An effective and functional foreclosure framework is essential for encouraging borrowers to restructure their debt, especially considering the high stock of non-performing loans (NPLs), according to a press release from the Cyprus Ministry of Finance on Tuesday.

The Ministry's comments came in response to a proposal put forward by parliamentary parties, which would allow non-performing borrowers facing foreclosure procedures to appeal to the Courts and obtain a suspension order until disputes, such as excessive charges or loan values, are resolved. This move has raised concerns among banks and experts who believe it could have a negative impact on financial stability.

The Ministry emphasized that despite the Cypriot economy's removal from the EU's excessive imbalances procedure, Cyprus still faces certain imbalances, as noted by the EU Commission. One of the vulnerabilities highlighted by the Commission is the high level of private debt, including NPLs.

Furthermore, the Ministry highlighted that the majority of these loans were provided during the credit expansion of 2006-2010 and have either been classified as non-performing or terminated almost two decades ago, unrelated to the recent economic crises experienced by Cyprus.

To assist vulnerable mortgage borrowers who have pledged their primary residence as collateral, the government has introduced three schemes: Estia, Oikia, and the plan of the Central Agency of Equal Distribution of Burden. However, despite these efforts, only 50% to 60% of eligible borrowers have chosen to participate in these plans.

"The fact that not all borrowers have responded to benefit from the government plans indicates a lack of interest and willingness to cooperate," added the Ministry.

Although foreclosures were frozen from March 2020 to January 2023, the government is now taking further measures to address the issue of NPLs. One such measure is a new scheme called mortgage-to-rent, aimed at assisting vulnerable borrowers in retaining their homes. The plan is currently being submitted to the European Commission for approval as it involves state aid.

"The European Commission is in the final stages of approving the plan, and its implementation will be immediate," stated the Finance Ministry.

Additionally, the government plans to present a bill to Parliament in the near future, proposing the establishment of a special jurisdiction in the District Courts to handle disputes related to loans secured by primary residences valued up to €350,000.

The Ministry expressed support for proposals to enhance transparency in the foreclosure procedure and provide better protection for borrowers in cases of voluntary debt-to-asset swaps, particularly when the asset is a primary or professional residence. However, it stressed that these proposals should be implemented while preserving the current foreclosure framework.

On the other hand, the Ministry cautioned against other proposals that seek to alter the foreclosure framework, such as suspending the foreclosure procedure or appealing to the court after a dispute has already been examined. Moreover, it believes that these measures would not improve citizens' financial behavior and could lead to a decline in the country's competitiveness.

"The possibility of universal access to courts as the final means to settle a foreclosure procedure would negate the advantages and purpose of the out-of-court foreclosure procedure introduced in 2018 and would revert to the lengthy and ineffective framework that existed before 2018, which was one of the longest frameworks in Europe," the Ministry explained.

In conclusion, the Ministry pointed out that introducing legal obstacles weakens the smooth foreclosure procedure, resulting in the depreciation of collateral values, increased capital requirements for banks, and a potential threat to financial stability, thus making the entire economy vulnerable to external shocks.

It is noted that NPLs have a significant impact on the economy, since borrowers fail to repay their loans, resulting in the deterioration of bank assets, leading to decreased lending capacity. This, in turn, hampers economic growth as businesses and individuals struggle to access credit for investments and consumption. But at the same time, behind NPLs are individuals and families who are in danger of losing their homes. These borrowers often face financial hardships due to job loss, unexpected medical expenses, or other unforeseen circumstances; NPLs represent the struggle and vulnerability of these individuals, as they are unable to meet their loan obligations. Thus, it is crucial for financial institutions and policymakers to find compassionate and sustainable solutions to support these borrowers and prevent further hardships.