Haircut possible for mortgages

30 September 2016
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Banks say they may go as far as forgiving part of mortgages in an effort to make it easier for borrowers to pay off their debts and for banks to avoid losses from selling their loan portfolios to funds. Haircuts on mortgage loans have never been an option until now.

The first possibility under consideration concerns splitting the loan and forgiving a part of it: The first part would be calculated based on the market value of the property and the debtor’s capacity for repayment. The part the borrower would have to pay would be half of the normal amount, with the rest being frozen for a period agreed with the bank. The lender could commit to writing off the rest of the loan at the end of the loan period if the borrower has been consistent in paying and does not have any other property that could be liquidated.

The second option for a partial write-off is just before the sale of the loan to funds. In this scenario, the banks would propose to the debtor a settlement that could include writing off part of the loan, provided that the borrower was consistent in his or her payments. However, the proposal for the buyout of the loan by the debtor should not be as low as the price offered to the fund, as that would contaminate the bank’s entire portfolio and could persuade debtors not to pay off their debts.

Meanwhile, Michalis Sallas, honorary chairman at Piraeus Bank, on Thursday proposed a “sale and leaseback” solution for properties on which bad mortgages have been secured.

He said banks could split the mortgage in two, whereby the first part of the debt, accounting for some 90 percent of the property’s value, would be proposed for sale by the bank with the borrower being able to stay in the property while paying rent. The borrower would be able to extend the duration of the loan, reducing the cost of its monthly servicing. If in five years’ time property rates have not returned to their previous level, the rest of the loan could be written off under certain conditions.

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