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Curing the non-performing loans disease

Following the implementation of an economic adjustment programme in a number of EU member states, different countries have adopted different strategies for dealing with non-performing loans.

non-performing loansCOUNTRIES under economic adjustment programmes have adopted various methods to tackle the problem of non-performing loans, giving over-indebted households and businesses the chance to pay down debt.

For example the Bank of Greece has announced a series of measures, which include: lower instalment payments, lower interest, considerable grace periods, temporary deferment of instalments, extending the loan repayment period for households and businesses, or allowing home-owners to turn tenants in their primary residence.

The main methods employed by the Bank of Greece to restructure loans are:

  • Short-term solutions (five years or less): Payment of interest only, or lower interest payments during a short-term period; grace periods; deferment of instalments; repayment of the balance that is in arrears; and debt rescheduling.
  • Long-term solutions: These are adjustments with a duration of over five years, and include a permanent reduction in the interest or on the contractual margin rate; switching the type of interest (e.g. from variable to fixed); and extending the loan repayment period.
  • Splitting a loan in two: The first portion of the loan is tied to physical collateral, where the borrower pays in instalments. For the second portion, or the balance on the loan (the unsecured amount), no interest is charged for a period agreed with the bank. On the latter, borrowers are subject to re-evaluation should their finances improve, otherwise they are required to take out a mortgage on another immovable property, that is to say, to put up other assets as collateral.
  • Operational restructuring: Concerns business loans for which a businessman is required to curtail spending and implement cost-cutting measures. Also debt/equity swaps.
  • Definitive restructuring: This involves drastic actions aimed at definitively tackling debt. Debtors voluntarily sign over to the bank their mortgaged property as part of a broader adjustment. Conversion into a leasing contract, whereby borrowers transfer ownership of immovable property to the bank and sign a leasing contract for a minimum duration (usually five years).

In Ireland, authorities have drawn up a list specifying the ‘reasonable living cost’ for households (families with children, couples etc.) This list outlines monthly expenses for food, housing, healthcare, education and so on. An average reasonable cost of living has been calculated, which lenders and borrowers refer to for debt settlement. The list cannot be questioned as it is based on data furnished by the country’s statistical agency.

In addition, Irish authorities have devised the concept of “cooperative borrowers” (i.e. borrowers who do not conceal information – such as income, assets etc. – from banks). By defining what a cooperative borrower is, a bank can no longer arbitrarily deem a borrower as being non-cooperative and therefore refuse to restructure his or her debt. Thus banks are obliged to examine each case separately, provided certain basic conditions are met. Moreover lenders may write off large chunks of debt once they find that a loan cannot be serviced due to the lack of income (or any prospect for income) on the part of the debtor.

In Spain, a house may be transferred to the bank, and the debtor may continue to reside in the house as a tenant for as long as it takes him/her to repay the debt. During the leasing period in question, ownership of the immovable property passes to the bank, and the borrower-tenant can repossess the house upon repayment of the loan at the period end. This is known as a leaseback.

The banks and the government have agreed a code of conduct, which all lenders have adopted. Eligible for these adjustments are persons whose income places them below the so-called ‘social exclusion’ line.

Spanish banks likewise grant grace periods, loan repayment extensions, etc. In addition, where the value of a property is currently lower than that at which it was purchased, the difference is split among the bank and the borrower. In the most extreme cases, a bank will take possession of a house but allow the borrower to keep residing there for two years as a tenant.

These are the sort of sensible solutions to which we here in Cyprus should look to if we really want to escape the vicious cycle of depression.

George Mountis BSc, MSc, Ph.D
Director, Business Development
Emergo Wealth
2, Demetrakopoulou str., 1090 Nicosia Cyprus
P.O. Box 25193, 1307 Nicosia, Cyprus
Tel.: +357 22 449122, Cell: +357 99 494142
Fax: +357 22 780589

Readers' comments

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  • Janner says:

    @Phil. It’s not just those that have paid in full. It includes those who have already paid thousands for the deposit and mortgage payments they thought would result in them one day owning the property outright. In effect all we are paying for is a loan…..what did the bank giver the loan for….you guessed it!!! For a property I could never own as it was used as collateral for the developers debts with the full knowledge of the bank (same lender) and the lawyer. Was I just unlucky….mmmmmm…..no! It was a state endorsed scam!!!

