A breakthrough or cosmetic touch to the mortgage problem?
14 November, 2013
A breakthrough or  cosmetic touch to the mortgage problem?
To insure better protection for consumers, Georgian authority intends to restrict private mortgage lenders to certain limits. Ministry of Justice has worked out a draft project that envisages introduction of a cap on interest rates, requires notary mediation of contracts, and also makes some changes to the execution law that handles insolvency. However, financial market analysts find the suggested changes insufficient to alleviate the aggravated mortgage problem.
To protect evicted people who lose their dwelling space due to unpaid mortgages,
authorities plan to place restrictions on private lenders who (unlike banks and micro-finance organizations) are not regulated by an official structure like a central bank. According to official statistics, out of 1300 eviction cases only 70 (around 5%) came from banks, with the remainder from private lenders who (unlike other financial institutions including banks, micro-financers and credit unions) are not regulated by National Bank of Georgia (NBG).
To put private lenders within regulatory frameworks and protect consumers, authorities plan to restrict lenders by capping interest rates that may exceed the average annual market rate (calculated by NBG based on cumulative rates of commercial banks) by 2.5 times only. Notary involvement becomes obligatory. If a client becomes insolvent, the real estate put up as collateral for the loan can go to the creditor only if the loan agreement specifies that.
Sector pundits think the suggested changes are just a cosmetic touch to the real problem, and insure no better protection for borrowers than those that have been provided by policies of no restrictions on private lenders. Lia Eliava, a financial market analyst, believes the mortgage problem is serious for the entire financial sector of Georgia, and government must undertake a more comprehensive approach to it, rather than focusing on private lending alone.
“These changes imply a carte blanche for private lenders rather than restrictions. The cap rate is very high in fact. Based on the current market rate it averages to 4% per month or 48% per year, whereas private lenders today offer 3%, and now they will go higher. The similar cap rate is a maximum 12% per year in the US, for example,” she said.
Besides the draft does not clarify who exactly will be calculating the cap rate each year or how private lenders, notaries or borrowers will learn this officially. NBG bears no obligation to calculate the figure and make it available to private lenders.
Execution also remains a problem. The changes allow borrowers to go to court if they do not agree with the property seizure, but the execution process will not be suspended until the court makes its decision. Besides, the draft provides no details on how to behave if the court (that may last for 2-3 years, as civil courts normally do) settles in favor of the borrower whose property has already been sold during court proceedings.
Center for Democratic Development believes the requirement on notary involvement will only increase costs to borrowers, while not reducing mortgage related risks. Currently contracts signed by private lenders and clients may be registered directly at Public Registry for GEL 5. Requirement of notary involvement may double and triple the cost, whereas notaries are only expected to explain to borrowers that they may lose their property in case of insolvency - but that is already clear to borrowers.
“Contracts registered by Public Registry have never been disputed,” the Center underscores. As Givi Korinteli, Head of the First Credit Union, explained to radio Kommersant, ceiling rates cannot alleviate high costs on loans inasmuch as private lenders will resort to indirect payments and increase costs on other loan-related services to offset the losses. By these changes the state just eliminates responsibilities toward borrowers who apply to private lenders, analysts said.
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