To the Rescue: How mortgaged homes may be protected – an alternative
The Grim Facts Cyprus ‘boasts’ the highest private debt level, as a ratio of debt over Gross Domestic Product, across the world (World Bank data, 2015)! According to the Central Bank of Cyprus’ ‘Household and Non-Financial Corporations Indebtedness Report’ (April 2017), total private debt (the sum of household and corporate debt) is equal to 273% of GDP. Household debt, in isolation, was equal to 124% as opposed to the Euro zone average of 59%. Total non-performing loans (NPL) in the Cyprus economy is just over €23 billion in the private sector (households and corporate businesses excluding government and financial corporations) representing around56% of household and corporate total debt (as per the latest Central Bank of Cyprus data). No further breakdown analysis is provided but we do know that housing loans were equal to approximately €11,5 billion as at the end 2016 and represented over 55% of total household debt. Housing loans are typically almost always collateralized by a first charge on the underlying residence.However, encumbering the household residence is not exclusive to housing loans. Admittedly, many other private loans, be it of a personal nature (for example consumer loans, student loans and so on), or of a business nature (for instance small, medium or large business loans, professional / freelancer loans and others), are very commonly secured by a mortgage on the shareholders’ home. It doesn’t take a genius to work out the maths. A very large proportion of local homes are encumbered in favour of banks and a sizeable part of these relates to loans that are non-performing. The Pressing Problemand its Explosive Repercussions The excessive private indebtedness in relation to the extremely high NPL ratios, combined with the significant proportion of homes which are charged as security for these loans, is like a bomb about to detonate. The road to NPL resolution and reduction has, to this date, proven slow and cumbersome, with more success exhibited insofar as corporate debt is concerned. Table 1 below is indicative of the trend. 
Most progress to date has been made via debt to asset swaps, mostly in relation to large corporate deals, and the run-down of deposits to reduce debt. Debt restructuring in isolation cannot really be sustainable long-term, and can actually be counter-productive, if the level of indebtedness is not adjusted, in some instances liberally, to match the true debt servicing capacity of borrowers. It would of course take much more than this to actually lead to a meaningful impact on the NPLs level: a joint-bank effort to resolve multiple-creditor debts, a concerted and disciplined approach to deal with the vast number of loans, possibly bringing in or utilizing outside expert skills and resources in sufficient numbers and, alternatively, other more unconventional actions such as outsourcing the management of these debts to shared debt servicing platforms, setting up an Asset Management Company and so forth. Notwithstanding the above, what this article is aiming at, is the substantial number of borrowers (households) who undeniably and categorically cannot service even part of their debts, despite their best intentions. It is not unfair to say that this may be the result of a mixture of events, past and present: - the economic downturn which has severely reduced incomes, - the acquisition of property at the top of the real estate market a few years ago, - our past (?) unsubstantiated optimism that we can always handle a lifestyle, and corresponding debt burden, which goes beyond our means, - situation-specific circumstances such as long-term unemployment, illness and disability, and - bankers’ excessive eagerness to provide new finance and achieve, often reward-related, business goals during the times when ‘growth’ was the only business word of any real meaning… So then, how do we deal with these borrowers-households from the business-financial angle on the one hand but also from the societal-ethical-communalperspective on the other? Dealing with Distressed Households Foreclosing on these borrowers is not really an option, unless of course they are uncooperative and are simply riding the wave of the, as yet, immature and ineffectual legal and enforcement frameworks, gaining time in the process. Not doing anything is of course not an option either. What then? The typical solutions offered to these borrowers such as extending the loan duration with a corresponding reduction in instalment, temporarily reducing or suspending scheduled instalments,or warehousing part of the loan for future payment whilst amortizing the remaining, lower part of the loan, may afford some breathing space to certain segments of the market but leave exposed a significant part of the market who find themselves in severe hardship. This hardship is often the result of household income loss due to long-term unemployment, illness or disability, relationship breakdown, over-indebtedness which simply goes well over one’s means, or a mixture of some or all of these factors. To top it off, many borrowers find themselves in severe negative equity or ‘under water’, in other words, the total debt which is secured,often via multiple charges, over the borrower’s home, exceeds the present market value of the property. Admittedly, the excessive level of existing indebtedness makes these householdseven more financially vulnerable when abnormal events unexpectedly come up, such as the need for a major capital investment (eg house repairs, a new car etc), the appearance of a serious illness etc. The essence of the matter is, that this specific segment of the market simply cannot sustain their debt. More specifically, these borrowers do not have the capacity to even partially service the debt over the long – term whatever typical solution is offered to them by the lender. Nor can it be reasonably expected that their situation will reverse so dramatically that it will give them