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Cypriot banks to benefit from foreclosure law

In its Credit Outlook, which assesses credit implications of current events, Moody’s Investors Service considers the implementation of the foreclosure law is credit positive for Cypriot banks.

Cypriot banks benefit from foreclosure lawLAST SATURDAY, the Cypriot parliament narrowly passed five bills affecting personal and corporate insolvency that implement the foreclosure bill passed last October. Implementation of the foreclosure bill is credit positive for Cypriot banks because it lays the groundwork for large-scale loan restructurings and improves the banks’ recovery prospects.

The laws’ passage and implementation of the foreclosure bill also allows the European Commission, the International Monetary Fund, and the European Central Bank (ECB) (known as the Troika) to conclude their fifth review of the country’s support programme. The review had been delayed by the wait to modernise the insolvency framework and implement the foreclosure law. If positive, the review’s conclusion paves the way for the next tranche disbursement. Concluding the review will also allow the country to access the ECB’s quantitative easing plan. Under the plan, Cyprus’ government bonds will become eligible for direct purchases by the ECB, which will improve bank liquidity and support modest lending.

The bills amend the corporate bankruptcy framework by introducing creditor protection for 120 days to allow for a company reorganization. They also legislate the licensing of insolvency practitioners in Cyprus and introduce a social safety net by providing protection against foreclosure on primary residences. This will allow courts to impose loan restructurings in case the negotiations between the concerned parties fail, and allow the write-off of individuals’ unsecured debt under certain conditions.

The new foreclosure framework mainly aims to shorten the time needed to foreclose and auction real estate collateral to 18 months from more than 10 years previously. Although nearly six months have passed since the new foreclosure framework was voted into law, parliament delayed its implementation until the enactment of Saturday’s bills.

The enactment will provide incentives to individuals to seek restructuring of their loans and discourages strategic defaults. This will help banks tackle the volume of nonperforming loans (NPLs), which were 50% of gross loans as of 30 November 2014.

Melina Skouridou, Moody’s Investors Service

Readers' comments

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  • @Peter McGowan on 2015/04/25 at 11:59 am – Developers and others do not get an 18 month warning. The repossession process has to be completed in 18 months – that’s different.

    And you can be sure that the banks and govt. are keeping a close eye on any attempts these people may make to transfer property that they own or shift money out of the country now that all capital controls have been lifted.

    The banks will have been smart enough (hopefully) to register memos against all property owned by developers with non-performing loans.

  • Peter McGowan says:

    So the property developers will have an 18 month warning that action will be taken against them, This only means they have 18 months to hide their assets or transfer them to another family member. Take action now, without warning. Make the developers submit an action plan, which sets out what their assets are as of the date the new law was passed and how the intend to pay back the loans. If this isn’t done, their assets should be seized without any more warning. !8 months is too long, better than 10 years but still too long.

  • @Mark on 2015/04/24 at 10:24 pm – Sadly Cyprus isn’t the only EU state where property values have fallen – prices in Portugal, Ireland, Italy Spain and Greece have also fallen and prices in Greece have fallen to levels last seen more than 15 years ago.

    As for your Swiss Franc loan thousands have a similar problem some of whom are taking action against the banks for mis-selling, while others are negotiating as a group to achieve better terms.

  • Mark says:

    @Nigel – Thanks for your reply. I must admit that I have not paid a penny towards my housing loans for over 12 months now because I am unable to reach an affordable agreement with my bank regarding the restructuring of my loans.

    My apartments have lost over 50% in value, the one is burdened with developer debt and the rent I am receiving for the one would not even be attractive for a staff room/quarters in my home country, South Africa. I am unable to let the other apartment because I dont have solar panels on the roof and electricity is expensive. Over and above all this, I have not received my Title Deeds and therefore am unable to sell the properties. I have also lost a fortune from the exchange rate as both my loans are in Swiss Francs.

    I ask myself over and over again, why must I pay another penny to my bank knowing that I will never see my money again?

  • Richard says:

    @Nigel. I will freely admit I have not – but I have a copy now and will read it over the weekend. Thank you.

