The Greek government, like its predecessors, is fighting the wrong war in seeking to protect the primary residences of medium-income debtors from foreclosures. By doing so, it maintains a system of asymmetric incentives, favoring strategic defaults, weakens the payment culture, undermines the bank recapitalization and delays the review process and the disbursement of bailout funds. It is time to rethink the entire issue and find the optimal solution that protects low-income borrowers and the unemployed without endangering future credit expansion and the country’s growth prospects.
Greece’s previous foreclosure law expired last year, meaning that banks can auction the homes of some borrowers who have stopped paying interest and capital for a long time if they wished to. However, banks have said they will not do so, unofficially extending the moratorium on foreclosures. They have good reason to do so. First, not doing so would have caused more damage to their public image. Second, they do not wish to take possession of more real estate. Third, they know that selling this property in a depressed real estate market will put more pressure on prices. The latter would force them to take more provisions, that is to set aside more money, hurting their profitability.
The previous law provided protection for homes valued at 200,000 euros or less, depending on the owner’s marital status and family size, and required that debtors had a maximum annual income of 35,000 euros and total wealth of 270,000 euros or less. The previous SYRIZA-led government worked on a more generous foreclosure law last spring, tightening further the prohibitions on primary home auctions. For example, it set the annual income ceiling at 50,000 euros and the overall wealth level at 500,000 euros. This law never went into effect after the European Central Bank (ECB) essentially rejected it.
Undoubtedly it is difficult for foreigners to understand the position of successive Greek governments and the political system in general on the issue of foreclosures. It is also difficult for an increasing number of Greeks to understand it when they are told of the following numbers, which are based on an analysis of data conducted by the Development Ministry in 2014.
Only 6.5 percent of all Greek taxpayers, or about 363,000, had bought a house with a mortgage as of 2013. About 88 percent of them had one or two children. In contrast, 44 percent had a primary residence without a loan and 12.5 percent were renting. About 28 percent were hosted and 6 percent provided free housing, usually parents to their children.
The average, net (after tax) household income of the persons with a mortgage stood at 25,500 euros and was much higher than the average income of all taxpayers calculated at 13,700 euros. It is noted that the average net income of those renting was 14,100 euros in 2013. The average person took a loan of about 75,000 euros to buy a house with an objective value of 140,000 euros. The vast majority of mortgages were taken out before 2007 when the legal values were considerably lower than commercial values. Legal or objective values are used to calculate taxes. About 75 percent of borrowers did not note have a second home and paid about 400 euros per month on average to service their loans in 2013. This average monthly payment may have been reduced since then because banks have become forthcoming in making monthly installments more affordable.
Coming back to the previous foreclosure law, analysts estimate the annual income criterion of 35,000 euros protects about 80 percent of all debtors. It falls to about 40 percent when net income falls to 20,000 euros and 30 percent if they also exclude those who have a second home. If only the criterion of a home value of 300,000 euros applied, about 99 percent of all debtors would have been protected.
Undoubtedly, this is a politically sensitive issue. The two ruling parties used to batter their predecessors for not doing enough to protect primary homes from foreclosure and they are now being called upon to considerably reduce protection. Nevertheless, we cannot ignore economic reality. Banks will be less willing to give more loans if they are afraid borrowers have incentives not to pay them back. This will undermine future credit growth and eventually the economy.
Also, the banks may need another round of recapitalization if they do not deal effectively with the nonperforming loans (NPLs), i.e. unpaid for more than 90 days. Problematic loans stand at more than 50 percent of gross loans and account for more than 100 billion euros, according to recent estimates. Mortgages comprise a big chunk of all loans, standing at 68 billion euros at end-September when the balance of total loans was about 205 billion euros. It is estimated that more than 40 percent of home loans are in arrears.
There is also a fairness issue. Is it fair to protect middle-income debtors and ask all taxpayers, including those with low incomes who rent a house, to provide public money to the banks to fill their capital deficits, emanating mainly from the bad loans? It is clear that somebody who can service his mortgage will not do so if he expects the state to bail him out. However, this will come at the expense of more than 98 percent of all taxpayers if we include those who are current on their mortgages.
The foreclosure law should provide protection to primary home borrowers who are in need, namely unemployed, underemployed, face health problems and have low net incomes, among others. If this is not the case, Greece is clearly fighting the wrong war.
[Kathimerini English Edition]