Greek banks faced with mounting mortgage delinquencies are following the advice of 5th-century BC playwright Euripides: Time heals.
Banks restructure loans rather than foreclose, extend terms to as long as 45 years, grant payment holidays of up to a year when borrowers are only required to make interest payments, or add guarantors to loans, often children who will eventually inherit the property.
Lenders see foreclosures as the worst way to collect, and so far Greece has avoided the price declines that result from vacant, bank-owned properties that destroy values of whole communities and flood the market, said Andreas Athanassopoulos, general manager of mortgage and retail banking for the National Bank of Greece, the country’s biggest lender with about 30 percent of all home loans. While Euripides was known as a tragedian, modern Greek bankers believe borrowers given a chance to remain in their homes will end up making good on their debts.
“There is a lot of stickiness in the market as people tend to buy their home, live there a lifetime and pass it on to their children,” Athanassopoulos said in an interview at his office in Athens. “The best way to get money from delinquent mortgage holders is to give them time, that’s the only doctrine, to help them pay their loans while minimizing the bank’s losses.”
At the moment, banks have little choice. In 2010, after Greece became the first euro nation to receive an international bailout, with an initial 110 billion euros ($135 billion), the government suspended foreclosures on primary residences with outstanding mortgage debt of 200,000 euros or less until June 2011. The measure was subsequently extended twice until the end of 2012 and is likely to be extended again in 2013, according to the National Bank of Greece.
By doing so, “the government can give comfort to borrowers and at the same time help the banks by delaying the registration of losses on their balance sheets,” said Theodoros Skouzos, an Athens-based tax lawyer. “It cannot go on forever, though, and when the measure is repealed, there will be foreclosures.”
Non-performing mortgages in Greece, in recession for its fifth year with a record unemployment rate of about 23 percent, reached 17.2 percent of the total outstanding in the first quarter, according to the Greek central bank. That’s up from 15 percent in the previous three months. Also contributing to the rising delinquencies are government pay cuts of public employees’ salaries by as much as 45 percent.
In the U.S., where there were 4.7 million foreclosures between January, 2006 and June, 2012, according to data seller RealtyTrac Inc., prices have fallen 34 percent. In Spain, where Tinsa, the country’s largest home appraiser estimates prices are down by a third, there have been about 330,000 foreclosures, according to PAH, a group that supports people who have lost their homes to lenders.
“We have learned a lot from what happened in the U.S. -- foreclosures pull down the value of properties in surrounding areas, and prices so far in Greece have not collapsed,” Athanassopoulos said. “The idea here is to support people repaying and to minimize losses.”
In Athens, prices have only fallen about 20 percent from the peak in the second quarter of 2008, central bank data show. In Thessaloniki, Greece’s second largest city, they’re 18.8 percent lower than the high point that year, according to Bank of Greece data. In other cities, they’re down 11.6 percent.
What’s good for Greek mortgage holders and home prices may not be as beneficial for holders of about 3.5 billion euros of loans packaged inside mortgage bonds, said Dipesh Mehta, a London-based analyst at Barclays Plc. The government and banks may be “kicking the can down the road” until the suspension of foreclosures is finally lifted, when an “avalanche” of repossessions could flood the housing market, he said.
Investors demand 22 percentage points above interbank rates to buy five-year senior bonds backed by Greek mortgages, according to JPMorgan Chase & Co. data. Spreads have widened from 10 percentage points a year ago, as investor concern grew that the country would need to leave the euro and return to the drachma. That compares with a 1.2 percentage points spread for U.K. prime residential mortgage-backed securities.
“Investors will be holding extremely long bonds especially as they will not be called,” Mehta said in a telephone interview. “They’ll be concerned over the tail risk especially for holders of junior notes about what will happen if repossessions do start to come through.”
In addition to those suffering hardships such as lost jobs or reduced pay, banks must also deal with delinquent borrowers who could pay yet prefer not to sacrifice their lifestyles, as well as those who have transferred cash out of Greece and filed for personal bankruptcy. Negotiating with those two groups, which represent about 20 percent of those seeking relief, is complicated by the legal prohibition on foreclosures.
