Cyprus’ ESTIA scheme to subsidise borrowers with toxic mortgages is failing to generate the expected interest with less than 3% of loan defaulters applying for government help.
ESTIA was launched in September in an attempt to reduce the island’s bad debt mountain.
Analysts attribute the failure of the government plan to a large number of strategic defaulters who chose not to take part in the scheme as they feel there is no substantial risk of losing their primary home.
The rescue scheme drawn up by the Ministry of Finance enables struggling borrowers to repay their loans by subsidising a third of the repayment of a restructured loan.
ESTIA covers borrowers that had non-performing loans up until September 30, 2017. The plan only applies to vulnerable borrowers whose market value of their home does not exceed €350,000.
However, according to analysts, favourable legislation in place to protect a borrower’s primary home and the continued political pressure to loosen the already weak criteria make integration into the ESTIA scheme unnecessary, rendering the project a failure.
According to data quoted by online news site Stockwatch, so far, only around 350 borrowers, out of the estimated 12,000 who meet the criteria, have applied.
These 350 applications which have been approved correspond to loans of around €110 million from a total toxic reservoir of €3.4 billion estimated to be eligible for the scheme.
Around 90% of the 350 applications come from borrowers with loans at the Bank of Cyprus and the former Co-op Bank.
University of Cyprus finance professor Sofronis Clerides told Stockwatch that limited interest in the scheme is a clear indication that it is not as attractive to borrowers as the government initially thought.
“This does not mean that the plan has to change. On the contrary, it is already very generous towards defaulting borrowers. What needs to be done is to make the alternative, which is not paying, less attractive.”
Clerides said that while the ESTIA scheme is the carrot, the stick is nowhere in sight. As he explained, the stick would be the fear of divestment of the homes of those who do choose not to join the scheme and continue to be inconsistent with their obligations.
“Otherwise few will choose to pay part of their debt when they can pay nothing,” said Clerides.
Also finding interest in the generous scheme disappointing, CIIM finance professor George Theocharides feels that the complexity of the scheme and the inadequate information provided to borrowers by the state and banks may have played their part.
However, Theocharides did note that there might be a high number of strategic defaulters who do not wish to reveal other assets.
He said more time should be given for people to understand what the scheme is about; procedures need to be simplified while introducing measures to reduce the moral hazard this scheme may pose to society.
Stavros Zenios, a professor of economics at the University of Cyprus, notes that the results are unsatisfactory, pointing out in a tweet, that the scheme is “failing BIG time.”
Strategic defaulters
He said that only 3% of the NPL problem is expected to be resolved through the ESTIA scheme at this rate.
“This would mean that either the remaining 97% are strategic defaulters who are not being discouraged by existing legislation, or that the ESTIA scheme does not offer real help to those in need.”
Zenios advised the government and the finance minister to take into consideration criticism made by economists regarding weaknesses of the scheme.
“Unfortunately, my colleagues’ fears have been verified and I am very afraid that even now the finance minister will not lend an ear, as he is more concerned about proving that all is well as he prepares to depart from the ministry at the end of the year.”
While agreeing that ESTIA will not function as the carrot if there is no stick, analyst Fiona Mullen argues the scheme is also failing due to complex procedures.
The director of Sapienta Economics thinks the incredibly low take-up has other causes too.
“Of course, the lack of punishment has played its role, but procedures are too complex for a large group of borrowers. Applying for ESTIA requires potential beneficiaries to fill in a 37-page form. One must ask how skilled at filling out forms are the most vulnerable borrowers?” she commented.
She said the forms must also be accompanied by a large number of supporting documents, acquiring these documents takes time and money, especially with e-government being non-existent.
“Are the most vulnerable, expected to have the time, knowledge, skills and money to acquire all of these documents?”
Matters become more complicated when the property mortgaged is jointly owned, and there are potential guarantors involved.
Mullen said there is yet another aspect to be considered which touches upon gender equality.
After doing research she has concluded that there might be an issue with women’s access to information.
