WEST INVEST Undervaluation of properties, a hurdle for the "First Home" program

An issue that the intended beneficiaries of the "First Home" program will most likely face is the undervaluation of properties by the banks. Alina Busuioc, head of real estate agency "West Invest", claims that banks are rather restrictive when giving out loans under the "First Home" program and refuse to accept certain types of homes as collateral.

Mrs. Busuioc said: "The moment you apply for a loan under the "First home" program, the bank will tell you if you qualify for the loan, let"s say 57,000 euros. If you do, the next stage is the pre-approval of the loan, which can"t be done without copies of the titles of the home on sale, land registry excerpt, tax history and tax certificate. In order to get these papers, the applicant needs to pay 5% of the value of the home to the owner. But one month later, it could happen that the bank would appraise the home at just 48,000 Euros. As a result, the customer would either have to come up with the rest of the money - which is rather hard to do -, or, give up on taking the loan and lose their down payment".

Mrs. Alina Busuioc picked a concrete example to illustrate this situation. A bank appraised a 3-room apartment built in 1987, in the vicinity of Liberty Mall, at a middle floor, at just 45,000 euros, even as sellers raised their asking prices by approximately 10%.

Alina Busuioc feels that the "First Home" program has lots of shortcomings: "The program is not really a form of social aid, because the minimum income requirements of 3,800 lei, are too steep. Besides, based on what I"ve been told by the banks, the FNGCIMM (National Credit Guarantee Fund for Small and Medium Enterprises), only has 30 people working on this program, for a number of 19 banks with branches all over the country. Thus, a loan application from Arad can take as long as five months to be approved".

• No benefits apart from the small down payment and the elimination of some of the fees

Mrs. Busuioc feels that apart from the small down payment required and the absence of the loan fee and the early closing fees, the program has no other benefits. The head of "West Invest" considers that pegging the interest rates of the program to the 3-month ROBOR and EURIBOR has disadvantages over the interest rate of standard mortgages, which uses the 6-month figures of the aforementioned indexes. She argued that EURIBOR will increase in the coming months, therefore the "First Home" program will require updates every three months, whereas standard loans will use the same indexes for a longer period of six months or one year.

• "First Home" no help for developers

Apart from the alleged social assistance nature of the government program, another stated goal of the program is to stimulate the construction sector. In fact, with the current market freeze, she feels it"s doubtful there would be any developers out here willing to begin construction with a down payment of just 5%, before being certain that the bank has approved the loan.

He explained that people that decide to join the program in order to build their homes themselves, have to erect the building using their own money within 18 months: "Once being notified of receiving the loan and once the building is erected, the beneficiary needs to go to the bank again with all the papers to prove his eligibility again, and to receive the money. Given this factor, there is always the risk that the client would no longer be eligible, as we are in a period of economic crisis". Thus, the beneficiary of the home runs the risk of no longer receiving money from the bank, and therefore the builder of the home would not be paid either.

Alina Busuioc further said: "We are in the midst of an economic crisis, when wages are dropping and unemployment is rising. I don"t think there are any constructors out there that would accept a 5% down payment, which amounts to 3,000 for a 60,000 Euro home, without being certain they would receive the rest of the money".

If we add the 18 months period to the 90 days spent waiting for the bank to approve the loan, developers would have to wait almost two years to get their money back under the "First Home" program. The usual down payment in the case of building a new home is 25%.