  • Phil says:

    Hi All

    For what it’s worth if you have a copy of your sale of contract, that you and the developer signed and was registered with the land registry, is there any small print or any print at all whereby you agreed to be guarantor to the developer should he fail to pay his loan(s)/taxes/debts. No I thought not. So irrespective that the bank have the land title as security against the developers loan(s)/mortgage(s) YOU are not legally responsible for their failure. Sit tight they are using emotional blackmail i.e you want your title deeds then it will cost. I know that’s easier said than done but you all need to unite and stand firm it’s the only way. Think about it do they (Cyprus Government) really want TV pics/news reports of foreigners being evicted by the Banks because you innocently purchased a property paid in full and refuse to contribute to the developers debts in order that you can get your title deeds and that the Bank are not perusing the NPL makes for bad bad bad worldwide press.

  • Janner says:

    No one really talks about the link between a NPL and the title deed. Many will not pay their loan because they have since found out they don’t own the property. Comparisons are drawn with Ireland but I’m sure the title was available in Ireland. I don’t know if this odd Cypriot conveyancing system exists anywhere else or if it does it can’t be to the same extent. Why would anyone pay their loan for something they don’t own. This is fundamental but rarely do I ever see the experts make this comment. Many will want their day in court but is it the governments tactic to wait for the limitations law to kick in at the end of the year and then go after us with a sense of ruthless urgency.

  • @a Andrew – I stand to be corrected, but I believe in Cyprus a ‘primary residence’ is a home that you and your family occupy for more than 183 days/year and you can demonstrate that you pay all its property-related charges and utility bills.

    Obviously, if I’m correct, this definition is inadequate – and I guess this is one of the reasons why the government is trying to define what constitutes a ‘primary residence’ more precisely.

  • a Andrew says:

    What is the official definition of “primary residence”. If you have one home in Cyprus, one home in The UK and one home in France, are they not all primary residences in each country. If a primary residence is the one where an individual pays his taxes, then there will be a lot of vulnerable home buyers in Cyprus. Many of them having invested heavily in the hope of one day retiring in Cyprus now stand to lose everything.

  • MarkD says:

    @scruffy
    Surely not even investment companies would purchase properties without title deeds, no matter how cheap they may be?

  • @Steve – The scheme would not apply to NPLs exceeding (say) €200,000.

  • Steve says:

    @Nigel. Below you said,
    “……sufficient intelligence to set an NPL limit above which any scheme would not apply – say €200,000.”

    Do you mean below, rather than above?

  • @Scruffy – I agree there is a possibility that developers’ NPLs and personal NPLs will be treated the same – but I sincerely hope not!

    Hopefully the politicians will have sufficient intelligence to set an NPL limit above which any scheme would not apply – say €200,000.

    This would prevent ‘normal’ home owners from having their homes repossessed, while those who bought ‘mansions’ and property developers would not escape.

    We’ll just have to wait and see what the government proposes.

  • Scruffy says:

    @Nigel

    With all due respect Nigel I believe that at the end game of this mess there will be no distinction between Personal NPLs and those of bankrupt developer’s NPLs. The banks will get their debt paid (albeit more slowly) by primary owned homes paying “rent” and repossess for sale the rest.

    They will avoid putting people out on the street and made homeless and the resulting damage to their credibility as a modern EU country will be avoided.

    For those that believe that no one will buy these thousands of repossessed homes I fear that you will be in for a shock when you see the many investment companies who even now, are circling like vultures above this island.

  • Robert Briggs says:

    @ Steve, the way things are going, due to these disgusting horror stories, now flooding out from the Cyprus Property Scene, no one is now touching anything here with a bargepole anyway, so this is putting the stops of any further “development”, crooked or otherwise.

    Also it appears that the “Authorities/Powers that be,” do not have the guts to do anything about this.

  • Steve says:

    I find it very sad that large numbers of commentators are accepting that the victims are going to have to pay some more on top of the full purchase price they already paid, whereas very few are saying that the authorities should go after the developers who sold mortgaged property and then did not pay off the mortgage or the interest.

    This scenario just encourages more crooked property development, because the criminal developers get away scot-free.

    If civilisation doesn’t start going forwards in Cyprus then it will continue to go backwards.

  • John Man says:

    Do you really think that if people had understood the “System” in which property were sold in Cyprus, there would be 2 thirds of these problems as there is, the fact is that a lot of the crucial information that over the past 5 years has come to light was well and truly buried by all the key players i.e. developers, banks, lawyers, and most important Government.

    Unless you are presuming that the people that are in this situation are totally thick!

    I’ve read lots of information on buying a property in Cyprus and there was nothing stating that if developers being able to get multiple mortgages you would be:

    a: be paying for a house that isn’t really yours,

    b:eventually you will need to pay off what they have borrowed before you yourself own the house or can apply for the title deed, also people like suppliers who are owed money because the developer never paid them can also place Memo’s on the title deeds which you don’t get to find out until you try going to the land registry to apply for the title deed, (another hidden gem)

    The whole thing is ridiculous to think that people would even consider buying under these conditions, come on people get real!!

