The European Central Bank (ECB) wants Greece to let banks seize more homes during a crushing economic crisis and said a law to protect homeowners goes too far and encourages strategic defaults.
The new coalition government led by the ruling Radical Left SYRIZA of Prime Minister Alexis Tsipras wants to insulate primary residences from foreclosures with many unable to meet mortgages because of government-imposed harsh austerity measures on orders of international lenders.
Greece’s Economy Ministry had asked for the ECB’s views on the draft legislation which was one of the few unbroken campaign promises from Tsipras and SYRIZA.
The draft law offers protection to primary homes valued up to 300,000 euros and requires that borrowers do not have an annual income of more than 50,000 euros to be eligible.
It also sets an upper limit of 500,000 euros for borrowers’ total wealth, of which bank deposits and other liquid assets cannot exceed 30,000 euros.
The conditions are more generous than under Greece’s previous foreclosure law, which expired last year. It provided protection for homes valued at 200,000 euros or less and required that borrowers had an annual income of 35,000 euros maximum and total wealth of 270,000 euros or less.
“The very broad scope of eligible debtors, which goes beyond the protection of vulnerable and low-income debtors, may create moral hazard and could lead to strategic defaults, undermining the payment culture and future credit growth,” the ECB said, according to Reuters.
“The draft law sets out significantly broader eligibility criteria in terms of the value of the protected property, the annual household income, the value of immovable and movable assets and the amount of deposits,” the ECB said, comparing it to the previous law.
“It is likely that the prohibitions in the draft law will incentivize debtors who are not in real need of protection to stop meeting their obligations or reduce them significantly, even if they have the means to meet them in full,” the opinion added.
Greek banks, which suffered 74 percent losses when a previous government devauled Greek bond holdings, have seen bad loans hit 34.2 percent and reported that 28.1 percent of home loans, worth 69 billion euros, have gone into default.
Mortgages make up one-third of all loans from Greek banks who want to seize more homes. Among the bad loans is a combined 250 million euros owed by the former ruling New Democracy Conservatives and its then-partner the PASOK Socialists who aren’t paying and aren’t being chased while banks are hounding others to pay up even if they can’t.