Stricter Mortgage Reforms for Borrowers’ Sake
28 February, 2013
Stricter Mortgage Reforms for Borrowers’ Sake
Stronger restrictions are supposed to be imposed on mortgage loans disbursement at financial institutions in order to protect borrowers from unreasonable loans. On the other hand, the administration plans to raise awareness of Georgian borrowers through TV ad-shots disclosing in-depth details of mortgage loans and risks related with the loan.
To mitigate the eviction problem of insolvent mortgage-borrowers deprived of living space and accommodation due to double impact of financial crisis and August war in 2008, Georgian government came out
with the initiative to reform the mortgage disbursement system and make mortgage disbursement more difficult. Tea Tsulukiani, Minister of Justice, trumpeted the idea on February 13, 2013.
According to her, the most painful aspect of the Ministry of Justice activity is execution of insolvent borrowers’ eviction process in spite of the fact that the process is legal and inevitable once a family laid its living space as collateral in the mortgage and could not pay it off.
Government decided to raise awareness of Georgian population [that still lacks due skills and knowledge of communication with financial institutions] through TV ad-shots elaborating intricate details of mortgage loan and related potential risks. The advertisement is already shot and scheduled to run on TV channels pretty soon. On the other hand, a governmental working group will work on reforms of mortgage related legislation aimed to impose stronger restrictions on mortgage disbursement at all institutes involved with the mortgage such as banks, credit unions and private creditors as well as notaries. The idea is to make mortgage loans not as easily available as today.
“But the key work is to be done with our citizens who have to “play” with the loans due to utmost poverty,” Tsulukiani stressed.
Paata Sheshelidze, President of New Economic School, finds inacceptable the state interference in the relationship between clients and banks or any other business. As to the advertisement that should raise awareness of population in loans Sheshelidze assess them as a money squander.
“It does not help. People should read contracts properly before they sign. Nobody forces them to go to banks and once they appeal a bank they should read a contract, if they do not then will face a loss and this will be the best lesson elaborating the contract and loan details,” he said.
According to Zurab Gvasalia, Head of Association of Georgian Banks, the problem lays with other credit institutes of limited responsibilities that also disburse mortgages rather than with banks. These private credit institutes and organizations are focused on collaterals when disburse mortgages and give out loans easily without proper analysis while banks implement an in-depth analysis before disbursing the mortgage, he assures. Gvasalia does not attribute the worsened social picture [eviction] with banks as far as based on statistics of 2012 only 1% of mortgage loan portfolio is problematic and the loans were restructured with 1800 personal borrowers.
Ditrich Muller, co-founder of Georgian Investment Group, believes banks are the key culprit in the aggravated picture of unpaid loans as banks pushed their clients in the claws of private credit institutions that impose even higher interest rates than banks.
“Banks did not pay due attention on risk management and used to disburse mortgages easily without due risk evaluation that led risky clients to insolvency. Meantime banks did not give to them more loans and the poor people to save their living space laid in banks mortgages appealed to private crediting institutions that demand higher yields on loans. Ultimately, they became insolvent,” Muller said.
According to Lia Eliava, an economic analyst, the key reason in this mortgage problem is the incompetence of the National Bank of Georgia (NBG) that failed to work out due normative basement to implement strong control over banks and their risk management skills.
“No bank in the EU will disburse a mortgage to a private client if the client backs the loan only by his/her single living space but banks pay no attention to such things here and this is due to improper regulation of the NBG,” Eliava said. “The NBG control must get stronger.”
On the other hand, creation of separate law on mortgages is a must to protect unaware clients as the best world practice shows. The loan disbursement is regulated by civil code in fact but it is too difficult to clients to gather information dissipated in sundry paragraphs of civil code.
“Some people in Georgia hardly distinguish banks from credit unions and private creditors. The latter two are not regulated by NBG and people fall as victims to them in the result,” Eliva said. “Therefore a voluminous law on different sort of loan disbursement and elaborating each detail related with the loan must be created that will prevent conclusion of hazardous loan contracts.”
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