Foreclosure protection for deed-less buyers

George Psyllides
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18
Foreclosure protection for deed-less buyers

Foreclosure protectionPARLIAMENT urged the government on Wednesday to find a solution for people who bought houses from insolvent developers without acquiring title deeds and who risk losing their properties even though they may have already paid for them in full.

The issue was raised during discussion of a bill tabled by main opposition AKEL to ban foreclosures in such cases.

“There is an emergency situation in the real estate market and people who meet their obligations are at risk,” AKEL MP Giorgos Loukaides said.

Many buyers are now in trouble as the crisis continues and property developers fold.

The developers’ land and buildings are counted as assets that need to be offset against their debt to banks, which gives lenders a claim on people’s properties that had been mortgaged by the developers even if the purchasers had paid the developer for them in full.

The banks readily lent to property developers, especially between 2004 and 2008, fuelling an unsustainable frenzy of activity which roughly tripled prices.

The outdated legal framework enabled property developers to sell on property that was already mortgaged.

Land registry official Charalambos Charalambous told MPs that issuing title deeds would not solve the problem since the developer’s mortgage takes precedent over that of a borrower.

A finance ministry official said a team of technocrats from the ministry, the Central Bank, and the land registry would assess the problem and the cost of these loans by the end of May.

She said the ministry was trying to find solutions but cautioned that AKEL’s bill provided an incentive to those who bought a house through a sales contract to never seek to acquire a title deed in an attempt to avoid foreclosure even where it might be warranted.

Editor’s comment

The Memorandum of Understanding (MoU) that has been agreed between the Cyprus government and the Troika of international lenders refers to this particular issue in Section C – ‘Legal framework for private debt restructuring’, paragraph 1.31. Namely:

The Task Force on registered, but untitled, land sales contracts will, by end-September, finalise a study assessing the magnitude of registered, but untitled, land sales contracts and underlying mortgages, in close cooperation with the working group reviewing the issuance of title deeds under the MoU provision 5.3. Based on this assessment and the recommendations developed so far, the Task Force will coordinate the work of the authorities involved and develop, by end-October, an action plan addressing at least,

(1) the removal of administrative hurdles for the transfer of title,

(2) the provision of tools to encourage the release of encumbrances on properties to facilitate title transfer, and

(3) the development of contractual standards for land sales contracts and connected loan and mortgage arrangements.

Opposition slams insolvency bill

Nigel Howarth
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15
Opposition slams insolvency bill

Opposition slams insolvency billTHE FIFTH and final bill of the insolvency framework, a crucial element for the implementation of the foreclosures legislation, will be discussed at a joint meeting of the House Finance and Interior committees today.

Ruling DISY party MP Andreas Kyprianou said that the bill satisfies many of the opposition parties’ concerns and noted that it has to be approved by Parliament so that Cyprus can join the ECB bond purchase program as well as secure the next tranches of its bailout loan from the troika of international lenders.

But the draft bill, which was approved by the cabinet last Friday, has been slammed by opposition parties AKEL and EDEK who claim that it does not offer complete protection to vulnerable home-owners and others who are unable to repay their loans.

Deputy Parliamentary Spokesman for AKEL Stavros Evagorou said that his party will not back down on its position of protecting primary residences, SMEs and loan guarantors – adding that AKEL will submit an amended bill.

EDEK considers that there are both positive and negative aspects to the bill and that it will introduce amendments to protect primary residences and SMEs if necessary.

DIKO MP Angelos Votsis described the bill as “complex” noting that some of its terms will result in the mandatory restructuring of loans under certain conditions while providing a way out for loan guarantors.

The European Party said that people should not fall prey to the banks for a second time and that the insolvency framework must protect them effectively.

The Green Party stressed that the protection offered by the bill contains a number of loopholes that could result in mass foreclosures.

