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.