Tensions rise as mortgage deadline looms, lenders seek solutions

Cyprus is nearing the end of the suspension of sales of primary residences priced up to €350,000, but the open-ended funds associated with the scheme remain unresolved. At the same time, loan buyout companies, feeling the pressure of time, are developing aggressive resolution strategies to ensure a return on their investments in the secondary loan market. In the coming days, we can expect loan buyout companies to start offering real estate, mass write-offs of outstanding loans (with the cooperation of the borrower) and other innovative approaches. They are even considering sharing some of their profits with borrowers because of the lucrative acquisition of troubled loan portfolios from Cypriot banks.

So far, the available data shows significant progress. Cypriot banks have been diligently getting rid of bad loans, mostly by selling them to US investment funds, which has led to a significant reduction in bad loans on their balance sheets. From December 31, 2017 to June 30, 2023, an overall reduction of €18.5 billion, or 89.7%, was achieved, leaving troubled loans of €2.11 billion out of total loans granted of €24.4 billion. As buyout companies respond to the relative lull in lending and sales, we expect specific real estate offers and negotiations between borrowers and buyout companies to restructure loans. A large part of these decisions will be to set fixed interest rates on loans. In addition, buyout companies are preparing to work in a special court where a third party will determine the loan balance, easing the negotiation process between these companies and borrowers.

As October approaches, there is a growing possibility that new legislation could again halt sales, affecting future lending. It is expected that lending requirements will become more stringent and require higher down payments, perhaps as high as 40-50% for new home purchases, given the difficulty of securing collateral.

The latest figures for March 2023 show that bad loans amount to €22.5 billion, of which more than 93% are more than five years overdue. Loan repurchases are mostly for closed loans (84%), while only 16% are active. In 2021, Servicers managed loans worth €19.2 billion for 80,192 loans. Now, with almost €3 billion of additional problem loans, the number of loans is expected to increase significantly. These credits are allocated as follows: 50% to individuals, 47% to non-public corporations, and 3% to other categories. Collateral represents 52% of the portfolio, of which 32% is primary residences and 65% is other real estate. "The Servicers own a significant amount of real estate, with a total value of 978 million euros. The government is facing a pressing issue regarding three open funds related to the sales, which should have been resolved by the summer with the cooperation of parliamentarians. The appointment of a Financial Commissioner and the promotion of a dispute resolution mechanism by the Central Bank of Cyprus are key developments in this regard. [This article was translated from the original Greek]