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15th August 2022
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HomeLegal MattersNew lifeline for defaulted borrowers

New lifeline for defaulted borrowers

Cyprus is to throw another lifeline to distressed borrowers to help them keep their homes following its ESTIA scheme for toxic mortgages, which failed to cover all applicants.

This time, the Finance Ministry is preparing to launch a mortgage-to-rent scheme aiming to bail out borrowers with a first home or an SME linked to a loan with a Cypriot bank or other credit acquiring company.

The scheme has a contractual value of €3 billion, for which authorities have already requested approval from Brussels’ Directorate-General for competition, as it is considered state aid.

The Finance Ministry’s request to the European Commission involves the transition of the state-owned Asset Management Company (KEDIPES), the former Coop Bank, to a bad bank entity which will be given the authority to absorb toxic loans from other institutions.

If approved, KEDIPES will launch a call to all banking and credit acquiring institutions to pass on toxic loans through a mortgage-to-rent scheme.

According to sources from the Finance Ministry, the scheme will cater to thousands of borrowers who have defaulted on their mortgages.

The scheme will cover non-performing loans collateralised by primary residences and primary businesses, mainly SME premises, with a value up to €350,000.

Beneficiaries will be people belonging to low-income groups and pensioners, regardless of whether they had applied to join the ESTIA scheme or not.

The program will also include borrowers who have defaulted on their mortgage but saw their application for the ESTIA scheme rejected, as they were classified as unviable due to their low income.

People with loans from the former Coop Bank, which have remained with KEDIPES, and defaulted borrowers of the state-funded Housing Finance Corporation, will also be eligible for the mortgage to rent scheme.

It has already been given an initial thumbs up by the competition authority under the European Commission, with several teleconferences slotted in for next week.

The project is dependent on the authority’s ruling, as it involves state aid.

It is expected to be greenlighted by the EU as it is a social welfare plan, falling under the government’s action to combat rising inflation and reduce a ‘mountain of private debt’.

The source told the Financial Mirror that Finance Minister Constantinos Petrides would meet with political party leaders to lay out the plan’s details next week.

“An important aspect of the plan will be the protection of the first home of vulnerable households with non-performing loans in various financial institutions,” said the source.

Brussels is expected to enable KEDIPES to purchase non-performing asset-backed loan portfolios from credit card companies, which have been bought from Cypriot banks.

The plan is for KEDIPES to acquire the properties tied to the mortgage at 50% to 60% of their current value.

“This way, the debtors would maintain occupancy of the property but not its ownership. In exchange, the outstanding debt would be written off.”

Borrowers will then be given the option to stay in the property, paying rent equal to 2% or 3% of its market value.

Rent will be adjusted annually based on a formula to be decided, while borrowers will have the option to state aid in case of any increases they cannot meet.

It will entail a 15-year payment duration, while borrowers could submit a proposal to acquire the property after five years.

The going price of the property for indebted borrowers will be the price KEDIPES acquired the property for minus any rents paid.

In case the debtor is not able to buy the property back, either because they do not have the resources or have passed away in the meantime, family members have the right to buy the property under the same conditions.

After five years, KEDIPES could sell the property if the terms are not met.

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