April 11, 2015 / 12:42 PM / 3 years ago

ECB sees risks in Greece's planned home foreclosure law

ATHENS (Reuters) - Greece’s draft law to protect primary residences from foreclosures goes beyond protecting low-income debtors and could encourage strategic defaults, the European Central Bank said in a legal opinion on Saturday in a potential setback to the plan.

The sun is reflected in the new European Central bank headquarters during its partial eclipse in Frankfurt, March 20, 2015. REUTERS/Kai Pfaffenbach

Greece’s Economy Ministry had asked for the ECB’s views on the draft legislation, which seeks to protect indebted citizens from losing their primary homes -- and fulfills a pledge by the governing Syriza party to deal with a humanitarian crisis brought on by the country’s debt crisis.

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.

“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 said that broad-based prohibitions on primary home auctions was not a sustainable solution to tackle the high level of non-performing loans at Greek banks.

“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 ECB supervises Greek and other euro zone banks.

Greek banks’ bad loans rose to 34.2 percent of their loan portfolios by the end of the third quarter of last year, from 31.9 percent in December 2013, according to Greek central bank data.

About 28.1 percent of home loans extended by Greek banks, which were worth a combined 69 billion euros, were non-performing or unpaid for more than 90 days, as of September 2014, according to latest Bank of Greece data.

That was up from 26.1 percent in 2013.

Home loans accounted for a third of banks’ total loans as of last September.

Reporting by George Georgiopoulos; Editing by Susan Fenton

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