The Mortgage Minefield
- By Anya Levitov
- Feb. 12 2009 00:00
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The economic crisis and decline in real estate prices have put additional strains on borrowers, making the worst-case scenario an imminent danger for many. This applies not only to those who have lost their jobs. Many of those who were considered "high quality borrowers" and have kept their jobs have seen their ruble-denominated salaries reduced by more than 30 percent by a combination of salary cuts and ruble devaluation. The situation is exacerbated by the fact that most mortgages were taken out in dollars or euros.
As a result of these circumstances, some of our clients find themselves in a position where they can't or don't want to pay and would rather voluntarily transfer the ownership of the apartment to the bank to save the bank the trouble and expense of going to court. Banks, however, uniformly show little enthusiasm about this.
Some banks refuse to even discuss the situation. BSGV, for instance, sent us a very stern reply, saying it had no procedure to deal with borrowers who are experiencing difficulties and plan to resolve any such cases, should they arise, through the courts.
Delta Credit confirmed that it is not interested in the property but encourages an early conversation with the borrower, saying it will agree for the apartment to be marketed and sold to repay the loan. A Delta Credit representative said, however, that the bank has not yet encountered a situation where the apartment would be cheaper than the loan, and they do not really know how to deal with such a situation.
Unicredit said it has no standard procedure to deal with possible foreclosures and that it encourages borrowers who encounter difficulties to apply with a written request to the bank requesting forbearance for a certain period of time. Although this sounds encouraging, it does not seem to work so smoothly. A request filed by one of our clients has been under review for three weeks so far, while initially he was promised a response within three business days.
All of the banks said they were not interested in owning the property but strictly in loan repayment. If ownership is transferred to the bank and the property liquidation value is below the amount owed, the borrower will have to compensate the difference between the amount owed and the property liquidation value.
If the borrower is not willing to do so voluntarily, the bank will turn to court and will seek a "deficiency statement" -- a court order to formalize the debt against the borrower, which means that any other property (not necessarily real property) will be subject to seizure and sale to cover the difference between the apartment value and the loan amount.
Moreover, court expenses and an additional 7 percent tax to the state on the unpaid amount will apply to help the banks further. Under current legislation, law enforcement officials can also, without a court order, impose restrictions on travel abroad, sanction fund removal from bank accounts and any other type account (for example removal of funds from a prepaid cellphone account) and order confiscation of the borrower's salary that exceeds the official poverty level.
The borrower is so highly exposed in these situations because there is no personal bankruptcy law in Russia.
It is likely that as the number of hardship borrowers increases over time, some form of bankruptcy legislation will be enacted as early as summer or early fall. As the number of borrowers unable to repay their mortgages increases, the banks might change their course of action.
At the moment, if you think you might find it difficult to make mortgage payments, you can try to sell the apartment at loan value, thus losing the down payment, loan payments already made and any investments on improvements.
Other options can be renting the apartment to help you pay the loan. Or you can try to get concessions from the bank to avoid transferring over the ownership. Once you transfer the ownership, you lose control over the liquidation procedure and might find out that you still owe the bank even though your property was at or above loan value.
Anya Levitov is managing partner of Evans Property Services in Moscow.