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Multiple creditors & foreclosures in Cyprus

A new directive for handling customers’ debts has been issued by the Central Bank; however foreclosing on non-performing real estate loans and evictions is not in anyone’s interests.

foreclosures THE CENTRAL Bank of Cyprus (CBC) has issued a new Directive on Arrears Management 2013 under section 41 of the Banking Laws of 1997-2013 regarding arrears management and restructuring of bank customers’ debts. This specific Directive applies to all banks, credit institutions licensed by the CBC and to all branches of international banks operating in Cyprus.

Specifically, Section 2 of the Directive relates to the approach to multiple creditors/banks. It appears that many borrowers may have various loans with multiple creditors, which can take diverse forms and may include, inter alia, other financial institutions and other types of creditors (e.g. trade creditors, workers, tax authorities, etc) that may be secured or unsecured. Such multiplicity of creditors may lead to complexity in finding a sustainable debt restructuring solution for the borrower.

According to the CBC, banks based in Cyprus should collaborate and be transparent during the debt restructuring process, having due regard to the following:

  • Banks/creditors acting independently and solely in their own interest may aggravate the difficulties for the borrower and lead to further problems in the servicing of their credit facilities.
  • In order to avoid the multiple impacts of bankruptcy on all creditors, the interests of both secured and unsecured creditors shall be considered in the development of a restructuring solution that is thus viable and sustainable;
  • Collaboration between the broader group of creditors is beneficial if it provides for burden sharing arrangements and minimisation of the overall costs.

Also, CBC recommended to the banking institutions to incorporate in their policies international best practices in this respect, such as:

  1. Where a debtor is found to be in financial difficulties, all local and relevant creditors should be prepared to cooperate with each other, to give sufficient though limited time (a “standstill period”) for information about the debtor to be obtained and evaluated, and for proposals for resolving the debtor’s financial difficulties to be formulated and assessed.
  2. During the standstill period, all relevant creditors should agree to refrain from taking any steps to enforce their claims against or (otherwise than by disposal of their debt/asset to a third party) to reduce their exposure to the debtor, but are entitled to expect that during the standstill period their position relative to the other creditors will not be prejudiced.
  3. During the standstill period, the debtor should not take any action that might adversely affect the prospective return to relevant creditors (either collectively or individually) as compared with the position at the standstill commencement date.
  4. The interests of relevant creditors are best served by coordinating their response to the debtor. Such coordination may be facilitated by the setup of one or more representative coordination committees and by the appointment of professional advisers to advise and assist such committees and, where appropriate, the relevant creditors participating in the process as a whole.

During the standstill period, the creditors should require the debtors to provide, and to allow relevant creditors and their professional advisors reasonable and timely access to all relevant information relating to their assets, liabilities, business and prospects, in order to enable the proper evaluation of the financial position and the development of sustainable proposals for all participating creditors.

The purpose of this Directive is the application by all banks of efficient and effective strategies, policies and mechanisms for the management of problematic lending situations and the attainment of fair and viable restructurings of loans of borrowers with financial difficulties. Note that as non-performing loans increase in Cyprus banks borrowers also need to understand these directives and demand from banks to be restructured based on these guidelines.

Foreclosures

Strong efforts were made by Troika to maximise bank recovery rates for non-performing loans, while minimising the incentives for ‘strategic defaults’ by borrowers (both commercial and residential loans). Troika indicated that the administrative hurdles and the legislative framework currently constraining the foreclosure and sale of loan collateral should be amended so that the property pledged as collateral can be foreclosed within a maximum time-span of 1.5 years from the initiation of legal proceedings. In the case of primary residences, this time-span could be extended up to 2 years.

It is stated in the MoU that the necessary legislative changes will be implemented by end of 2013, macroeconomic conditions permitting. We believe that the time span for the eviction from primary and secondary residences will be subject to a significant debate as there are significant social and financial implications associated with it. Also, we believe that given the present economic conditions in Europe and specifically in Cyprus, it is not in the banks’ interest to repossess such assets as the property prices have significantly dropped, something which will impact capital levels and profitability. However, we believe that new directives and ‘mortgage rescue schemes’, such as the ones applied in the UK, should be used and should strongly supported by the government.