    @Steve R. If everyone keeps on avoiding the problem by taking devious, evasive action – rather than biting down on the problem – you are right – the market will never recover.

    It’s grow-up time. Too many corrupt old men run the world’s banking systems. As for the Moody’s, Standard & Poor’s etc – well – they (in my eyes) have no credibility whatsoever here as an independent assessor of world finance practices and product health. They ranked total junk with the top / most secure classifications immediately prior to the global collapse of 2008. They were all exposed as fakers.

    Someone powerful needs to unravel it all – that’s for sure. None of us on our own can – unless we get organised into a much better collective voice. Some brave souls have tried that in the last few years and been greeted with a tidal wave of apathy.

    If it’s not done – the Republic are committing their children to a bleak future (and it ain’t just the Cypriots either)!

  • Steve R says:

    ECB are only interested in figures. Re-call defaulted loans and get as much (or in most cases, as little) as you can get. Most of these properties do not have title deeds and are burdened with developer loans. Take out the cost of re-possessing the property and most would be in negative equity. In real terms anybody with equity in the UK would have got rid of it a some time ago. This law has been so well advertised over quite some time it has given people time to reduce their equity. People act in a different way when their back is against the wall.

    The banks have had enough time to try and come to some agreement with the purchaser and the first thing would be to admit a certain amount of fault on their part. When the property comes up for sale in Cyprus who in their right mind would purchase one. Would the banks actually lend money against these properties again in the form of a mortgage. I don’t think so. This would then leave it to cash/investor buyers only. Would anybody with a spare 150K buy a property without deeds and a developer loan off-set against it. The banks have to be seen to be doing something to satisfy the ECB.

  • @Richard on 2015/04/24 at 2:05 pm – I hope everyone has read the Pimco Independent Due Diligence Report of the Banking System in Cyprus and what it refers to as the ‘idiosyncratic factors’ of the banking system.

    One of the key objectives of the foreclosures law is to enable the banks to put pressure on ‘strategic defaulters’, i.e. those who can pay but who choose not to do, (like developers and others) as they will be able to seize their assets in 18 months rather than 10 years under the laws current provisions.

    Speaking to the FT last month Joun Hourican said “Without the legislation in place we feel like we’re wielding a marshmallow hammer when we deal with debtors.”

  • Richard says:

    @Nigel @Mark. The ‘tone’ of both articles & remarks seems to now be suggesting that it’s the poor old banks that have suffered!

    The banks lent money out recklessly willy-nilly to people on the flimsiest of ability to pay. They lent money out to developers who mis-used and manipulated the system flagrantly and many built houses in the shoddiest manner possible (if at all).

    I’m well aware that people have very short memories – but Dear God – I do hope now that people are not 100% siding with the banks. 80% of the problem was created BY the banks greed and short-sighted, imprudent, reckless practices.

    People who recognised the error of their judgement early on – have expended VAST amounts of energy to rectify their position with the banks – only to be stone-walled and/or be taken further advantage of.

    Whilst we are about it – and if it’s only me on this forum left doing it – let’s remind ourselves that the BULK of the bad debt is DEVELOPER DEBT (around €2.5bn). That is – wilful avoidance of paying off loans by those who (in many cases) have an ample asset base to cover it.

    What happened to the President’s pledge to go after these guys first? Anyone remember that?

  • @Mark on 2015/04/24 at 8:29 am – Anyone who deliberately defaulted on their loan without discussing it with their lender is asking for trouble.

    I don’t know how their lender will treat them as a result of the new legislation (which has yet to come into force). But as you may be aware lenders have been taking legal action against defaulting purchasers. Uncontested actions were successful have resulted in the seizure of the property they purchased and EU Enforcement Orders issued against some have resulted in charges being placed on their UK homes, while others have been ordered to repay the debt in instalments.

    (I do not believe that thousands have defaulted, hundreds yes.)

  • Mark says:

    So Nigel, what does this mean for the thousands of buyers without Title Deeds who have intentionally defaulted on their loan repayments?

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