E-auctions: An uncomfortable reality

Electronic auctions began in Greece last week after months of discussions and delays. It was a minor first foray into this form of foreclosure in terms of volume (only two properties went under the hammer) but a much more significant moment as far as substance is concerned. E-auctions are seen as a vital part of the process through which Greek banks are going to heal the financial wounds caused by the crisis.

Greece’s creditors, as well as representatives of the European Central Bank’s Single Supervisory Mechanism (SSM), were in Athens last week and would have been watching events closely. E-auctions have become so important because public auctions had virtually ground to a standstill as a result of protests by activists who want to prevent homes being sold by banks, as well as lengthy strikes by lawyers and notaries. Last year, fewer than 5,641 property auctions were held compared to almost 52,027 in 2009, before Greece entered a full-blown economic crisis.

Conducting property auctions is regarded as essential because banks need to get nonperforming assets off their balance sheets as part of their efforts to becoming lending institutions again. Auctioning properties is one way of doing this and lenders need to have the full range of options, including selling portfolios of bad loans to funds, at their disposal if they are going to meet the targets for reducing their nonperforming exposure.

Auctions could also trigger another positive side-effect for banks, and the banking system in general by encouraging strategic defaulters to come forward and start meeting their loan repayments to prevent their property being sold at well below its market value.

There is strong evidence that a considerable number of bank customers have taken advantage of the genuine economic hardship faced by hundreds of thousands of Greek households in recent years to avoid their obligations. Before agreeing last month to sell a 1.5-billion-euro pool of non-performing, unsecured consumer loans to Sweden’s Intrum, Eurobank attempted to contact thousands of customers to see if it could convince them to settle up. According to reports, some 114,000 loan-holders were contacted and told that the amount they owed could undergo a haircut of up to 94 percent if they agreed to pay the remainder in six monthly installments. Only around 2,000 customers took up the bank on its offer.

The extremely low participation rate is thought to be indicative of the non-payment culture that has been fueled by developments over the last few years. The ECB is among the institutions that has repeatedly insisted this needs to be addressed.

Banks are expected to pick up the pace of e-auctions from the beginning of next year. It is thought just a few dozen will be held in 2017, followed by several hundred in January and then around 1,000 a month until September. The aim is for 2,000 per month to be held in the final quarter of next year so that at least some 15,000 properties can be put through the process in 2018. Around 41 percent of mortgages were classified as nonperforming exposures by the Bank of Greece in August, meaning there is a large real estate pool from which banks can pluck properties to sell to the highest bidder.

The political implications of a rise in the number of homes being sold in this manner could be severe for the current government, which is concerned about the message these foreclosures send to voters. Government spokesman Dimitris Tzanakopoulos stressed last week that the homes of working class Greeks are not at risk. He argued that the Katseli Law passed in 2010 protects 70 percent of main residences from repossession. The government has also suggested that only properties worth more than 300,000 euros would be made available.

The issue is particularly sensitive for SYRIZA because it had campaigned against foreclosures while in opposition. Also, the demonstrations against auctions have now been taken up by parties to its left. The governing party does not want to seem less in tune with the concerns of the working class than its leftist rivals, even though they have negligible support at the moment. Prime Minister Alexis Tsipras will be aware of how fertile a political breeding ground home repossessions proved for the left in Spain and will hope to avoid giving his opponents in Greece the same kind of platform.

Despite these political concerns, banks seem determined to press ahead with the e-auctions, especially in light of the stress tests, conducted by the SSM, that Greek lenders are due to undergo early next year.

Kathimerini reported last week that banks are set to offer their customers mortgages specifically so they can buy homes in the auctions that will be conducted. Apart from helping guarantee that the auctions will be successful, the banks are also interested in ensuring that property prices do not plummet as it would lead to them collecting less from the auctions (the target in 2019 is to rake in more than 12 billion euros) and would result in the assets against which their customers have borrowed declining in value. There have also been reports that banks will buy a large number of properties themselves for this reason.

Apartment prices in Greece have been declining since the first quarter of 2009. The biggest annual fall was posted in 2012, when they contracted by 11.7 percent, followed by another double-digit drop of -10.9 percent in 2013. The trend has been decelerating since 2016. Also, there are few new homes coming onto the market as construction has dropped sharply. The number of building permits issued has plummeted by around 87 percent in the last 11 years. Just 864 were issued in August, from a monthly average of close to 8,000 permits in 2005.

There is no doubt that the repossession and auctioning of homes is a highly unpleasant process, especially if the owners involved have genuinely fallen on hard times as result of the economic difficulties Greece has been through. The uncomfortable reality of the country’s situation, though, is that if banks do not begin shifting off their books apartments linked to nonperforming loans, particularly in the case of strategic defaulters, then the financial system, as well as the housing market, have little hope of recovering.