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Legislation for repossessions and foreclosures in Cyprus is urgently needed before new lending can commence.

Date: 24/03/14

Non-performing loans at Bank of Cyprus are now officially at over 50%.

The reasons for non-payment are various: some cannot pay and some simply choose not to pay. Whatever the reason for non-payment it’s clear that such a high rate is very bad for cash flow at the bank. 

For those who cannot pay the solution is obvious – repossession and sale on the open market can clear the case while the bank shoulders the losses. At the same time there is a large group of foreign buyers who purchased with Swiss Franc mortgages. These borrowers are in such deep negative equity that there is no chance of repaying the loan by proceeds from a sale. To make the matters worse Cyprus banks are actively chasing assets of these borrowers in the UK to make up the difference if they can sell. The Cyprus property nightmare for this group seems to have no end. 

Free and reckless lending by banks in Cyprus to both individuals and companies is what forced Cyprus to apply to the Troika for emergency funding last year. In a true market economy loans that are not serviced for sometimes a year would end up with inevitable foreclosure. This result would allow the lender to get back at least some of the money it had given. Not so in Cyprus where repossessions are almost unheard of. The reason for this lies in the lengthy court procedures that the bank has to go through.

But how can a bank or other financial institution lend money if it cannot foreclose for non-payment?  With the courts’ delays making it almost impossible for banks to get their money back quickly, lenders have stopped lending to even the very best customers. Being left with over 50% non-payers on the books, banks don’t give any new finance to qualified property buyers, who in turn would support asset prices.

The full force of law should ensure that lenders can get their money back. Foreclosures should be allowed after 6 months of non-payment. Whether it is a 1st , 2nd or 3rd home, should make no difference. Legislation should also be passed to allow borrowers to simply hand back keys to their property and suffer no further action. This would ensure prudent lending from financial institutions, who should be 100% involved in lending on quality properties in Cyprus without having an “eye” on overseas assets.

Repossessions and foreclosures go hand in hand with new prudent lending. For all involved – the lender, the borrower and the Cyprus economy in general, new legislation from our government is highly needed in order to encourage timely repayments. 

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