Dr. George Mountis
Regional Managing Partner
Banking | Wealth & Trust | Asset Management advisory
P.P. (The Parthenon Partners) & Co
Tel: + 357 – 99 49 41 42
Email: george.mountis@theparthenonpartners.com
Web: www.theparthenonpartners.com

Readers' comments

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  • Frank says:

    Costas

    Doesn’t the ECB transfer money to banks by ‘purchasing’ collateral from them in a way similar to the purchase of bonds? The Capital Requirements Directive dictates that the ECB shall consider the solvency of the borrower and the risks to the capital. For that purpose, Fitch, Moody’s & Standard & Poor’s ratings would seem to be the natural source for assessment. We all know that Cyprus is in ‘junk’ territory. I would suspect that the ECB is duty-bound to try to offset risk. Best way to do it is to not lend a cent: sadly unacceptable. I don’t know much (actually, anything) about this sort of risk management. I do know that if I was absolutely forced to make money available to Cyprus; I would ask for a high interest rate: primarily to discourage Cyprus from excessive borrowing but also to compensate me for my risk.

    I do readily accept that my thinking could easily be at variance with that of the ECB.

  • Costas Apacket says:

    Frank,

    I don’t think the ECB is allowed to discriminate between Banks in different Euro Zone Countries when lending to them, especially as to whether they are high or low risk.

    So I ask the question again, why are lending interest rates so high in Cyprus, when they are not elsewhere in the Euro Zone unless the Banks themselves are running an uncompetitive regime similar to a Cartel?

  • Frank says:

    Perhaps the high mortgage rates in Cyprus simply reflect the status and reputation of the banks and the country. Anyone supplying capital to a Cypriot institution must surely consider such as a higher risk investment. Thus, they will demand a higher return on their capital. I would feel more secure with 2% return from a Northern Europe bank than I would with a 10% return from a Southern Europe bank. My capital would be safe and my return small: yet better than the chance of my capital being lost. The truth has been revealed and we now know how the economy has been mismanaged and how property buyers have been conned. As Winston Churchill said: “The farther back you can look, the farther forward you are likely to see.” Cyprus’s past fiscal behaviour has queered its future. Money from outside will be expensive. Money from within will be exported. From the Book of Mixed Metaphors: They have ‘killed the Goose That Laid the Golden Egg’ and ‘the chickens are coming home to roost’. Something to do with Cypriot ‘fowl’ behaviour, I believe.

  • Costas Apacket says:

    There are at least seven Banks in the UK who are at the moment offering various types of mortgages for less than 2%, some as low as 1.49%.

    Are all of the Cypriot Banks unable to obtain their funding from the same sources as these other Banking organisations or is it just a case, in Cyprus, of gross profiteering from a captive market?

    A bit like the EAC?

    If you don’t believe me just look at Compare Mortgages.

  • Ivan says:

    Costas Apacket has neatly summed it up. The banks are causing a lot of the trouble by breaking their loan agreements and adding 2% p.a. to the interest rate to increase their profit. They divert all the focus by allowing everyone to blame the Swiss franc mortgages.

    BoC now charge you €150 a year extra if you bring money into Cyprus.

    None of this helps but no one seems to want to do anything other than play at issuing worthless statements.

  • andyp says:

    @Pippa

    “before the repossession of a property bought in good faith” should not even be an option for the banks.

    The only reason homes bought and paid for are on the line is due to the corrupt practices of colluding lawyers, developers and bankers with the blessing of successive Cyprus governments who have done nothing.

  • ijames says:

    Are we not already in a “stand-still” period? Have we not been in a “stand-still” period for several years?

    And, in respect of taking effective action against the NPLs of developers, are are likely to be standing still for quite some time to come.

  • Andrew says:

    Has anyone explained to the Troika that Developers, Banks, Lawyers and Land registry have conspired for years to conceal mortgages from unwitting buyers. Has anyone told the Troika that buyers were deliberately and systematically not informed of these mortgages.

  • Pippa says:

    @andyp,

    I share your concerns, having paid in full to the developer for our house. In a just system, the developers personal and family assets would be first to be reclaimed, before the repossession of a property bought in good faith. But then with the sharp practices that have been in place innocent parties will probably bear the brunt.

  • Costas Apacket says:

    Perhaps if the Banks actually reduced their lending rates, instead of perpetually increasing them, there would not be so many people getting into arrears or defaulting on their loan repayments in the first place?

    For example, mortgage rates on offer from the BoC are at twice the level they should realistically be set at, which is unsustainable, and which will lead to a massive and totally unnecessary increase in NPL’s, if no sensible corrective action is taken.

    Let’s hope that John Hourican is reading and listening.

  • andyp says:

    As yet I have neither seen nor heard of the Troika nor Cyprus government drawing a line between normal foreclosure due to bad debt and developer mortgages on “sold” properties.

    Will this issue ever be addressed or will the victims of the property fraud simply be expected to pay off someone elses debt or lose their homes?

    Cyprus should be very proud of itself for allowing this fraud to continue for so long.

  • The views expressed in readers' comments are not necessarily shared by the Cyprus Property News.

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