Fore­clo­sures and buy­ers - where to from here?

Financial Mirror (Cyprus) - - FRONT PAGE -

With the im­ple­men­ta­tion of the law, the free trans­fer by cred­i­tors of the prop­er­ties should now be en­forced, be­cause the at­ti­tudes to­day by some bankers/fi­nanciers is not to al­low the free trans­fer even if a trans­fer re­lease has been is­sued, or if a bank guar­an­tee has been is­sued for the trans­fer (thus, in ef­fect, break­ing the law).

The ques­tion that re­mains is, although the banks will not be able to fore­close on the prop­erty that has been fully paid, they should al­low trans­fers if the buyer has paid the 100% of the sales price, as well as the rel­e­vant mu­nic­i­pal and prop­erty taxes.

The log­i­cal way to pro­ceed is for the fi­nanciers to al­low trans­fers, by de­duct­ing mort­gages and re­mov­ing any pending ‘memo’ on spe­cific prop­er­ties, since they will no longer be able to fore­close any­way. This way, the lender is not worse off ac­cord­ing to the law.

Here, there might be a prob­lem as it makes sense for fi­nanciers to stop lend­ing as they will not be able to fore­close on mort­gages. But this is a fu­ture con­cerns of lenders (and does not pre­cede the new law), who should ex­ert stricter con­trol over the de­vel­oper’s rev­enues from sales, and that they were in­deed re­ceived, placed in the project’s ac­count and dis­bursed only with the ap­proval of the bank (eg. for use by the civil en­gi­neer where there are works). Any sur­plus in­come or cost per unit should be re­tained by the bank un­til the com­ple­tion of the project. This way, if there are un­sold units at the end, the sur­plus in the ac­count should be used for other costs (in­clud­ing prop­erty, mu­nic­i­pal and in­come tax, etc.).

This new leg­is­la­tion will also put banks on a more sus­tain­able foot­ing as re­gards new projects and buy­ers/sell­ers, where:

i. where it is fi­nanc­ing the de­vel­oper there should be closer mon­i­tor­ing of costs and rev­enues ac­cord­ing to a bud­get con­trolled ei­ther in­ter­nally by a team from the bank or by ex­ter­nal con­sul­tants who will act on be­half of the bank.

ii. When fi­nanc­ing buy­ers where the seller is also the guar­an­tor as part of the so-called “cor­po­rate guar­an­tees”, the guar­an­tor should also par­tic­i­pate in eval­u­at­ing the buyer, since un­til now the bank used to eval­u­ate the bor­rower and disregarded the guar­an­tor, throw­ing the re­spon­si­bil­ity onto the guar­an­tor, but with al­low­ing the guar­an­tor to eval­u­ate the buyer.

iii. Any non-ful­fill­ment of the pur­chaser’s obligations, who in the mean­time has sub­mit­ted the ti­tle deeds and there­fore the guar­an­tor can­not get back the sold unit to re­sell and thus cover the guar­an­tee, is great injustice against the seller. There­fore, with some reg­u­la­tory changes, the can­cel­la­tion of the de­posit and the re­cov­ery of pos­ses­sion by the guar­an­tor with ‘va­cant oc­cu­pancy’ (there are sev­eral tricks that cur­rently ap­ply to pur­chasers) should be done au­to­mat­i­cally and with­out long court pro­ce­dures, pro­vided that the seller has ful­filled his obligations. Thus, the seller can also be cov­ered for his guar­an­tee. As the word­ing of the ‘cor­po­rate guar­an­tee’ cur­rently stands, which is com­mon to all lenders, the buyer re­tains pos­ses­sion, col­lect any rents etc. and the guar­an­tor (seller) is called to cover the debt of the bor­rower, but with­out be­ing able to re­pos­sess the prop­erty, to re-sell ei­ther by auc­tion or oth­er­wise, and to re­turn any dif­fer­ence to the buyer or bank.

iv. At present, the method­ol­ogy for mort­gages and guar­an­tees does not take into ac­count of any vari­a­tions in prop­erty prices. When prices are on the rise there is no par­tic­u­lar prob­lem, but if they are fall­ing (as it is now), any dif­fer­ence would have to borne by both, i.e. the bank/seller/de­vel­oper, and the buyer. This could mean a higher risk for lenders and may be re­flected in the level of in­ter­est or col­lat­eral.

Th­ese and other is­sues are in need of fur­ther dis­cus­sion, but the is­suance of ti­tle deeds needs to be put on a new ba­sis with sim­ple pro­ce­dures and not as it is to­day. With the fail­ure of the con­struc­tion amnesty (which can be cor­rected by a sim­ple de­ci­sion of the Cabi­net), and the un­en­force­able prac­tice that ex­ists to­day, the pri­or­ity of the seller/lender should be the is­suance of ti­tle deeds. This is where the par­tic­i­pa­tion of the lender is nec­es­sary, and not the cur­rent trend of in­de­pen­dent fore­clo­sure. This is to the ben­e­fit of lenders which is why there are re­ports of mass fore­clo­sures. For ex­am­ple, if there is a sin­gle project with 30 units and no ti­tles, who will buy them? While if there are 30 sep­a­rate ti­tle deeds it is safer for all, thus in­creas­ing their value while re­duc­ing the risk for ev­ery­one. This will also help to avoid the so-called mass fore­clo­sures and the sale of mort­gage port­fo­lio to third par­ties.

We will con­tinue to mon­i­tor the de­vel­op­ments.

www.aloizou.com.cy ala-HQ@aloizou.com.cy

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