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Blunt warning on foreclosures law changes

Adjustments to the law on foreclosures could have “significant negative impact” on the Cyprus banking system warns the European Central Bank (ECB) in an email to the Central Bank governor.

Blunt warning on foreclosures law changes THE EUROPEAN Central Bank (ECB) has warned that changing the foreclosures law would have a significant negative impact on the island’s banking system, MPs heard on Wednesday.

The ECB, together with the Single Supervisory Mechanism (SSM), want to give a legal opinion regarding the opposition’s insistence on amending the foreclosures framework, MPs were told.

“If such adjustments are finally approved, we expect a significant negative impact on loan loss that banks have to allocate under IFRS 9, extended recovery periods might have to be considered, reliance on the repossession of collateral might have to be reduced and the inflows of new NPLs might be accelerated, as the incentives to improve of payment culture and avoid strategic defaulters might be hindered,” the ECB said in an email to central bank governor (CBC) Constantinos  Herodotou, a copy of which was distributed to the members of the House finance committee.

Speaking before the committee, Herodotou told MPs that the ECB and SSM want to give a legal opinion on the matter since the changes proposed by opposition parties affected banks under their direct supervision.

MPs were debating a presidential veto to a bill passed on July 12 that effectively renders the foreclosures legislation ineffective and will very likely lead to a need for fresh capital as the value of collateral would be affected.

Herodotou told MPs that on Tuesday he received phone calls from the ECB and the SSM asking to give their legal opinion on the matter since the matter concerned banks under their supervision.

“We cannot do anything we want in important systemic lenders, the SSM is the supervisor,” Herodotou said. “That is why we have objections.”

MPs were discussing whether to accept the president’s veto, which would put the matter to bed, or reject it and leave it to the Supreme Court to have the final say.

The attorney-general has already said the bill contains unconstitutional provisions and opposition MPs want to find a compromise that the president would accept.

Diko proposed affording the financial ombudsman the power to decide whether a bank had complied with the CBC’s code of ethics on loan restructuring, one of the issues raised by opposition MPs who claimed borrowers were at the banks’ mercy.

Herodotou said this was considered a temporary solution, adding that the CBC would try and find a permanent way to resolve the matter.

“We want a mechanism to be found that will work but also be in line with our obligations towards the ECB and the SSM. We promise to run an analysis and come up with a mechanism,” he told MPs.

The CBC suggested enabling the ombudsman to halt a foreclosure during the period between the time he decided the code of ethics had been violated until the CBC issued its own decision.

However, opposition parties objected because the CBC’s proposal limited the scope of the bill to loans that have a primary residence as collateral.

“Let us cover the most sensitive, the primary residence that is, until we have the final proposal,” Herodotou said.

The bill in question had been passed by opposition parties on July 12. They said they wanted to introduce additional safeguards for homeowners with mortgages they are unable to service, and to restore the negotiating balance between lenders and borrowers.

A week later President Nicos Anastasiades refused to sign off on it saying it rendered foreclosures legislation ineffective, raising the risk of downgrades for the island’s banks and the economy.

Foreclosures play important role in the Cypriot financial system

“Foreclosures play an important role in the Cypriot financial system,” the ECB said in the email, affecting the very high non-performing loans in the Cypriot banking system that amount to 30 per cent compared with the 5 per cent of the average of the banks supervised by the SSM.

Foreclosures the ECB added, affect the coverage ratio of such defaulted assets via loan loss provisions, which relies heavily on the repossession of collateral to avoid a higher coverage associated to aged vintages, that is, older NPLs.

The ECB said that the amendments to the framework on foreclosures will potentially obstruct future NPL sales by the Cypriot banks.

“Given the key role of asset sales in the strategic NPL resolution plans of the main Cypriot banks, we are very concerned that the envisaged amendments to the foreclosure framework will weigh on the prospects for successfully concluding NPL portfolio sales,” the ECB said.

Noting that investors request a clear legal framework that would enable them to price properly the envisaged deals, the ECB added “that the significantly extended timeframe to dispose of collateral under the envisaged new foreclosure framework will have a perceptible impact on the price for such portfolio sales.”

The ECB said the amendment of the law on foreclosures would affect strategies to reduce NPLs, potentially impacting the bank profitability, solvency, quality of assets and rating.

“While an exact estimate of the impact is difficult at this point in time, it will be important part of our supervisory examination programme for 2020, which has to follow a risk-based approach for all institutions we supervise,” the ECB concluded.

Readers' comments

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  • embapaphos says:

    Agree with MartynG, way things are going those who already struggle to make ends meet yet still service their loans/debts are to carry on subsidizing the free loaders who live in a life of luxury due to the fact they have ‘spare’ cash (courtesy of not paying loans even though they can)….what really needs to be done is a clear picture needs to be painted of who owes what.
    Apparently most NPLs are courtesy of ‘homeowners’ they say but

    1.the strategic non payers need to be weeded out chucked out

    2.those is dire straits and living a 5 bed plot with a swimming pool given the option to downgrade if they cannot restructure their loans, that way this argument of the of the big bag banks leaving people homeless means nothing.

    3.any MPs and their firms with NPLs

    Buck has to stop somewhere, maybe easy talking as someone who isn’t being chased by banks but it is a case of re-possessions, or we all channel our hard earn’t cash into a Cyprus wide pot to pay for each others lifestyles, debts and over indulgences…

  • MartynG says:

    Despite the Cyprus President has ordered a STOP to this further ridiculous ‘kicking the cans down the road’ – loans long outstanding, and likely un-serviced – the majority of MPs seem to think the Cyprus Banking System is some sort of charity – where people, some of them probably lots of their families and friends, possibly even some of them themselves??were provided Repayment Loans. But are again being ‘very kindly’ invited not to repay them…thereby putting the already creaking cyprus Banking ‘systems’ into further, long term distress.

    The headline paragraph above spells it out very clearly : if you, Cyprus, continue with these handouts, privileges, un-serviced loans then the Cyprus banking system will simply “fall back into even greater disarray” than we have witnessed over the last 10 years or so.

    What a way to run a country, economy….in this kind of ‘Never-Never’ land.

    “Foreclosures play an important role in the Cypriot financial system,” the ECB said in their email to Cyprus Government, affecting the very high non-performing loans in the Cypriot banking system – that amount to 30 per cent compared with the 5 per cent of the average of all the banks supervised by the SSM. So, already defaults on Cyprus mortgages, are way, WAY out of Order – thus property loans are SIX TIMES higher than all the rest of those in other EU countries.

    Let’s just hope the Cyprus President is able, as he has hoped – but so far without much progress – to reverse this ludicrous situation, and SOON!

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