Vulnerable debtors and foreclosure auctions
Vulnerable debtors and foreclosure auctions
Vulnerable debtors and foreclosure auctions
28 October 2023

By Theodore Kalantonis, Executive Chairman at doValue Greece

A few days ago, Greece returned to investment grade. To get there, it was necessary to resolve and restructure the banking system. The Greek state achieved this by successfully implementing a very specific method: securitising aggregated non-performing loans, with State guarantees, and transferring part of the securities, along with their management, to new private owners. The involvement of private investors was agreed with the EU, to avoid state subsidy issues.

The new regulated servicers sector now manages those loans, on behalf of the new owners, based on specific and strict business plans. Any failure translates into severe sanctions for the servicers. Therefore, the servicers are restricted by a very tight framework determined both by each portfolio owner’s strategy and by the servicers’ duty to implement the business plan, so that state guarantees are not called.

The business plans do not simply include general targets, but rather very specific recovery targets per provided instrument – settlements, consensual sales, enforcement. Therefore, foreclosure auctions are not a choice for servicers, but an obligation. As a result, several auctions have been scheduled in the near future that involve more than a few properties used as primary residence.

All this information refers to Greece. However, all legal and financial systems provide for enforcement processes, including liquidating collateral, in case of default. And the reasoning behind that is apparent. In the absence of enforcement, as an ultimate (yet necessary) measure, debtors would simply default on all their obligations, which would immediately lead to the interruption of all kinds of credit. Under the prevalent social pressure, all parties involved – debtors, banks, investors, the State – have been turning a blind eye to this reality for over 15 years now. With no payment culture there can be no credit system, nor development. Also, this is how one can ensure equity among citizens. Focusing exclusively on debtors who fail to meet their obligations, we forget two other major groups. First, the people who, even with sacrifices, prioritised paying back their family (or business) debts. And, even more so, especially in the mortgage sector, we forget the people who instead of taking out a loan, have been paying rent every month for years, a cost which has risen sharply lately.

The Greek crisis was exceptionally severe and lasted long, leading households to an objective inability to repay their debts. Protecting them is both a goal and an obligation, so that we can avoid the extreme social tensions experienced by other countries, notably Spain. So far, we have avoided that in Greece, thanks to the significant contribution of the servicers’ employees and executives. However, protecting primary residences falls under social policy. And social policy is to be exercised by the State. It cannot be delegated neither to the discretion nor to the responsibility of other participants in the economic process – banks, investors or servicers.

Today, there are tools and resources available to provide housing assistance to those who truly need it. For the most vulnerable, the establishment of a Property Acquisition Entity has been announced. The first thing that needs to be clarified is the definition of vulnerable households. The State has set a framework and has even made improvements with the recent Hatzidakis law. By issuing a vulnerable certificate and enrolling in the interim programme (until the Entity is established), enforcement processes for the primary residence are suspended. However, participation has been very poor, to phrase it in a very mild manner. What is the main reason behind that? Issuing a vulnerable certificate requires (quite reasonably) lifting banking confidentiality to determine objective financial inability. A significant number of debtors who do not repay their loans refuse to consent and receive up to €210 per month for rent subsidy, as provided for. One can speculate about their motives. There is another interesting example. Last year, banks voluntarily implemented an interest rate subsidy programme for households in financial distress. Once again, lifting banking confidentiality was required, and once again participation was limited, even though the scope of vulnerable households was expanded for this specific programme. The number of those in financial distress significantly decreases every time objective proof of income and/or financial inability is requested.

One of the reasons why establishing the Entity under Law No. 4738/2020 has been delayed is collecting the required funds. Yet, little does it matter whether such funds will be private or public. If the State contributed a relatively low amount of €0.5 billion, around 10,000 vulnerable primary residences could be included in the Entity within the next two or three years. Concerns about compliance with EU regulations on state aid are mitigated, due to the precedent of the Cypriot plan already approved by Brussels. As for the final cost, the number of certified vulnerable individuals may ultimately turn out to be significantly lower than current estimates. This means that it is possible to significantly expand the scope of vulnerable debtors, not only based on financial criteria (property value and size, income), but also on purely social criteria (family size, health issues of family members, etc.). Those who do not fall within the scope of the vulnerable debtors or insist on not making the most of the opportunity given to them, will have to accept that they cannot remain property owners without repaying their debts. As far as their housing needs are concerned, they will be able to enter any other government programme, either already available or introduced in the future.

However, the most important thing is to clarify the boundaries between business activity and social policy, and the latter should be generous in terms of benefits and strict in terms of conditions. This way, the right to housing for the truly vulnerable debtors will be ensured, along with the opportunity to reclaim ownership of their property in the future. Time, however, has a negative impact on everyone. Debtors continue living in a state of uncertainty, often with serious consequences for families, while the State incurs a rising final cost. We need to be realistic and make decisions. Greece has been in crisis for over a decade now, which partly explains why dealing with such a sensitive issue was always postponed into the future. However, now, both the conditions and the necessity for all the above to happen are in place – and they need to happen as quickly as possible.

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