ESTIA fails to attract hard-up borrowers

Complicated and costly application process means 97% of those eligible have stayed away

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 borrowers 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 nonperforming loans up until September 30, 2017. The plan only applies to vulnerable borrowers whose market value of their home does not exceed EUR 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 EUR 110 mln from a total toxic reservoir of EUR 3.4 bln 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.”

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 EUR 815 mln over 25 years, allocating a budget of EUR 32 mln each year. The total value of restructured loans eligible for the scheme amount to EUR 3.4 bln.

Applicants must also meet income criteria to be eligible to join the scheme:

Total family income should not exceed EUR 60,000 for each calendar year for a family of at least four children, EUR 55,000 for a family of three dependent children and EUR 50,000 for a family with two, and EUR 45,000 for a family with one dependent child and EUR 35,000 for a family with no dependent children and EUR 20,000 for a household of one.

The same criteria apply to single-parent families.