Meanwhile Pierre Moscovici, EU Commissioner for Economic and Financial Affairs, told reporters at a Eurogroup press conference on Monday that Cyprus has to implement the foreclosure law without delay.

“On Cyprus, I would also like to again stress the importance of implementing without any further delay the Foreclosure Law, which has been suspended again recently by the Cypriot Parliament. The entry into force of this law is an essential precondition for addressing effectively the problem of non-performing loans, which is the main challenge for the Cypriot economy at this time.

“We all recognised that Cyprus has made impressive progress in building a new and more sustainable basis for jobs and growth over the past two years. It would be a great pity if this progress were slowed due to this one issue. I understand that the adoption by the Cypriot Ministerial Council and tabling to Parliament of the Insolvency Bill should help to expedite this process, and I hope that this will be the case and that the programme will soon be on track.” he said.

Banking and real estate intertwined

George Mountis BSc, MSc, Ph.D
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3

Banking and real estateTHE STABILITY of the Cypriot banking system is highly correlated to the real estate sector as past and current lending practices of local financial institutions have amplified both the upturn and the downturn of the Cyprus real estate market.

On one hand, the large credit expansion of the years 2006-2008, especially in the real estate sector, was instrumental in fuelling the overheating of the property market during that period. On the other hand, when demand from domestic and foreign investors collapsed post 2008 and prices took a significant hit, the banking sector was faced with an unprecedented situation due to the skyrocketing of non-performing loans (NPLs) that were collateralised by real estate, resulting in extreme lack of credit, which in turn amplified the fall in demand for real estate.

To date, loan origination remains at extremely low levels and consequently the ability of buyers to buy property is limited and property prices remain depressed. This is what is often described as the “cyclical” effect of the lending criteria and policies employed by the Cypriot banks. It is obvious now that during the inexorable rise in property prices in the period 2004-2008, the banks in Cyprus “underestimated” the credit risks implicit in mortgage loans. This could be attributed to various reasons, including the lack of sophisticated systems of risk assessment and the lack of reliable data and information. But the main reason is that the continuous increase in property prices created a false sense of security in Cypriot banks, which in turn led to the rapid credit expansion in the island’s housing market. This is the classical myopic expectations view, which is one of the main factors driving cyclical movements in real estate markets.

These myopic expectations were among the main reasons that kept property prices increasing rapidly up to the Q3 2008, but also kept prices falling after the beginning of the global financial crisis as international investors stepped back in the side-lines expecting further deterioration of demand and prices.

The sharp decline in property prices and the depreciation of mortgaged properties has led to the significant deterioration of the loan portfolios of domestic banks and increased the credit risk and bank capital requirements. The shortage in the supply of credit by the banks has reduced the demand for properties by home buyers and investors alike, further reinforcing the downward trend in property prices.

The Central Bank of Cyprus (CBC) and the local banks have to consider the consequences of the property price declines and the re-pricing of their portfolios and adapt their policies accordingly. In order to do this in the most effective way, data for all mortgaged properties need to be collected and appropriately analysed. For example, using such tools, the geographical concentration and other characteristics of problematic properties/mortgages can be identified, allowing the risk assessment to the sale/ divestment of specific types of properties and specific areas.

The demand for properties has become more vulnerable to the fluctuations of prices because of the banking system influence. Theoretically, the decision of granting a loan must be based on long-term projections regarding the future value of the financed property until the repayment of the loan. Also, the repayment ability of the borrower has to be assessed and seriously considered. The lack of adequate information for assessing and evaluating prevailing market trends and possible future prices, however, prevents a correct evaluation of requests for mortgage loans. The funding decisions as a result, are primarily based on the prices of similar properties at the time of the loan request.

