Cyprus must throw another lifeline to distressed borrowers to help them keep their homes under its ESTIA scheme for toxic mortgages, which failed to reach all applicants.
This time, the Ministry of Finance is preparing to launch a “mortgage-rental” scheme aimed at rescuing borrowers with a first home or small and medium business associated with a loan from a Cypriot bank or other lending company.
The contract value of the scheme is 3 billion euros, and the authorities have already requested the approval of the Brussels Directorate General for Competition, as it is considered state aid.
The Ministry of Finance’s request to the European Commission includes transforming the state-owned asset management company (KEDIPES), formerly Coop Bank, into a bad banking institution that will be given the authority to absorb toxic loans from other institutions. If approved, KEDIPES will urge all banking and credit acquiring institutions to transfer “toxic” loans through the “mortgage for rent” scheme.
The scheme will serve thousands of defaulting mortgage borrowers, according to Treasury sources. The scheme will cover non-performing loans secured by main housing and main business, mainly SME premises, up to EUR 350,000. The beneficiaries will be people belonging to low income groups and pensioners, whether they have applied to join the ESTIA scheme or not.
The program will also include borrowers who defaulted on their mortgage but had their ESTIA application rejected because they were classified as non-viable due to their low income. People with loans from the former Coop Bank who stayed at KEDIPES and insolvent borrowers of the state-funded Housing Finance Corporation will also be eligible for the rental mortgage scheme.
The competition authority under the European Commission has already approved it, and several teleconferences are scheduled for next week.
The project depends on the decision of the authorities, as it involves state assistance.
The EU is expected to give it the green light as it is a social security plan that falls under government action to fight rising inflation and reduce the “mountain of private debt”.
The source said Finance Minister Konstantinos Petrides will meet with political party leaders to discuss the details of the plan next week.
“An important aspect of the plan will be protecting the first home of vulnerable households with non-performing loans at various financial institutions,” the source said.
Brussels is expected to allow KEDIPES to purchase portfolios of non-performing asset-backed loans from credit card companies that have been bought from Cypriot banks.
KEDIPES plans to purchase mortgage-related properties at prices ranging from 50% to 60% of their current value.
“Thus, the debtors will retain possession of the property, but not the right of ownership. In return, outstanding debt will be written off.”
Borrowers will then be given the option to stay on the property by paying a rent of 2% or 3% of its market value.
The rent will be adjusted annually based on a formula to be determined, and borrowers will be able to receive government assistance in the event of any increase they cannot meet.
This will entail a 15-year payment duration, while borrowers can submit a property purchase offer after five years.
The current price of the property for indebted borrowers will be the price at which KEDIPES purchased the property, less any rent paid.
In the event that the debtor cannot buy back the property, either because he has no funds or has died in the meantime, family members have the right to buy back the property on the same terms.
After five years, KEDIPES may sell the property if the conditions are not met.