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CYPRUS: EURO 815 mln ESTIA scheme taking shape to save mortgage defaulters

23 September, 2018

It is estimated that around 10,000 vulnerable borrowers could be part of the government-backed ESTIA scheme set up to manage toxic mortgage-backed NPL portfolios weighing down the Cyprus banking system.


A Ministry of Finance source confirmed to the Financial Mirror that the ESTIA scheme will cost a total of EUR 815 mln over a 25-year period. This means an average of EUR 33 mln a year will need to be included in the state budget to cover the scheme.

Bank of Cyprus and Hellenic Bank have identified some 6,000 clients which fall into the group of vulnerable borrowers, while thousands more are to be added to the list once the former Co-op figures out how many lenders meet the criteria.

Borrowers who are eligible to participate in the scheme are to see a haircut on their loans up of to 32%, lower interest rates and an extension of the repayment period in order to save their homes from being repossessed.

As expected Bank of Cyprus, the bank with the largest NPL portfolio, has the lion’s share of clients eligible for the ESTIA scheme expected to get off the ground in January 2019.

Talking to the Financial Mirror, BoC source said that the bank has identified some 5,000 eligible clients with loans valued at about EUR 1 bln.

Hellenic Bank is said to have 900 eligible clients with loans totaling EUR 250 mln. Meanwhile, according to reports, the Cyprus Asset Management Company, functioning solely with the purpose of managing the ex-Co-op’s NPLs, is not yet in a position to give information on the number of eligible borrowers, as they are still making the necessary calculations. But it is likely to be at least several thousand.

The BoC source said that the bank has identified customers which fit the profile and criteria set by the government and are now ready for the next steps.

“We have done the necessary preparation so as when the scheme get’s the final approval, everything will be in place. Once approved and the relative agreements with the government are signed we will inform clients and call them in to renegotiate the terms of their loans,” said the source. The loans will then be subsidized by a third by the government.

ESTIA criteria

According to what has been announced by the government, eligible borrowers have to be residing in Cyprus for the past ten years, with a loan, that has at least 20% which has not been serviced for a minimum of 90 days on 30 September 2017.

The loan must also be linked to the borrower’s first home and not exceed EUR 350,000 in value, while the borrower’s family income can’t not exceed EUR 50,000.

The rest of the family’s assets should not be worth more than a 125% of the market value of the home in question. Loans that were restructured after the cut-off date cannot be included in the scheme, while the borrower has to remain loyal to the terms agreed with the bank throughout the repayment period or will be automatically excluded.

The scheme covers one third of the borrowers’ monthly installment and is expected to include total loan worth EUR 3.4 bln -- EUR 1.2 bln belongs to BoC, EUR 1.3 bln to the defunct Co-op, EUR 250 mln Hellenic and around EUR 600 mln from other banking institutions.

According to figures released by the Finance Ministry, 13,070 NPLs to be included in the scheme are linked to houses valued up to EUR 350,000, with one out of three borrowers owning a home with an average value of EUR 282,000.

The government is confident that the ESTIA scheme will benefit all parties involved and will nullify a serious threat to the country’s economy posed by the high number of NPLs in the banking system. At the same time the government hopes to prevent a social crisis with hundreds or thousands of borrowers losing their homes.

“Our common goal is to help reduce non-performing loans. We made the scheme for a class of borrowers who have mortgaged their primary home. Practically, we are protecting the borrower’s primary residence,” Finance Minister Harris Georgiades has said.

Although the government scheme means well, it has its critics.

The Cyprus Chamber of Commerce (KEBE) and the Cyprus Employers and Industrialists Federation, feel that ESTIA leaves a lot of scope for strategic defaulters, who purposely have chosen not to pay their loans, to take advantage of the scheme.

In a letter sent to the Finance Minister, KEBE chairman Christodoulos Angastiniotis, raises the chamber’s concerns that the scheme will see reliable borrowers end up financing strategic defaulters.

He also expressed concerns over the ceiling of the scheme’s income criteria.

“The rationale is that individuals, families or businesses with property worth close to EUR 800,000 and an annual income of EUR 50,000 can be classified as part of vulnerable groups and be supported by other taxable citizens is being cemented,” said Angastiniotis.

KEBE is suggesting that the scheme should only include loans linked to homes with a maximum value of EUR 250,000 and a family income of a maximum EUR 25,000.

KEBE is also worries about the effect the scheme is to have on public finances.

“Given that the public debt is already at 110% of the country’s GDP, we should be very careful about undertaking new spending, in order to avoid the risk of coming under new fiscal measures by the European Authorities,” said KEBE’s chairman.

Echoing the same concerns, Michalis Antoniou, director general of the Cyprus Employers and Industrialists’ Federation, told the Financial Mirror that the income criteria set by the scheme is too high, allowing people and businesses who should not normally be included in a vulnerable group, to take advantage of the government’s intentions.

“Although we will not organise a crusade to have the scheme annulled, we do feel that it should be altered. We have made our proposals to the government and to the European Authorities and we are waiting for feedback”, said Antoniou.

He acknowledged that it is only normal that while trying to resolve pressing matters such as the high level of NPLs, that mistakes and flaws will be included in such schemes.

“Our common goal is to reduce the high number of NPLs and debt in Cyprus,” said Antoniou.

Cost Effective

The Finance Ministry official said: “We have run through all the scenarios and ESTIA costs are not expected to inflate public debt or derail the state’s fiscal policy”.

The Movement Against Repossessions, finds the scheme to be solely in favour of the banks. Talking to the Financial Mirror Demetris Demetriou, the Movement’s Nicosia Coordinator, said that the banks are the only party who will be benefiting from Estia.

“The state will be financing 1/3 of people’s monthly installments after the loans are renegotiated between borrowers and the banks, which means that banks will be getting a significant part of the loans back, whereas private funds are buying NPL’s at just 15% of their nominal value,” said Demetriou.

He said that this was the case with the packaging of BoC NPLs-linked to property worth EUR 5.6 bln sold to the Apollo Fund for just EUR 1.4 bln.

Demetriou suggested that an NPL management body set up by the state should purchase the loans at the discounted price and come to an agreement with borrowers for refinancing their loans at 50% of their nominal value.

“It would be a win-win situation, with banks off-loading their NPL portfolios to the state, borrowers being able to keep their homes, and the state not losing any money as we will be looking at a refinancing scheme, which will see the state earning back their money with interest.”

Georgiades, while announcing during the week that the cost of the project has been included in the 2019 state budget, said that the scheme is now before the European Commission for final approval.

“The parameters of the scheme as approved by the Council of Ministers and formulated in cooperation with other political forces, have been filed with the competent section of the European Commission which is expected to approve them," said the minister.