MPs told tinkering with foreclosures threatens whole system

Despite dire warnings from the government and the Central Bank, MPs on Monday decided to send on to the House plenum for a vote four legislative proposals amending the foreclosures framework.

The four bills will go to the plenum on July 6. But in parliament, it quickly became apparent that the rules governing property repossessions have many moving parts, and that tinkering with them could unravel the system.

One of the bills – co-sponsored by Disy and Diko – provides that a foreclosure memo sent to a debtor should include information about the amount owed to the bank. Here, neither the finance ministry nor the Central Bank had any objections.

The other bill which authorities had no problem with, concerned Akel’s proposal on property-for-debt swaps at the market price rather than the forced sale price. The finance ministry said it agreed with this, but proposed an exemption for the ‘mortgage-to-rent scheme’ – yet to be rolled out by the government.

Giorgos Panteli, the finance ministry’s permanent secretary, tried to allay the concerns of Akel MPs who suspect the government wants to stonewall their bill with promises of a government scheme that may never come. He said the ‘mortgage-to-rent’ scheme has already received the thumbs-up from the EU, and that it’s expected to be published soon.

But both the government and the Central voiced major reservations about the two other bills tabled by the parties.

One of these bills – a joint proposal by Akel, Diko, Dipa, Edek, Elam and the Greens – would allow debtors to secure a court order setting aside a repossession process until a determination is made on the exact amount owed to the bank. Authorities warned of the risks this could pose to the stability of the banking system and to state revenues.

Kleanthis Ioannides, a Central Bank rep, said there appears to be some complacency about the 9 per cent of non-performing loans (NPLs) in the Cypriot banking system. Some think that this ratio is low, but it is in fact quite high, he argued – the EU average stands at 1.8 per cent. He further noted that the European Central Bank considers a bank as high-risk when it has NPLs over 5 per cent.

The official also said that a deterioration in the legal framework governing foreclosures can lead to an increase in bank capital provisions, in turn affecting provisions for NPLs.

Weighing in, the finance ministry’s Panteli said that indefinitely suspending foreclosures proceedings would significantly impact the state as it would jeopardise the recovery of NPLs by Kedipes, the successor entity to the defunct state-run cooperative bank.

Panteli said credit rating agencies always factor in the presence – or absence – of an effective foreclosures framework.

“If we go ahead with such a proposal, it will adversely impact our access to money markets,” he told MPs, explaining that it would become more expensive for Cyprus to borrow money.

The official also cited European Commission assessments, according to which high private debt – reflected in the level of NPLs – constitutes one of the largest imbalances in the Cypriot economy.

A representative of the attorney-general’s office said the bill in question poses a double problem – of constitutionality and rules of procedure – since it would allow parliament to interfere in jurisprudence.

MPs queried the government as to the status of a bill which would set up special courts fast-tracking foreclosures cases. The finance ministry replied that the bill has already been discussed twice at the cabinet, and should be announced at the next cabinet session.

The Central Bank rep said that, as at March 31 this year, 36 per cent of NPLs in the banking system were loans in arrears for more than five years. And of these, 26 per cent were loans in arrears for more than seven years.

Responding to an MP’s question, the same Central Bank rep said the total amount of NPLs secured by primary residences (worth under €350,000) came to €530 million.

The financial ombudsman jumped in, calling this data “wholly inadequate, if not misleading”. He called for the creation of a database with information on the amount of loans for which courts have issued a foreclosure ruling.

“Unless we have sufficient data, we can’t work properly,” he noted.

Finally, the fourth bill heading to the plenum is a proposal by Edek MP Marinos Sizopoulos. It provides that a repossessed property be auctioned off at the value of the property at the time of the initial mortgage contract.

In remarks later, Disy MP Onoufrios Koula pointed out the discord between the administration and the pro-government parties in parliament. On such a crucial issue concerning financial stability and the economy itself, there was no consensus between the government and the parties backing it.

For his part, Akel’s Aristos Damianou said Monday’s debate “debunked the scaremongering about a possible collapse of the banking system.”

He added: “Either the government will accept the human and constitutionally enshrined right of people to take legal recourse in seeking justice, or else it must acknowledge that there exists no rule of law in the Republic of Cyprus, and on the false premise that the banks are in danger.”