Second chance for bad debtors

Banks are promoting a refinancing model which offers haircuts for cooperative borrowers. This is being followed by debt management companies and investment schemes in cooperation with the funds and servicers that have taken over 70 billion euros in bad loans.

The practice of “discounted payoffs” (DPO) allows someone who owes a bank for example €100,000 but has property valued at €80,000 to get a loan of €50,000-55,000 from another institution and to repay their debt to the fund to which their loan belongs with a significant haircut.

The condition is that they allocate a part as a down payment – in this example it can be €10,000 – thereby reducing their total dues by €35,000. The refinancing for the payment of the debt to the fund will be done by a third investor, who will grant a new loan of a smaller value, based on the agreement made with the management company, whose consent is a basic prerequisite to promote this DPO solution.

National Bank is already in discussions with Fortress on the matter with the aim of creating a joint venture that will refinance loans following an agreement with doValue, which is one of the largest loan managers. Also in discussions is Intrum, another major loan manager, while independent funds such as Hellenic Finance are in the picture too.

In the case of National, the model reaps the positive results of the split-and-settle program which it implemented in 2019 for mortgage borrowers. According to that program, if the debtor paid off part of their debt the bank rewarded them by writing off the balance of the debt, which could reach up to 40%.

The benefits of this refinancing model for the borrower are obvious, as they not only get an incentive through the haircut, but also cash to repay part of their debt to the fund that has bought their loan. The debt does not drop to zero, but it is significantly reduced so they avoid the auction of their property on the one hand and take on a smaller debt on the other.