Cen­tral Bank di­rec­tive fails to de­ter­mine prop­erty-against-loan op­tion

Financial Mirror (Cyprus) - - FRONT PAGE -

Among other things nowa­days, the Cypriot in­vestor can­not help but won­der whether real es­tate prices will con­tinue to dive; if the leg­is­la­tion reg­u­lat­ing fore­clo­sures will see many prop­er­ties be­ing auc­tioned; or, whether in­ter­ested buy­ers will man­age to se­cure bank loans on good terms to pur­chase a prop­erty. With all th­ese in mind, what should one do? Play the wait­ing game or go ahead with a pur­chase?

The fore­clo­sures leg­is­la­tion and its stip­u­la­tions have been in force for some time now. We be­lieve that if a bank en­forces the law it should take 4-5 years to com­plete the pro­ce­dure, rather than the 18 months orig­i­nally de­manded by the Troika of in­ter­na­tional lenders. We also know there is a huge num­ber of non-per­form­ing loans (NPLs), adding up to about 50% of over­all loans within the bank­ing sys­tem.

The cor­rect man­age­ment of th­ese NPLs will de­ter­mine whether the fu­ture of banks and the econ­omy at large are vi­able.

The Cen­tral Bank of Cyprus has cir­cu­lated a multi-page di­rec­tive out­lin­ing the course of ac­tion for NPLs.

This pro­ce­dure fails to ad­dress an im­por­tant op­tion: while banks are will­ing to dis­cuss var­i­ous loan pa­ram­e­ters with their clients, they avoid tak­ing the op­tion of ac­cept­ing a prop­erty against the loan.

Our in­dus­try’s sug­ges­tion is ex­actly this. The bank and the bor­rower must se­ri­ously con­sider this op­tion – i.e. of the bank buy­ing the mort­gaged prop­erty at the mar­ket value in ex­change for equiv­a­lent re­duc­tion of the loan. The mar­ket price will be es­tab­lished by two in­de­pen­dent eval­u­a­tors (ac­cord­ing to the fore­clo­sures law), one cho­sen by the bank and one by the bor­rower.

Ac­cep­tance of the above op­tion would have the fol­low­ing ben­e­fits:

1. The bank would not have to wait for at least four years for the auc­tion sale, at the end of which the prop­erty price might be sig­nif­i­cantly lower than the cur­rent one.

2. Many NPLs will never make it out of the red zone. In th­ese cases, our sug­ges­tion is the only op­tion beyond the auc­tion­ing of the prop­erty. It is eas­ily un­der­stood that if there are mass auc­tions, real es­tate prices will drop sharply. This will cre­ate the need for re­cap­i­tal­i­sa­tion of fi­nan­cial in­sti­tu­tions. We are cer­tain that banks would not want to walk down this road. They might follow the pro­ce­dure in ex­treme cases, when clients do not co-op­er­ate.

3. No­body wants the banks to end up own­ing nu­mer­ous prop­er­ties as this is not part of their business. How­ever, they could func­tion as prop­erty own­ers, but only for a short pe­riod of time.

They would aim to group th­ese prop­er­ties and of­fer them to in­vestors or choose to sell them when the time is right. The Cen­tral Bank is giv­ing banks a 3-year grace pe­riod to sell th­ese prop­er­ties but a small ex­ten­sion, if needed, would not be the end of the world.

We know that our propo­si­tion might not be con­sid­ered the best bank­ing prac­tice, but tak­ing into ac­count the cur­rent eco­nomic cli­mate, it might be the best op­tion both for the banks as well as the non-per­form­ing bor­row­ers. The bor­row­ers will have less bur­den­ing de­mands to hon­our, in­ter­est will stop adding up and banks will own the prop­er­ties which they can man­age as they please for profit from in the short term and sell in the medium term.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.