some hope of being able to service the debt in the future. Although in certain instances, a borrower may be in aposition to ‘trade down’, that is to sell the home and buy a smaller one, of lower value, using the surplus proceeds to pay down a part of the debt, thus reducing the overall debt servicing requirement, this option is only open to an exceptionally few cases, whereby there is positive equity in the home and there is a steady income inflow which can sustain the amortization of a smaller loan. This ‘trade down’ scenario is really not open to the lower end of the housing market and is, in any event, further obstructed by the slow and illiquid housing market, whereby sales of second hand homes are taking back seat. Furthermore, the situation becomes even more complicated and unmanageable in those instances arising from negative equity and multiple debts, often from different lenders, and corresponding charges registered on the property. The recently implemented Home Protection Scheme, offered by the Cyprus Land Development Corporation (CLDC), affords only temporary and partial relief given that it subsidizes up to 60% of the mortgage instalments (capped at €10.000 per annum) for up to three years only. In addition to housing loans, the scheme covers mortgaged homes securing small business loans too; small businessesdefined,in this instance, as only those companies with an annual turnover of up to €250.000 and up to four employees. In conclusion, there are certain borrowers-households who need truly permanent solutions for their particular circumstances and needs which are not catered for by the typical schemes offered by banks or the CLDC. The social and economic impact of threatened and actual foreclosures, upon individual borrowers and their children, is immense and comes in a number of forms. Affected borrowers and their families typically suffer stigma, ill-health, breakdown in personal relationships and, commonly, family upheaval and friendship destruction given the intricate layers of personal guarantees in the local economy. Regrettably, children’s well-being and education also suffer as a result. Lenders, on the other hand, are impacted by the financial exposure but also, and possibly greater so,by a loss of reputation and an increasing hostility against them. Arguably, the true extent of the problem is not really known since the size of the vulnerable segment of the society is typically camouflaged by the web of family help and support but also by the social stigma which is attached to financial distress and homelessness. AnAlternative: a Permanent Solution If we turn our attention internationally, to sieve best practices from countries which have much more extensive experience in dealing with similar problems, we will typically find so-called ‘mortgage rescue schemes’ which have been set up with the laudable aim of helping the most vulnerable home borrowers at immediate risk of repossession. These schemes provide a supported and structured exit from homeownership for vulnerable households (Evaluation of the Mortgage Rescue Scheme and Homeowners Mortgage Support, The Centre for Housing Policy, University of York School of the Built Environment, Heriot Watt University July 2010, for the Department for Communities and Local Government, UK).According to this study, the overarching rationale for these schemes is twofold: - Avoid the desperation of families, adults and children, which arises out of the pervasive threat of homelessness and / or the stress of relocation or the stigma of personal bankruptcy and home repossession. - Alleviate the economic and social costs of repossession for both borrowers and lenders alike. The most common and most beneficial, in line with the peculiarities described above, of these schemes is the ‘mortgage to rent scheme’. Depending on a number of qualifying criteria, which revolve around household income measures, wealth benchmarks in the form of the value of total owned real estate or other assets, but also, in certain instances, around special societal circumstances such as long-term unemployment or disability due to physical or mental impairment, the borrower voluntarily surrenders possession of the home to a third party who will immediately rent the property back to the borrower. The nuts and bolts of the scheme such as the sale price, the rental amount, the rental tenancy duration and so on, may vary from scheme to scheme. Typically though, the sale price is at, or close to, the independently valued open market value of the property. Moreover, the rental amount is lower than the market rental rate, or it is customized according to affordability criteria, and the tenancy agreement usually offers renewal rights or may even last for 25 years, whereas in certain instances the borrower-cum-tenant may be given a buy-back option. Under any scenario, any remaining debt following the application of the sales proceeds towards reducing the secured loan, will have to be negotiated with the financing bank to be either written off or, if this not feasible, for a new manageable repayment programme which may include a write-down portion. The scheme should normallybe under the auspices of the Cyprus Government and could well come under the umbrella of the Cyprus Land Development Corporation and /or the Housing Finance Corporation and / or a new organization to be specifically set up for this purpose. The Perceived Benefits: A Win-Win Situation As already explained there may be a sizeable part of the population which is facing the financial threat of survival and homelessness. This part of the population is not easily identifiable for reasons already described, nor is it conducive to the conventional resolutions typically provided by banks. The proposed scheme has the potential to afford the key stakeholders the following significant benefits:
| Stakeholder Category | Perceived Benefit |
