The law of giving in payment has raised barricades

• Sources: "Meetings between the banking sector and the presidential administration"

Last week was an extremely tumultuous one for the banking system, after the law of giving in payment which allows the giving of the property to extinguish bank debts was passed by the Parliament.

In the press, the issue was among the most discussed, with comprehensive articles and entire shows putting the parties involved face to face - initiators, bankers, consumers, the NBR.

Each time, the controversies have escalated, with grave accusations being made by each side.

Among other things, heated discussions have taken place concerning the social nature of the law, its constitutionality, the retroactivity of the regulation, as well as the degree of violation of the European Directives.

At the end of last week, presidential sources have told us that several meetings have taken place between representatives of the banking system and officials of the Presidency.

The talks have revolved around the law of giving in payment, and the bankers have presented their point of view on the subject.

Economic analysts have relatively different opinions concerning the new regulations, which are set to be passed by the head of state.

The law of the giving in payment of homes has good sides and bad sides, says Ionuţ Dumitru, the president of the Fiscal Council, who emphasizes that this regulation can protect those who represent social cases, but that it also gives an advantage to real-estate speculators.

"In a situation like this, there is no «best solution». A point of equilibrium needs to be found, however, and it does exist here".

Mr. Dumitru thinks that if the law is implemented, it will have negative effects on the state budget.

The economist explained to us: "The potential effects of this law on the First Home program can not be disregarded. Upon a very high variation of the price of the mortgaged loan, the temptation of giving in payment the asset in question can appear. The debtor will only have paid a very small downpayment, of just 5%, and the bank has granted a loan of 95% of the value of the property. But this amount subsequently fell far more than 5%, which will probably make some of the customers resort to using the provisions of this law. After foreclosing on the collateral, the bank will be left with a loss, and the difference between the actual value of the property and the initial one will represent a loss which will be borne equally by the bank and by the state, because it is the state which has guaranteed 50% of those loans. The amounts - more than considerable - which will be borne by the state will directly affect the budget and every taxpayer will pay. The inventory of loans taken out through the First Home program is about 20 billion lei. And if a bank does go bankrupt, it will be the state as well that will have to pay, as part of the resolution procedure. The banking system has its part of the blame, through the exuberant lending prior to the crisis, but we shouldn't live with the delusion that banks will be the only ones to lose following the application of this law.

Depositors will be affected, an in extreme cases, the state, meaning all of us. It is not equitable and fair for the taxpayer to pay for certain people that have conducted speculative actions".

Ionuţ Dumitru emphasizes that in each case, the lawmakers' responsibility is very high.

• Piperea: The law does not stipulate only the extinguishing of the debtors' debt, but also of the liability of the guarantor, as part of the "First Home" program

However, lawyer Gheorghe Piperea, one of the initiators of the law, contradicts Ionuţ Dumitru. When asked how this law will affect the First Home program, Mr. Piperea recently said that the Romanian government will benefit from its application, because it stipulates not only the extinguishing of the debtor's debt, but also the of the guarantors' liability: "Half of the loan offered through the First Home program is guaranteed with the property being acquired and with the future earnings of the debtor, and half is guaranteed by the state. The draft law states that if you can't pay that debt, then you go to the bank and you offer the house to extinguish that loan. The law states that it is not only the debt which gets extinguished, but that of the guarantor as well. Thus, the Romanian state will win out of this law, as it will have the ability to make that money available, which will no longer be locked for the collaterals in question".

• Rechea: "The fierce struggle around the law of giving in payment will have long term effects on the position of the banking system within the economy

The fierce struggle around the law of giving in payment to extinguish debts will have long term effects on the position of the banking system within the economy, analyst Călin Rechea states.

He said: "Beyond the pro and con arguments, with a considerable advance for the former, the reality of a deeply unbalanced balance of power in the relationship between banks and their individual customers. This law tries to remedy that situation, if only partially. We shouldn't forget that in the context of the fractional reserve lending system and of the "license to create money" which banks have in modern economies (see the studies of the Bank of England published on the BURSA website on April 28th 2014 and May 6th, 2014), the financial institutions hold a privileged position in the economy, one that no other entity has, not even the industrial sectors with the highest political influence.

The fact that individual debtors are being asked to fully repay the debt, even after the foreclosure of the collaterals, represents nothing else but an unlimited loss, which is being demanded in the name of avoiding moral hazard (the tendency of taking on unjustified risks amid a third party bearing the costs).

Unfortunately, this unlimited liability does not exist in the case of the banking system alike, and the moral hazard therein is heavily supported by the Central Bank, as well as by the state.

Even a cursory analysis can easily invalidate the "bogeyman" of lending coming to a halt, even with the raising of the necessary downpayment to 50%, because the adjustments on the real estate market will trend towards the true purchasing power of the population.

Moreover, when the "First Home" program was launched hurriedly, far too few criticisms of it existed. Back then, banks did not invoke moral hazard, even though the measure was clearly intended to artificially prop up the prices on the residential real estate market, to keep the banks' balance sheets from imploding".

Mr. Rechea thinks that the law not getting applied, after its passing in the Parliament, will severely affect the image of the banking sector and the public's trust in it, especially as that lack of trust is already extremely high.

• Radu Zilişteanu: "The law of giving in payment - an obstacle to real estate investors"

In the opinion of Radu Zilişteanu, real estate market expert, the Law of giving in payment will also have negative effects on the real estate sector.

If this draft law passes, banks will put up for sale for 50,000 Euros properties acquired for 80,000 Euros eight years ago, which will lead to a price drop in this sector, an aspect which will overlap over the already existing imbalances between demand and supply.

"We have an inventory of 475,000 real estate collaterals on the market, which means that the effect of the application of this law will be very high in the real estate sector", he says.

Radu Zilişteanu thinks that this draft law will represent an obstacle for investors that want to develop businesses in Romania.

"Loan agreements stipulate that if the real estate market drops, banks have the right to ask debtors to bring in additional collaterals or to request the immediate renegotiation of the loan agreements. But not every bank has done that, and current events have caught them unprepared", Mr. Zilişteanu concludes.

• Adrian Mitroi, CFA: "I think that the effects will be temporary and not important enough"

CFA economist Adrian Mitroi does not believe that the effects which specialists say this law could have will come true.

He told us: "I think that these will only be temporary effects and not important enough. The pressure of international finance is the one that matters the most. Any administrative influence will be negated by this pressure. The law is not necessary and it is useless, and if its gets passed, its effects will be just as insignificant. We are talking about an administrative intervention into a market mechanism and every administrative intervention is short-lived. That is why I am extremely cautious in making any kind of scenario. The economic reality is many steps ahead of economists and politicians alike".

Mr. Mitroi says that the only negative element that he can speak about in all this process is the way that the political and economic segments of the economic society operate - without strictness: "We are witnessing a typical Romanian situation, superficial, with blame being laid on people".

The specialist feels that the giving in payment of homes can be a good idea today, when compared to the decisions made eight years ago, but it could prove a bad idea in another eight years.