“The problem with laws encouraging foreclosure forbearance is that they can encourage people who can pay not to, leaving the banks with no muscle to force people who take advantage of the law to pay,” said Ivan Zubo, an analyst at BNP Paribas SA in London.
Foreclosure “is not a strategic option for us,” said Athanassopoulos. “We want the law changed to give us more discretion and flexibility. I would never foreclose on a person who has lost his job but we need more discretion with people who are taking advantage.”
The Greek mortgage market had annual growth of 82 percent in the early 2000s when first-time buyers took advantage of easier financing and interest-rate reductions as the country joined the single European currency.
Home loans expanded to 80.5 billion euros by the end of 2010, and home prices in Athens increased more than 170 percent from 1997 through the end of 2008, according to data from the country’s central bank.
Even now, Greece’s household mortgage debt as a percentage of gross domestic product is among the lowest in developed countries, at 36 percent, and less than half the level in the U.S., Ireland and U.K, according to Deutsche Bank AG analysts Conor O’Toole and Rachit Prasad. “It ranks second lowest only to Italy among the selection of European peripheral states and far lower than the U.K. and the U.S.” they wrote in a May report.
The biggest delinquent debtor in the country is the Greek government, which has 6.8 billion euros in arrears to companies. That’s also a drag on the economy, which contracted more than 6 percent last year. Mortgage lending has ground to a halt as the banks deal with rising delinquencies and potential buyers wait to see whether the country will be able to negotiate an agreement with its international creditors that will allow it to get further bailout funds and stay in the 17-member European currency.
Greece’s so-called troika of creditors -- the European Central Bank, the European Commission and the International Monetary Fund -- are in Athens this week to review the country’s progress on implementing budget cuts.
Also dependent on further agreement with the troika is an additional 23 billion euro payment from a recapitalization fund for Greek banks that is part of a broader delayed second tranche of emergency funding for Greece. So far, 25 billion euros of recapitalization funds have been paid.
Core tier 1 capital at the National Bank of Greece is at 8 percent after receiving 7.4 billion euros in the first round of recapitalization. Like all other Greek lenders that must rise to 9 percent by the end of September and 10 percent by July 2013.
“If the state is given the thumbs up for its progress, the disbursement from the troika will come and the state will pay its arrears and there will be liquidity,” while the bank “recapitalization will also boost liquidity,” said Petros Christodoulou, National Bank of Greece’s deputy chief executive officer. “Unless you have liquidity nothing can function. Liquidity is like blood, nothing can function without blood. I hope that from September onwards this will happen.”
Citigroup Inc. this week updated its forecast for a Greek exit from the euro, saying there is now a 90 percent chance, probably in the next two or three quarters. Previously it said there was a 50 percent to 75 percent likelihood, and said it would most likely happen in the next two to three quarters.
Greece, which has struggled to meet targets for narrowing its budget deficit, has more ground to make up after holding elections in May and June that highlighted voter anger over the bailout terms. An inconclusive May 6 vote led to a June 17 rerun in which the New Democracy party of Prime Minister Antonis Samaras, finished first with almost 30 percent of the vote.
Samaras formed a government with the Socialist Pasok party, which came in third, and the sixth-place Democratic Left with pledges to keep Greece in the euro while fighting for looser aid conditions from the region and the IMF.
The Greek public remains divided about the austerity measures, with polls showing a majority favor a renegotiation of bailout terms. Alexis Tsipras, head of Greece’s biggest opposition party Syriza, on July 23 called on the government to refuse talks with the troika.
“There are opportunists sitting on the sidelines saying, ‘Let’s leave Europe, let’s not pay a penny, let’s blackmail them,’ but any technocrat knows that is certain death,” said National Bank of Greece’s Christodoulou. “I for one believe in the opportunity of staying in the game, and that is the opportunity we give to homeowners. Taking away the home of a particular family tears apart the social fabric of an already stressed society,”