| Borrowers | - Protects households from the deprivation of their home- Provides relief from the uncertainty and stress of unsustainable debts- Enables life continuity for households and families without the inhumane pressures from the threat of homelessness, home-school-neighbourhood moving and all the psychological and reputational effects that this entails - Provides a buyer in a slow / distressed market - Achieves a sale at close to market value rather than a distressed sale, minimising the shortfall, or overhang debt, if in negative equity, for which the borrower would still be responsible under normal circumstances - Provides a trusted landlord at reasonable,usually below market value, rentals, and without the subsequent burden of property-related taxes, insurance fees, maintenance costs. |
| Lenders | -Financial and reputational cost avoidance of foreclosing, securing and maintaining property, legal costs of sale- Attraction of market value than distressed sale price, minimising potential debt shortfall- Avoids greater losses from negative equity and security, maintenance, insurance and management expenses if the property is swapped |
| Central Government | - Despite the potential financial cost to be borne by Central Government, the scheme should go a long way in fulfilling the State’s social policy for deprived citizens- The scheme may also directly or indirectly positively impact social benefit, health and education costs- The existence of the scheme may also indirectly influence lenders’ own forbearance policies, thus ultimately benefiting borrowers via more flexible bank-offered solutions without having to resort for the State’s support |
Adapted from: “Evaluation of the Mortgage Rescue Scheme and Homeowners Mortgage Support,The Centre for Housing Policy, University of York School of the Built Environment, Heriot Watt University July 2010, Department for Communities and Local Government, UK” In conclusion, the scheme described above would go a long way towardsdefusing the explosive mortgage bomb, by offeringa mutually beneficial and sustainable resolution to that vulnerable part of society in need and to financing banks respectively. This would, in turn, restore confidence and stability in the market and would fulfil the Government’s social and communal role, aiding the weakest members of society by easing their financial burdens without the need of re-location. This would be the springboard for the reinstatement of our fellow citizens’ well-being and prosperity. The scheme would bring back their sense of pride and their belief in life, following the long period of acute anxiety, when whatever they were earning was never enough to make ends meet and when the risk of losing their homewas ominously hanging over their heads at all times. Rennos Ioannides Financial Analyst / Insolvency Practitioner [email protected] https://www.linkedin.com/in/rennosioannides/
The way out of the above mentioned deficiencies is mostly concerned with initiating a coordinating political economy initiative, in the form of a scheme that could be enforced by the state in cooperation with the lenders (commercial banks) to reduce the current and future envisaged burden (financial, social and individual costs).
Writing off borrowers' mortgage liabilities that are unsustainable could be a temporary solution but a policy mix if decided by all relevant stakeholders could be an initial step in restricting economic repercussions.
Once all stakeholders have something to gain by the U.K's paradigm, referred in the article, could be feasible to implement while it further allocates, in some respect, horizontally, total costs identifying a remedy that it could be reliable in the long run. After the bulk of schemes put forward by the banks failed to restore a steady and relatively quick recovery on the NPL's, a new policy trial should be promoted.
Currently, what matters for the Cyprus economy is to enforce a resolution plan capable of minimizing total costs related issues and restricting the existing deadlock to restrain the financial system's impairment. The benefits referred are significant and can be a good start for confronting with the substantial distortions realized prior to the financial turbulence and kept on until now...
Best
Thank you for your insightful input. I am too of the opinion that circumstances and timing are now indeed mature for the State and lenders to start exploring alternative ways of assisting the financially weaker members of our society. I am pretty sure that the size of this segment of the society and the depth of their socio-economic, psychological and health stress are not fully known due to cultural reasons deriving from our close-ended society. It would be good to see the State initiating the discussion.
While I support and hope such ideas materialise, I am sceptical about what percentage of this segment falls into these two categories:
1) Those that in their current situation are genuinely looking for solutions but none exist and 2) Those who think even though (for whatever reason) they are now completely unable to maintain the current home and loan, consider it their "right" to keep it.
For the second group, doing nothing is proving a viable strategy so far, given the current legal framework.
Thank you for your comment.
The size of this part of the population is indeed unknown. However, my experience and the sheer size of private indebtedness lead me to the conclusion that this might be a sizeable part of the population. I have already alluded that due to socio-cultural reasons of our closely-knit society, the actual depth of the problem may be a well kept secret. You are right that a portion of the population may be taking advantage of the slow usage of the legal enforcement framework, but I cannot see this "limbo" going on for much longer. Banks will have to move to recover their debts sooner or later. The sooner the State, lenders and borrowers engage in meaningful discussions to explore alternative resolution strategies for those truly deprived, the chances of success will be maximized.
I could not read your complete article, I lost track .
