12° Nicosia,
22 May, 2024

Who benefits from the proposed rent-to-mortgage scheme?

The plan will be implemented beginning January 2023

Panayiotis Rougalas

Panayiotis Rougalas

The parties involved met just yesterday, with the final draft in front of them. One week after the three-month sales suspension was passed, it is expected to be one of the two measures that, once implemented, will make new extensions of this type unnecessary. The first is the Rent vs Instalment Scheme, and the second is the establishment of a special court to hear cases involving non-performing loans.  Returning to the Mortgage to Rent Scheme, which will hopefully begin to be implemented next January, the conditions that a borrower must meet in order to be accepted into the scheme have been "locked in." And there are three of them. First, on December 31, 2021, the borrower must have had a non-performing loan. Second, the property (mortgage property) for which the borrower has a non-performing loan must have a market value of up to 250 thousand euros. Third, the borrower should be a member of a vulnerable group and receive government assistance.

How will it work? KEDIPES will expand its operations, according to the final draft presented to banks, credit acquisition companies, and other stakeholders. KEDIPES will be able to buy and manage properties from vulnerable borrowers, and will specifically buy 60% of the market value of the collateral submitted for the loan from banks and credit acquisition companies. The bank and credit purchasing companies will write off the remaining 40% of the collateral's market value, removing the problematic lending from their books, and the property will be transferred to the jurisdiction of the KEDIPES.  The borrower will continue to live in their home, and after 5 years, they will be given the option to repurchase it at the current market value. It is important to note that the government will pay the rent for the vulnerable borrower's stay. In effect, he will relinquish the property for which he owed money and did not pay the KEDIPES, but he will continue to live there, with the rent paid by the state.

KEDIPES will purchase 60% of the market value of the collateral for the loan from the bank and credit purchasing companies.

The ESTIA rejects

The number of borrowers who will participate in the "Rent vs Instalment Scheme" is unknown. The Ministry of Finance has previously stated that 2,000 homes would be transferred to the KEDIPES in this manner, at a cost of around 400 million euros. The Plan's perimeter is unclear; however, it is now clear that the ESTIA Plan's rejects will be "side-lined" into the Plan. The reference is to those borrowers who submitted applications, were examined, and were determined to be ineligible to participate in the ESTIA.  An exception will be made for them even though the Scheme was for a property with a market value of up to 350 000 euros and not 250 000 euros as provided for in the Mortgage to Rent scheme. There may be as many as 800 borrowers who are deemed unviable for the ESTIA plan, according to estimates. The circle has grown even more as a result of the most recent modifications to the plan. If a resident is a benefit recipient, and residents are defined as second-degree relatives, such as grandparents, grandchildren, sons-in-law, daughters-in-law, best men, and siblings, they may also apply to join the mortgage-to-rent program.

GDPR is an obstacle

Banks have information on the first two criteria. They know which borrower had a non-performing loan on December 31, 2021, as well as the market value of the mortgaged property. However, they are in consultation with the state and must find a solution to identify borrowers receiving benefits.

Banking circles argue that the General Data Protection Regulation, also known as the "GDPR," has created an understandable barrier that must be overcome. Permission must be granted to release the information of those borrowers who are in trouble and eligible to participate in the Scheme. As a result, the relevant Ministries, KEDIPES, and banks must consult.

The thorny 60% recovery rate

According to sources close to the process, up until the writing of the latest draft, banks consider the 60% recovery rate of the collateral's market value to be low. They are now requesting that this percentage be raised closer to 80% so that banks only write off 20%. However, there is no "green light" from the Ministry of Finance to do so because it increases the state's burden. Non-performing loans in Cypriot banks now total slightly less than €3 billion. These are the "deep red" loans, for which the only solutions available are "mortgage to rent" arrangements.  If banks do not put a little 'water in their wine,' they are not expected to find other solutions and will be forced to simply write off those loans sooner or later. We're talking about borrowers who can't pay anything, and those loans are the true cost of the crisis for banks. So they will either receive 60% of the lending they provided to mortgage-to-rent borrowers, or they will be forced to simply write off the entire loan and receive "zero euros." At the same time, a very small percentage of borrowers will fall into the following category, but borrowers may benefit from this process in some cases.  If, for example, the property has a market value of 100,000 euros and the borrower owes the bank 50,000 euros, KEDIPES will give the bank 50,000 euros and repay the loan, but the borrower will receive 10,000 euros. Of course, if the borrower has other obligations to other banks for other loans, etc., these 10,000 euros will be used to cover his current obligations.

[This article was translated from its Greek original and first appeared in Kathimerini's printed edition]

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