  • Robert Briggs says:

    As I understand, the Banks are starting foreclosure actions against the innocent and duped Property Buyers &/or this includes the Buyers being forced to pay the Developers debts, both to the Bank and the Inland Revenue, in order to secure their Title Deeds, despite these Buyers paying in full to the Developers, who not servicing their loans to these banks, were then made bankrupt.

    If these covert developer loans, ad nauseum, were not disclosed in the beginning &/or in all stages of the purchase processes, to the Buyers, either in the Sales Contract, by the Lawyers, by the Sales Agents, by the Developer, or by the Bank/s involved!

    THEN THIS IS CRIMINAL FRAUD INSTIGATED BY THESE ENTITIES ( & that is putting it politely, RB.) AGAINST THE PROPERTY BUYERS.

    Your opinions and advice in these matters are welcome.

    Yours Sincerely, Bob Briggs.

  • @Janner, @Stuart, @Andrew and @a Andrew – we are talking about something different here.

    These possible solutions apply to those with mortgages who cannot maintain their repayments NOT to developers who sold property and ‘conveniently forgot’ to tell the buyers that they’d mortgaged the land on which it was built.

  • Denton Mackrell says:

    By nature, I’m rational and believe in tackling problems in a systematic, organized way. Most of the time, such ‘normal’ problem solving works but not when the problem is so large and complex that it becomes ‘a mess’ – a system of problems that defies resolution simply by solving component problems sequentially, even if in groups.

    By definition, a mess is intractable and ‘the system’ recoils from any attempt to ‘solve it’. All that happens is that the system adapts and modifies itself so as to maintain the status quo and ‘no real change’. Messes therefore can only be ‘solved’ by tackling the WHOLE system in one go – it must be a complete, comprehensive and decisive solution delivered as a knock-out blow. Tinkering, piecemeal and strung out attempts at solving the mess just won’t work.

    As another commentator implied, the Cyprus property mess is in a class of its own. Having analyzed it for some 10 years and for a long time feeling that indeed it was possible to solve it by a collection of appropriate measures, I now regard it as impossible. I have written off the Cyprus property market as a totally intractable mess.

    OddJob and SoOJob expressed it all better than I can but his advice of ‘sauve qui peut’ and abandon Cyprus property market (if I’ve paraphrased him correctly) seems the most sensible action to take. Removing oneself from the mess and having a safer and more financially secure existence in another country has to be the preferred solution at the personal level. Hell will freeze over before we are ever likely to see a systemic solution applied to the Cyprus property mess.

  • @scruffy – If someone cannot repay their mortgage in the UK, the building society/bank can take action and recover the property.

    If this happens the homebuyer and family will be dealt with by Social Services and may have to live in a hostel, bed sit or accommodation run by a private landlord.

    Which would you refer – living in the house you purchased or a shabby hostel?

    And, it’s unlikely that the unfortunate would have parted with 200,000 as he wouldn’t have paid off his mortgage.

  • a Andrew says:

    The Banks may well ask for a contribution from people who have paid in full. Will that include the compounded interest accrued over many years of non payment? The total amount outstanding including interest could well be more than the property is worth. The maximum amount any bank should ask for is a token contribution to cover administration costs.

    Lawyers who failed to protect their clients in the first instance, should also now work for free.

    Certainly the developers and their cohorts should have their personal and business assets seized first and they should also be made bankrupt, before innocent individuals are targeted.

  • Andrew says:

    The assets of the developers, homes, cars, property, land, investments, (anything and everything) in Cyprus and worldwide should be seized, sold and used to pay their debts. This includes all family members of the developers, seize everything. Make examples of them, justice, and thereafter, owners may be inclined to chip in the pay off any further existing mortgages of the developers where needed to receive their title deeds.

    All Cyprus banks should be closed and sold off and ONLY foreign banks allowed to operate in Cyprus for the next ten years. Why? Does anyone think the same headaches will go away using the same Cyprus banks that brought us to this mess? NO and 100 times no.

  • scruffy says:

    Paying rent a win win for all? Your having a laugh. Some poor s*d pays £200,000 to buy his house and then has to pay rent till he falls down dead and the bank claims the house. He could have rented a mansion for that kind of money not to mention he can’t pass it on to anyone else. If anyone is prepared to accept such a solution God help us

  • Peter Davis says:

    What I can see is the occupier being asked to pay a small rent on a house paid for in full, over the threat of repossession if they refuse, to with title deeds being held by the bank.

    The occupiers then being allowed to reside for perpetuity with the property being sold on the death of the occupant(s), with proceeds going to the bank against the debt.