The Lenders are unwilling to face the reality and take on the necessary write offs to allow the borrowers to return to debt servicing and the borrowers are unwilling to drastically deal with their financial problems by, exchanging assets for debt, selling assets, etc. Of course the one cannot come with the other. If a borrower wants to resolve his problematic loan, the bank needs to look into it and actually help him deal with it. In most cases we see the banks unwilling to cooperate and thus the problem just organically grows. Banks are unwilling to release property for sale, they are unwilling to take on assets and offer write downs but are always to ready to blame the borrower for inaction. The borrowers should have access to capital (yes through loans from other institutions) to repay/refinance their existing loans if their bank is unwilling to offer a restructuring option. It is often the case that the bank is willing to accept a lumpsum amount to decrease the overall exposure but the borrower has no real option as no other bank is willing to look into the option of financing that amount.
The government/CBC should force the banks to proceed with generous write offs in the cases where the loans cannot be serviced and the borrower has no other options. The banks are probably ready to sell those loans for 20% of the value but they refuse to do a 40% haircut to allow the borrower to repay it and keep his assets. Another huge issue that needs to be resolved promptly is the personal guarantees. In the past all the banks offered the exact same terms for a loan and that meant one should offer personal guarantees on top of the mortgaged property. That hinders the economy from growing as effectively everyone in Cyprus is indebted to the bank for whatever they own/will own, earn/will earn!!! This is outrageous and the CBC should come in and make all personal guarantees (in the case where a property is mortgaged) void. Very few people in Cyprus had personal loans for pleasure or lifestyle (and if the bankers had given them these loans, then the bankers should be held liable if they had no means to support them). Most of the loans were for housing, education and providing for elder family members.
Thank you for your comment.
It is my firm belief that if we are to move forward, we ought to take a variety of actions through a concerted effort of all stakeholders concerned, namely lenders, borrowers and, not least, the State.
What you are talking about is how to turn one form of rent (interest) into another (actual rent payments) while allowing the banks to confiscate the homes of the poor borrowers. This presents two problems. The lesser one is that it is no more than an attempt to sweeten the pill while allowing the banks to improve their balance sheet position. The biggest problem however is the fact that you hardly touch the root of the problem which is that the economic agents of (households and firms) are so indebted that an attempt to collect in such large scale will condemn the economy to decades of recession. To quote Michael Hudson, "a debt that can't be paid will not be paid!". That is the truth of the matter. To attempt to find ways for the ailing economy which is in phenomenally deep balance sheet recession to keep paying while conceding the ownership of their assets may serve the banks for a while but will only condemn the economy to a long and deep economic depression.
If we are to ever get ourselves out of the straits we find ourselves in, we ought to start taking actions; sitting still will not cure our illnesses This is but one of a number of alternatives, whose aim is primarily to alleviate deprived borrowers' stresses.
I agree about the richness of using words sparingly. I am sorry you could not read the entire article but when such significant issues are discussed and elaborated there must be a certain breadth and depth in the analysis. It is an issue after all which touches upon the lives of a number of our fellow citizens.
The alternative provided by the author and other schemes, is to delay the process but the fact remains that some people own properties that they cannot afford, they take advantage of the prevailing system and they are unwilling to make changes in their lifestyles.
Thank you for your comment.
The article makes reference to those borrowers who truly find themselves in stressful financial circumstances they cannot escape from despite their best intentions. These people are usually locked in unsaleable properties and have no realistic hope of turning their situation around. I suspect that this is a substantial, but not very apparent, portion of our population.
I think Mr Ioannides proposal has a lot of merit and it is one way for the banks to revert to being banks and lend instead of running internal bad banks and taking so much time of management. The real worry is the amount of restructured loans which revert to being NPLs when the economy has been growing and public finances were under control. I had suggested a similar proposal whereby these distressed loans of banks were swapped with long term zero coupon bonds issued by the government or the Cyprus Land Development Corp guaranteed by the government. The banks would have had significant benefits and the government would have lived up to its social responsibility. Did those in government understand it had no impact on debt sustainability or did the view that government should not help the banks prevail? Well we saw what the Italians did and begs the question why it is good for Italy and not for Cyprus?
As for the role of the Central Bank, as some of us know, when they did suggest following meetings with the MOF and the ECB that a study be made for a Real Estate Investment, and its viability, there was a chorus of disapproval from ALL political parties. At this time, August 2013, NPLS were about 30%. It was fairly predictable that due to unemployment and a sharp recession NPLs would rise significantly but those forces that decided how to deal with the problem lived in self denial. On top of this Parliament made the resolution of NPLs even more difficult and this is one more reason that Mr Ioannides proposal has a lot merit.
