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