    The would give the banks a limited income and the sale of properties being released slowly over a span of 10-30 years so as not to impact the market.

    Maybe a win win for all sides?

    It’s still a mess whatever happens.

  • Stuart says:

    The situation in Cyprus is quite different to that in Ireland and Spain. In fact, it is probably unique when compared to anywhere else in the world due to the underlying level of corruption and deception that has contributed to this outrageous position where an honest buyer is faced with the prospect of having to pay off the debts of a dishonest seller in order to legally own the property concerned.

    These are not just simplistic cases of buyers failing to service their loans or mortgages and having to be given extra time to pay or periods of grace. As Nigel suggests, even if purchasers are obliged to contribute towards the debt of the developer, most might be very unwilling to do so and the legal ramifications could drag on for ever, given the pace of justice in Cyprus.

  • Ivan says:

    Bank of Greece- ‘include a permanent reduction in the interest or on the contractual margin rate’

    I believe the banks here increased the contractually agreed profit margin by 2% and refuse to honour the original contracts. It makes agreeing a mortgage with a bank here worthless as they will increase it at their will.

    How do they expect people to have confidence in a system that allows them to do this?

    They are doing their best to bring the market to a standstill, they should be stopped!

  • @Janner – By foreclosing on the developer’s mortgage the bank effectively takes on the debt – and then it can move the process of issuing deeds forward. So it should be possible to get Deeds issued which can then be transferred to those who purchased.

    BUT the debt still needs to be repaid and I suspect those who bought property on a development will be asked to make a contribution towards paying it off.

    On top of that there may be other debts that the developer has amassed – the repayment of these may have to be made by buyers.

    Whatever happens, it’s going to be a unholy mess!

  • Janner says:

    Nigel. I hear what you’re saying and I agree the last the things the banks want is to be saddled with worthless properties. The issue is what are purchasers paying for as the title does not exist. Unless the banks move first and remove the developers debt and any other debt to make the title available what is a purchaser paying for? How are the banks going to remove the debt from the collateral?

  • @Janner – Thanks for your comments. I can’t answer on behalf of George, but thinking about what options may be open to the banks:

    I think it very unlikely that they will seize properties that have been paid for in full. If they did that, it would kill the market stone dead. It would attract so much media attention that no-one would contemplate buying property in Cyprus for many years.

    And what are the banks going to do if they do decide to repossess? The banks need capital and no-one is buying. Repossessed properties will need to be maintained to keep them in a marketable condition and that’s money the banks can ill afford to spend. Plus, as no-one is buying, it’s going to take years to sell them off.

    What is more likely to happen, in my opinion, is that the banks will ask those who have bought property to make a contribution towards repaying the developer’s debt – perhaps by extending/increasing their loan repayments if they have one. I hope people get together in groups to negotiate the best deal they can. And I can see many court cases – it’s going to drag on for years.

    All because of the web of deception and lies. If they’d been honest and run their business correctly, all this mess could have been avoided. Well they’ve made their bed and it’s time for them to sleep in it.

  • Janner says:

    All valid points George. However, it is not just about one loan against one asset (property). As you well know it is about multiple loans against one asset. How is that unravelled?

    Those that thought they bought their property outright only to find the title deed could not be issued due to a sneaky developer debt will rightly believe they have a claim to that asset. What is the bank to do? Repossess the property used by the developer for their loan in the hope that they can sell it to recover some of the developer debt? If this happens then they can expect the person who thought they bought it to challenge this in the courts. This would really cause a problem for the banks.

    They could choose not to repossess the property but this does nothing to recover the developer the debt. What about the same situation regarding the developer but lets say the person who thought they had bought it, with a loan/mortgage from their friendly bank, is now refusing to pay as they believe the property will just be repossessed. The purchaser will be saying why throw good money after bad.

    Does the bank repossess the property and sell it in an attempt to cover the developer’s loan or the purchaser’s as the one asset was used as collateral for both loans? These are just basic examples. Add into the mix numerous loans taken out on the same asset with more than one set of purchasers for that same asset along with unpaid taxes, invoices for companies/tradesmen not paid and it becomes a complete mess to resolve. These are the real issues. Who really owns it? And what exactly do they own when the property doesn’t have a title deed. It looks like they just own a debt!

    To use the one asset as collateral against numerous loans many times over is, in my limited understanding, either fraudulent or just an incredibly stupid/corrupt way of doing business and Cyprus is in this situation due to it’s own greed.

    Purchasers feel justifiably conned and I feel unless the government does something very big and bold (with the approval of the TROIKA) this corrupt mess can only end up in the courts if the parties concerned cannot reach agreement.

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