Romania residential deals gain speed before final approval of debt discharge bill

Newsroom 25/04/2016 | 17:51

After more than half a year of fierce debate, a bill that enables the discharge of mortgage-backed debts through transfer of the property to the creditor was adopted by Parliament in mid-April. The law promises to bring about a more balanced relationship between borrowers and banks, but its opponents paint a doom-and-gloom scenario.

Simona Bazavan

 

To the applause of MPs from the Chamber of Deputies, the ‘passing to pay’ bill passed the final vote virtually unanimously on April 13, marking the end of more than six months of fierce debate.

The draft passed by Parliament makes several important changes to the one President Klaus Iohannis refused to sign into law and sent back for re-examination in December last year. For example, only end-users can benefit from the law and the mortgage must be on a residential property, and not just any type of building. The law will also apply to loans that do not exceed EUR 250,000 at the time they were taken out, including by borrowers currently going through foreclosure or whose properties have already been foreclosed on.

Another major change is that MPs have compromised on exempting the Prima Casa state-guaranteed loan program from the law. This comes after the government warned that should the ‘passing to pay’ law apply to Prima Casa, it would bring about the end of the program.

The bill will now go to the president who can only vote it into law, in which case it would come into force in 15 days’ time. Another possible scenario is for the law to be challenged by the Constitutional Court.

 

A house divided: bill splits opinion from the off

The ‘passing to pay’ bill has undoubtedly been one of the most controversial to come out of Parliament in the past couple of years. It aims to make banks and their clients split the risk and so protect consumers from abuses committed by lenders, according to the bill’s initiator, liberal MP Daniel Zamfir. While this sounds straightforward, the bill has stoked controversy from day one.

Its fiercest opponents have been by far the local banks. What has made the law so unpalatable for lenders is that once it comes into force, it will give debtors the upper hand by enabling them to discharge their mortgage-backed debts by transferring the property to the bank. This would be a considerable game-changer given that, under the current legislation, a home owner is expected to pay back their mortgage under almost any circumstances.

The higher risk means that banks will have to increase their lending costs, they warn. Lending conditions will overall become much harsher, with down payments for mortgages increasing from the present level of about 15 percent to about 30 percent for RON-denominated loans and even higher for euro loans, banks say, and indeed several have already made such changes. In turn, this will mean fewer people will qualify to take out loans. According to data from BCR, the largest Romanian lender, only one in ten clients can afford a deposit of over 30 percent of the value of the property they are looking to buy. This means that the number of eligible clients for a mortgage will drop by 60 percent over the next five years, from 270,000 to only 110,000, according to its estimates.

International institutions such as the International Monetary Fund and the European Commission have previously criticized the law, saying that it will affect the security and stability of the local financial market and will pose overall macroeconomic risks. The National Bank of Romania (NBR) has backed local banks in their protest against the law and stressed in a recent stability report that the “uncertain and unpredictable legislative framework in the financial and banking field” poses a “severe systemic risk”. The NBR has estimated that the law will generate around RON 2.8 billion in bank losses, even though central bank representatives have also said that they do not expect too many borrowers to exercise the debt discharge option. ING said in statement that the bulk of losses will be related to hard currency mortgages granted before the financial crisis, as both currency depreciation and declines in property prices make them susceptible to having an above par loan-to-value ratio.

In the real estate industry, opinions vary. Some say the law will set the residential market back and this at a time when it was finally resuming growth. More moderate commentators argue that the market will eventually find ways to balance itself.

 

House prices to go up or down?

The central bank has warned that the negative effects produced by the ‘passing to pay’ law will see house prices fall by up to 10 percent. One effect so far has been an increased number of transactions, say real estate agents. Following uncertainties regarding the future of the Prima Casa state-guaranteed loan program and the final outcome of the ‘passing to pay’ law, many prospective buyers have sped up the decision to purchase a property.

House prices have strengthened, increasing countrywide by 6.5 percent at the end of the first quarter compared to December last year, according to data from real estate platform Imobiliare.ro. It is worth noting however, that by March asking prices had stabilized, and while all major cities saw asking prices go up in the first quarter, the highest levels were reported in western Romania. Bucharest saw a more modest hike, according to the same source.

In the capital, asking prices were up by an overall 3.3 percent in Q1 and 1.4 percent in March against the previous month. The average asking price stood at EUR 1,051/sqm for ‘old apartments’, meaning mostly flats in blocks built before 1990, and EUR 1,144/sqm for new apartments. For the latter category asking prices have posted a more significant 6.9 percent increase so far this year.

 

The main changes made to the final draft

–     The law will apply only to end-consumers, thus preventing developers from benefiting from it

–     The mortgage must be on a residential property

–     The law will apply to loans that do not exceed EUR 250,000 at the time they were taken out

–     Beneficiaries include individuals presently going through a foreclosing procedure or whose properties have already been foreclosed on

–     Prima Casa loans are exempt from the law

 

BR Magazine | Latest Issue

Download PDF: Business Review Magazine March (II) 2024 Issue

The March (II) 2024 issue of Business Review Magazine is now available in digital format, featuring the main cover story titled “BAT DBS Romania Hub: A Vibrant New Office For An Employee-Centric
Newsroom | 27/03/2024 | 17:32
Advertisement Advertisement
Close ×

We use cookies for keeping our website reliable and secure, personalising content and ads, providing social media features and to analyse how our website is used.

Accept & continue