’s proposal relating to NPLs is based on the rational economic approach that ensures the efficient allocation of resources and eliminates market distortions, but takes no account of the social implications. It would certainly have dire social consequences, which is why the government must formulate a credible counter-proposal, aimed at providing a safety net for genuinely hard-up, house-owners as well as those who have paid for their properties and have no title deeds. This might be a costly exercise, but it would be the rational and responsible approach, infinitely better than the government advocating disregard for legal contracts.

Readers' comments

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  • marktyler says:

    This is when push comes to shove. The music is about to stop. Who will be left without a chair (or house) to sit in?

    It seems prima facie reasonable the Troika should require banks to foreclose on any and all non-performing loans, repossess the underlying asset (homes in this case), sell them at the market price. The banks use the proceeds to boost their inadequate capital bases. If Cyprus were a normal country that is. Instead politicians right question “Is this Bandit Land?”

    The problem which (tragically for many tens of thousands of home-owners) the Troika might ignore (considering it easier to turn the other cheek perhaps), is the deceitful conspiracy which the Cyprus establishment has perpetrated to bring the situation about. The Troika then deserves to lose credibility as a fair “Leader” of the EU members’ interests. Since it implicitly condones the actions of Cyprus’ leaders, the EU effectively becomes no better than them.

    Hence, the EU becomes a snake’s head. This is something which most people would agree should be cut off when it causes harm to people.

    Benign neglect is not a satisfactory defence.

    The right and honourable thing for the Troika to do is calculate the amount needed to adequately recapitalize the Cypriot banks to make them commercially viable. This “Troika judgement” should quite simply require title deeds be issued to all those who have paid the full price of their original contract, require banks to recognize their losses in full (including developer mortgage loans), then add these amounts so calculated to the amount of new capital required. The increase in amount needed to rescue Cyprus is nothing less than essential, right and proper.

    Then the EU and Troika gain respect and legitimacy for their fair and just leadership.

    Which will it be? Snake Head? I’m afraid so…but how terrible will be the consequences for these “Leaders”?

  • Steve says:

    The way the Cyprus government’s draft counter-proposal has been expressed suggests to me a difference in more than just the time periods, i.e. eighteen months versus five years. I read the Troika’s proposals to be based on the “ticking clock” approach so frequently employed in labour disputes, in which case the definition of non-performing loans is 90 days (in some circumstances less than 90 days) without payment by the borrower or the borrower’s guarantor. At this point the process of repossession begins and is so amended (no more long queues at the Land Surveys Dept) that on the day the clock strikes 18 months the property will be repossessed for sale. The government’s counter-proposal, on the other hand, seems to be assuming the repossession process does not even begin for 5 years.

    I am pleased to see that at last someone is drawing more attention to the Troika’s proposals on title deeds, but am disturbed at the lack of emphasis on the Troika’s accompanying support for the amnesty and their request for monthly progress reports on the matter when currently hardly anyone has applied. Is this to be the means by which the government is expected to accomplish the issue of all outstanding title deeds by the 4th quarter of 2013? For example, could there be a threat coming that the Land Registry will issue tainted title deeds for all properties that have not participated in the amnesty or have outstanding developer mortgages or other disputes?

  • Odd_Job_Bob says:

    “The troika’s proposal relating to NPLs is based on the rational economic approach that ensures the efficient allocation of resources and eliminates market distortions, but takes no account of the social implications.”

    No sh#t Sherlock!!! If whoever wrote this is only NOW realising that THIS IS WHAT THE IMF DO (Latin America, Africa, hell, it’s what the whole “eliminate the Third World Debt” movement was all about!!!) then he should really be applying for employment in alternative industries.

    There’s an old economists saying (that I’ve just made up): “The IMF are like the Horsemen of the Apocalypse: when you see them coming, it’s already too late!”

    The only possible option is to do a Finland (a latter day Argentina, if you like). Nothing else has any chance of working.

  • Gavin Jones says:

    Regrettably, Cyprus has become a state which has kicked overboard the very notion that the rule of law is to be respected.

    Firstly, it’s become the norm that lenders can only repossess their security i.e. properties, on a loan repayment default only after an average period of 10 years has elapsed. This is quite plainly ludicrous. The government’s proposal to reduce this to 5 year is hardly any better and totally unacceptable. By the same token, is it alright for citizens to delay paying their taxes for 5 years or more and would the government accept that? Somehow I don’t think so. However one views this, contract law is being broken.
    Putting the social aspect to one side, someone can take out a mortgage on a house, cease making payments and be secure in the knowledge that they can’t be evicted for years. Why should the lender be held responsible for the mortgagee’s changed circumstances?

    Secondly, and more disturbingly, for many years the state has been condoning the openly fraudulent behaviour of certain developers, lawyers and banks when it comes to the selling of properties with hidden mortgages to thousands of unsuspecting buyers, thus depriving the latter of their title deeds. This, more than anything, has condemned Cyprus to pariah status.

    Make no mistake, the title deed scandal is a massive fraud and lawyers, the supposed guardians of the law, have been central to its betrayal.

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