“Usually the paperwork is left to the men, even if the loan is in their name. This could mean that women do not have the means and the necessary information to apply.”
The ESTIA scheme is estimated to cost the state some €815 million over 25 years, allocating a budget of €32 million each year. The total value of restructured loans eligible for the scheme amount to €3.4 billion.
Applicants must also meet income criteria to be eligible to join the scheme:
Total family income should not exceed €60,000 for each calendar year for a family of at least four children, €55,000 for a family of three dependent children and €50,000 for a family with two, and €45,000 for a family with one dependent child and €35,000 for a family with no dependent children and €20,000 for a household of one.
The same criteria apply to single-parent families.
Nigel / Martyn, you can’t have mortgage insurance if you don’t have a mortgage! The Banks talk about a “mortgage” when they are peddling their loans but if there is no title deed there is no mortgage, well not belonging to hapless “owners” who will only have a beneficial interest until the title deeds have been issued. Don’t give the Bank another excuse for misselling!!!!
You know only too well that State aid to state aided banks that financed over-priced properties with their own credit with highly complex and dense legal contracts that borrowers did not understand (or did not see) and probably received no independent advice on.
I have learned (from this superb site and from your excellent 10 Golden Commandments and from personal experience) no title deeds mean these people can’t sell their properties even if they want to because the assignment contracts coupled with absence of title deeds and secret mortgages (with unknown contingent liabilities) mean that they probably do not own their properties and have no rights including the right to sell or to sue in court.
Readers should read Professor Clerides excellent report: The collapse of the Cyprus Banking system.
Who peddled the Swiss Franc loans to disguise the over-lending? How many lies were told to tens of thousands that these were beneficial? Low interest rates? CHF may have low interest rates but the margins charged by Cyprus Banks are the highest in Europe. Another con. Owners can’t switch banks even if they wanted to. Who took guarantees, contracts of assignment, etc to disguise the NPLS? Who allowed the NPLs to accrue and accrue? Look at the recent (and almost daily) cases in the Cypriot courts where banks are challenging the Transfer of Mortage Law as unconstitutional because of Developer mortgages. Look at the amounts outstanding, owed by Developers to the Banks and how long these liabilities have not been serviced. These debts are accruing on domestic properties. The Banks are asking homeowners to prop up Developer debts too. If they foreclose on the Developers, they kick out the homeowners and then lose on both sides because they have lent twice on the same land and property. The Banks are claiming privity of contract – and yet failed to tell many buyers of the existence of these mortgages that they are claiming the right to have brokered! In some cases buyers may have known about them, in others not. The CCPS has decreed that the taking of secret mortgages is an unfair commercial practice but the Banks say it is “privity of contract”.
Why did they take the mortgages – to fuel the building spree that created the bubble which inflated the price of property which the economy could not sustain. The banks cannot finance properties without title deeds and so took mortgages over them, but they aren’t necessarily homeowner mortgages; they are landowner / developer mortgages. The assignments lock in the home owners until title deeds are issued – which can take 30 years (!).
The Banks’ writ of summons request the courts for permission to sell repossessed properties to anyone for any price regardless of value. How, prey, is that helping the economy when properties are off-loaded to connected persons at an undervalue? How is that helping homeowners whose negative equity will never recover because of over-supply in the market (because of unscrupulous Bank / developer (and solicitor) activity?
There may be strategic defaulters but there are many people who are truly suffering – including employees of the Banks who have toxic borrowing. There are unfair terms in all Bank contracts. There will, possibly, be unfair terms in the ESTIA contracts. Of course the government will have made sure there is not (!)
There is no way for an ordinary sole to check that interest is being charged correctly on the accounts – notwithstanding that the unlawful 360 day interest rate is being used (declared unlawful in 2006 by the way) which means that the borrowers are paying more than lawfully required. The 20% discount is probably less than they are legally entitled to anyway, based on the overpayments and mistakes.
The whole thing is a bugger’s muddle but the Banking System, the Regulators and the Government must shoulder most of the blame, but of course they are made of Teflon. Unfortunately, it will always be the ordinary folk who pick up the tab.