The experience from international markets indicates that property prices are subject to considerable fluctuations, which may or may not coincide with the “economic cycles”. Due to the strong link between credit availability and effective real estate demand, these fluctuations are amplified and become much more intense due to policies applied by credit institutions, when these are of cyclical nature. For this reason, monitoring recent trends and assessing most likely medium term movements in property prices should be of direct interest to the monetary and supervisory authorities. As the recent experience from the domestic financial crisis has shown, the sharp decline of property prices can have a severe impact on the banking sector and the real economy of the country. It is no surprise that under these circumstances both the authorities and the banks are reviewing their credit rating systems and their methods of monitoring mortgages/properties so as to better manage their portfolios.

Overall, the experience of the past seven years has shown that the banking and the real estate sectors in Cyprus are strongly interlinked and that the restoration of the health of the banking system is vital and necessary for the sustainable recovery of the real estate market. We expect that the passing of the foreclosure law will pave the way for the gradual recovery of the banking sector but also mark the beginning of the bottoming-out process in the Cyprus property market within the next 24 months.

Dr George Mountis is the Managing Partner of Delfi Partners & Company

T: +357 22 503152 | D: +357 22 503182
M: +357 99 494142 | F: +357 22 503113
E: [email protected]

Optimism over insolvency framework

Nigel Howarth
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10
Optimism over insolvency framework

Optimism over insolvency frameworkTHE CABINET has approved the last of the five bills comprising the insolvency framework, which includes details of guarantors’ obligations in respect of the debt.

The final bill, which was approved on Friday, covers personal repayment schemes (consensual or imposed), which protects primary residences from seizure under certain conditions and the role of guarantors, repayment schemes and debt-relief orders.

Consensual personal repayment scheme

A licensed insolvency practitioner will prepare a consensual personal repayment scheme on behalf of the borrower and will apply for a 70-day execution proof court order giving them time to prepare the proposal. However the borrower will be unable to request a personal repayment scheme if more than 25% of the debt was incurred during the six months prior to their application.

The lender is obliged to accept the repayment scheme, which may last for up to 5 years, taking into account “reasonable living expenses” issued by the Commerce Ministry.

The personal repayment scheme will maintain lenders in the same or a better position had they foreclosed on a property.

Primary residences will not be repossessed if the value of the home is below €250,000, the debt does not exceed €300,000 and other property assets do not exceed €250,000. In addition, the borrower must be able to prove a loss of income of at least 25% “for reasons beyond his control” (as a result of the financial crisis.)

When protecting a loan defaulter’s primary residence, the insolvency practitioner must consider four factors:

  • The cost of keeping the primary residence, including maintenance, taxes, and insurance.
  • The borrower’s income.
  • The ability of others living in the house to contribute to repayments.
  • The needs of the borrower and his family and the cost of alternative housing arrangements.

Imposed personal repayment scheme

Personal repayment schemes may be imposed on a borrower by a court. They will remain inforce for three years and may be renewed on expiry.

As with personal repayment scheme, imposed repayment schemes will maintain lenders in the same or a better position had they foreclosed on a property.

The borrower’s income exceeding “reasonable living expenses” has to go towards servicing the debt. In addition, all the other borrower’s assets have to be taken into account, with the exception of liquid assets worth less than €35,000 and income generating properties.

Guarantors

The fifth bill also enables lenders to pursue loan guarantors for payment, but restricts the amount they may claim to the difference between the assessed value of the collateral and the size of the loan they guaranteed. E.g. If the unserviced loan amounts to €100,000 and the collateral (property) is valued at €80,000, the guarantor will pay €20,000.

The lender may also pursue loan guarantors for up to two years following the implementation of the repayment scheme.

A guarantor may also take action against the borrower for the amount he may be required to repay.

Coordinated repayment schemes

Coordinated repayment schemes relate to small businesses that employ less than 10 staff and which meet the criteria for personal repayment schemes (above), in which the owner of the business has used their primary residence as collateral for their business’ loan.

An examiner will be appointed to review the borrower’s finances and propose a settlement, which will need to be confirmed by a court.