In my view unless the government (most probably the new government) steps in and helps the NPL resolution the long process, as mentioned by the Governor of the CBC (maybe a decade to resolve), will have to see its course with all the risks this entails. The notion that the government should not step as it will nationalise losses is no longer a good one. Yes governments have responsibilities to the people that have suffered and if this means that banks benefit from profits why not? Is this not the same in other countries or is Cyprus going to be the sole exception of helping its banks. Have the Germans, the British the French, the Dutch, the Spanish, the Irish, the Italians the Greeks not all done the same? Please do not tell me Italy and Greece are in better public debt positions!
The EU Commission and the ECB are highlighting risks of continued high NPLs and it is high time that banks are offered a helping hand by government albeit for the distressed part of the population. I do not think Parliament would object to this and it is for the Minister of Finance to rethink his attitude as the decisions at the ECB/EU are political and the BRRD was not applied in the case of Italy! Cyprus should persuade its EU partners that it was dealt a severe blow to its financial system that was unprecedented and a solution suggested by Mr Ioannides, or a variation thereof, should be revisited. Doing nothing is an option but not one that is in the interests of the economy and the people who are in distress.
Thank you very much for your insightful intervention.
It is also my firm belief that sitting still, simply expecting this nightmare to go away, is a recipe for disaster. A wide range of initiatives and actions are essential and we have to start thinking outside the box if we are 'to save the game'. The State's involvement is indeed crucial to this effect.
Now is indeed the time for stakeholders (Government, lenders, borrowers, independent experts etc) to engage in meaningful discussions to explore alternative strategies. Time is against us.
Now, we are saying let us scam the taxpayers again, you are saying the government is going spend the money but the government spends the taxpayers money. And the purpose of this is to get rid of the NPLs from the books so the banks would look healthy again and the speculators who purchased the penny shares of the banks would have significant capital gains. It is all about the money and how are we going to get our hands in the taxpayer pockets.
You are absolutely right to be so frustrated with what has happened in Cyprus.
However, this is not what this article is proclaiming. This is not about letting unscrupulous bankers off the hook. Instead, this is about exploring alternative ways of protecting our deprived fellow citizens who cannot make ends meet. I have noted on a number of occasions that I suspect that the number of people faliing into this category is substantial.
The proposed scheme, or any similar scheme for that matter, could actually bring banks into the picture by requiring them to put up equity funding into the scheme and / or by obliging them to write off part of the related loans and so on.
What I think is important, at this point in time, is to initiate a public discussion, which shall hoppefully culminate into concrete actions, of how we can help people who are facing financial hardship.
Many politicians of the opposition who were screaming about ELA or the legislation that was supposed to enable banks to better manage their NPEs, prefer for the banks to stay without any external professional support so that they exert political influence in the management of the NPEs. The evidence in the EU, and in Spain in particular, is that NPEs platforms that are professionally managed produce better results. In fact this is what the EBA and ECB wish to see also in the case of Cyprus and this is what the former CEO of the Irish bank Resolution Corp (managed about €80 ban of NPEs in Ireland) suggested as early as 2013 at a panel discussion. In my view it is overdue and both Hellenic and the Co Op should be applauded for making the right decision.
As the distressed segment of the population the proposal of Renos is very apt and even more after this development. For those who offer views without know full facts it is good to conduct some research and see what loans were made by the Co Op pre 2013, what security was offered and what is the value of the security today. It cannot be the case that politicians should be left to make political capital of such a positive development and ask silly questions as to whether ALTAMIRA will be paid. Do they know of any professional firm that does not get paid? Is there a free lunch in their party because if there is we should all go and eat to our heart's desire!
I fully agree about the benefits of debt servicing platforms whoch shall be run by professional experts and will fall outside the inflexible boundaries of a conventional banking set-up. Indeed, I have written extensively about this in other articles. I have even suggested that smaller banks might be well advised to pull their resources together in some sort of 'partnership' to set up a shared servicing platform, along with one of the servicing experts. That way they will gain from economies of scale and the multiple debts of borrowers, with various banks, will at last be dealt with uniformly and comprehensively.
As I have said many times before, what I think is distracting is sitting idle and not being active to deal with the NPLs mountain. A number of concerted efforts is called for, be it in the form of outsourcing to specialised experts, (shared) debt servicing platforms, debt write downs, mortgage to rent, debt for asset / equity assets and the like. All constructive deliberations and all potential efforts which are aiming at resolving the fundamental problems facing us as a country, as an economy and as a society should be welcomed, nurtured ans seriously considered and not simply brushed aside.