Dear Cyprus: Issue title deeds at point of sale, simplify the contracts and learn the meaning of, and apply the principle of “good faith” and perhaps normality may resume in 60 years or so when all the people whose lives are being ruined are dead. ?
Anyone signing up for ESTIA should seek independent financial advice – do not rely on the Bank’s solicitors or any connected solicitor. Make sure your solicitor is acting in your best interests because there is nothing you can do if they don’t. The solicitors are not regulated, even though the system pretends they are. Read the terms and conditions of what you will be asked to sign even before you fill in the application form to make sure you are not wasting your time. Make sure you are not unconditionally giving up your consumer (or fundamental human rights). This is not a “gift”, and it could be another trap. Check the interest rates you are being offered and how they can be changed once you are trapped into the contract. Check your rights, but keep an eye on those obligations, because they are too often concealed in Cyprus. Banks and solicitors seem to be more equal than others.
Perhaps someone should send the contract to the CCPS (the government?) to get it vetted before it goes on general release. Prevention my friends, is way better than cure and it is a legal consumer protection obligation (much ignored in Cyprus). “Cure” is ugly, painful and expensive and the balance of power and the odds of success are quite firmly weighted against you. The “cure” will make you bitter, twisted and has the capacity to destroy you. It will eat your heart out. The system in Cyprus is designed that way. Oh – by the way – the assignments apparently mean that your outstanding debts (which are not recuperated from your estate) are bequeathed to your children. How many of you know that?
We should all write into our wills that the property and associated loan is bequeathed to the Bank / Cyprus Government!
Don’t sign up to Estia until you have negotiated directly with the Bank. They are offering better discounts directly and secretly, though you may have to appoint expensive legal counsel in order to achieve your goal. This may or may not be cheaper in the long run – perhaps this is why the take up of the scheme is low. Those in the know, know there are alternatives available. Vulnerable people are just reeled in. Make sure you know what you are paying up front and that you have a written contract with your legal adviser. Be careful.
To all of you living the nightmare .. Good luck.
And to British businesses who are thinking of, and being encouraged to move to Cyprus post Brexit with false promises by unscrupulous lawyers – be careful. It is a fantastic place to invest if you want to lose money quickly. Interest rates are the highest in Europe and a case in the court may take 7 years (or more) to first hearing which will be in Greek of course.
No amount of sunshine, low taxes and European Access will negate that. If you decide to make the move, make sure you really know what you are letting yourself in for and don’t, under any circumstances, buy a house or business premises without title deeds. Unless you get one of the many property bargains for sale to any person at any price cheap enough to be able to walk away if you need to, it is my belief (and experience) it is financial suicide that will ruin your life and poison your relationships.
Caveat emptor. Here endeth the lesson.
I will have to side with finance minister Georgiades on this, the docs required to complete / furnish are on a par with those needed to get low income benefit…I bet my bottom dollar that the low uptake is due to the fact that the particular persons have things to hide in terms of assets, savings etc….how else can you explain turning down the chance of having your mortgage in essence slashed?
Either way the honest taxpayers will get the short straw again…
What an appalling state of affairs!
But WHY are we Surprised?
Much of the culture re Borrowing was easy-peasy via local, friendly, helpful Bank. managers.
Manyana Mortgages !
So, for most, Why Bother now?
Another Gr8 big HOLE in Cyprus finances!!
Don’t hold your breath, folks…they’ll find a way of s t r e t c h I n g things!!
Doubtless the EU will be asked to subsidise.
Nigel – I doubt many Lenders even suggested Mortgage Insurance?
Mx
It is not Government money. The Government has no money, its income comes from the honest taxpayer, business and industrial rates that it applies.
Taxation is dead money it represents no investment or potential to create jobs.
People who take loans should be responsible for their own debt. In financing debtors and their creditors the Government do the rest of the country and responsible people who pay their way a disservice.
Ed: I often wonder why people don’t take out Mortgage Insurance – it would save the taxpayer coughing up!