Debt-relief orders

Borrowers whose loans do not exceed €15,000 may request the Insolvency Service to issue a debt-relief order. The borrower has to demonstrate insolvency for at least two years following their request, their income levels over and above “reasonable living expenses” should not exceed €100 and assets protected during the bankruptcy procedure should not exceed €400.

Debt-relief orders will be issued for a two-year ‘monitoring period’. On expiry the borrower and their guarantors will be relieved of any obligation.

Cyprus Bar Association in the dock

Nigel Howarth
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10
Cyprus Bar Association in the dock

AN ACTION Group is being formed whose objective is to bring a formal legal complaint against the Cyprus Bar Association in the European Commission. Those who may be interested in joining the Group should get in touch via my ‘contact page‘.

Many readers who have paid a lawyer may not realise that legal fees in Cyprus for non-court work are often much higher than in other European states.

The Cyprus Bar Association maintains a system of minimum fees for out of court work including Wills, powers of attorney, property transactions and the administration of estates which inflates charges, prevents fair competition, and exists nowhere else in Europe.

An Action Group is now being formed to stop this abuse through a formal legal Complaint to the European Commission against the minimum fees regulations and the role of the Cyprus Bar Association in enforcing them. High level specialist Counsel in London has advised by written Opinion that the fee regulations clearly breach European law and in particular the provisions of Article 101 of the European Treaty.

In response to a Complaint, the European Commission has the power to:

  1. declare excessive fees calculated under the fee regulations to be unlawful,
  2. fine the Cyprus Bar Association up to 10% of its annual income and require it to cease any future action to fix or control fees charged by lawyers.
  3. provide the basis for private recovery actions in the Courts by overcharged clients.

The next step is to prepare a fully argued Complaint to the European Commission setting out the detailed arguments and law involved.

The Action Group is being advised by Mr Robert O’Donoghue of Brick Court Chambers and by BPE Solicitors LLP

Action driven from the UK

For obvious reasons the chances of finding a lawyer in Cyprus who is prepared to progress any action against his Bar Association at the European Commission will prove ‘difficult’. It will probably prove even more ‘difficult’ to find a lawyer in Cyprus who is willing to take one of his colleagues to court to claim overpaid fees!

Legal precedent

In 2004 the European Commission condemned the minimum fee scale imposed by the Belgian Architects’ Association. The Commission considered that the fixing or recommending fees to be a “very serious infringement” and fined the Association €100,000.

Contact

Those who may be interested in joining the Group should get in touch via my ‘contact page‘.

Problem housing loans below 10 percent

Nigel Howarth
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8
Problem housing loans below 10 percent

Bank of Cyprus problem housing loans below 10 percentBANK OF CYPRUS’ problematic housing loans account for approximately €1.2 billion (9.4%) of its total non-performing loans of €12.7 billion and just 10.2% of its non-performing loans in Cyprus.

According to the bank’s preliminary results, housing loans are its best performing category of loans as regards the level of non-performing loans.

At the end of last year housing loans totalled €4.4 billion accounting for 21% of the bank’s total loans in Cyprus, which amounted to €21.2 billion.

Non-performing loans in Cyprus for the other categories reported by the bank are considerably higher:

Corporate NPLs 61.4% (€6.2 billion)

SME NPLs 65.9% (€3.0 billion)

Retail (non-housing) NPLs 50.1% (€1.1 billion)

The Greek-language newspaper Politis, reported that 30 big debtors from 45 companies had non-performing loans amounting to €5.26 billion with the Bank of Cyprus; half of all the non-performing loans held by the bank.

The CEO of the Bank of Cyprus has said on numerous occasions that the bank would not pursue mass foreclosures on vulnerable members of society.

On Thursday, opposition parties once again voted to delay the suspension of the foreclosures legislation; this time until 19th March. However this time saying that the suspension was to allow them time to study and pass the five bills comprising the insolvency framework, which is seen as a safety net for distressed borrowers who have pledged their homes and businesses as collateral.

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