Drowning In Debt

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March 4, 2009, 9:47 p.m. | Ukraine — by Maryna Irkliyenko

Maryna Irkliyenko

Maryna Irkliyenko worked as a Kyiv Post staff writer from 2009-2013. She is now a London-based private equity correspondent at Mergermarket, a global mergers and acquisitions news service.

More homeowners can’t keep up with mortgage payments during economic crisis. Vitaliy Chernyavskiy and his wife, Olena Tkacheva, moved to Kyiv from Zaporizhya four years ago to start a family in the city with big opportunities. Years of rapid economic growth convinced the family last year to buy the apartment they had been renting.

It looked like a safe bet then. The family was making $5,000 a month, comfortably middle class, and more than enough to cover the $1,800 mortgage payment.

Then everything went downhill fast.

When Ukraine’s economy took a dive, Chernyavskiy lost his job last year and his wife’s income barely covered the monthly payments. Last August, the bank raised the interest rate, bringing payments to $2,100 on the home loan. Combined with a 40 percent drop in the hryvnia since then, the married couple is now drowning in debt. Their salaries are paid in hryvnia, while their loan is repaid in dollars.

Today, they are one missed payment away from having their lender start foreclosure proceedings that could force them to surrender their home to the bank.

Sadly, they are not the only ones in Ukraine. Dreams are crashing all around as people slip from middle class to poverty. “Sometimes there are just two days left before the salary payment, and you have an empty fridge, so you can not afford to have children in these circumstances,” Vitaliy Chernyavskiy said.

The Chernyavskiys are among 10 million Ukrainians who took out loans in the last two years, with at least half of those credits denominated in dollars. Dollar loans came with lower interest rates. Currently there are 400,000 families owing mortgages of Hr 102 billion (or about $13 billion), “80 percent of which are in foreign currency and, under the current hryvnia rate, 20 — 30 percent [of borrowers] cannot meet their loan obligations,” said Andriy Nesteruk, analyst at Phoenix Capital.

Officially, some 2 percent of loans were classified as non-performing by February, but others believe the figure is much higher. As these unpaid debts pile up, banks are facing threats to their own solvency. “From the beginning, we should understand that the crisis creates difficulties both for clients and banks,” Greg Krasnov, the general director at Platinum Bank, said. When clients can't pay their loans and lose their homes, banks face bankruptcy.

Oleksandr Koksharov, partner at Best Credit Anti-Collection, notes that – as real estate prices drop by double-digit percentage points – buyers are finding themselves “under water.” In other words, they owe more than the home is now worth.

Also called being “upside-down,” the unhappy circumstance gives borrowers a powerful incentive to default on their debt obligations and walk away from their loans. “It would not make sense for people to continue repaying the loan whose value significantly exceeds the market value of the collateral,” Koksharov said.

The Chernyavskiys know well the temptation to default. Vitaliy has gotten a freelance job that brings in some income, but not enough: “The situation is very frustrating because I spend the larger part of my salary to pay off the mortgage. I can’t use money that I earn. Meanwhile, my debt is only growing, so I don’t see the point [of keeping up with payments].”

On the other hand, if the bank seizes their apartment and sells it via auction, the proceeds are likely to cover only half of the loan amount at current depressed prices, leaving the family on the hook for the remainder.

The bank is not much help in finding a way out, the Chernyavskiys said. Mortgage restructuring specialists offered the family an extension of the repayment period, from 15 to 25 years. That, however, would increase the cost of the apartment to $500,000, while decreasing monthly payments by just $100. The couple owes $2,500 in fines for late payments. They are currently paying what they can, but can’t keep up.

Despite this situation, banking experts say borrowers should promptly inform their lenders about financial problems in order to work out a plan to save their homes. Banks would rather have money, not apartments, cars and other items that they would most likely sell at a loss. Experts also advise borrowers to learn their rights instead of just accepting what banks say.

“As soon as they encounter financial problems, they need to notify their bank in order to find a mutual solution,” advised Platinum Bank’s Krasnov. “Both a client and a bank should work together to work out the best affordable solution.”

Recently, the Justice Ministry announced that banks have the right to seize people’s homes without a court decision if borrowers miss payments for more than 90 days. A few days later, Justice Minister Mykola Onischuk explained that the new law applies only to mortgages issued after Jan. 14, and then only if this condition was specified in the mortgage contract.

Meanwhile, pressure is mounting on the government and National Bank of Ukraine, specifically, to develop programs to help families like Vitaliy Chernyavskiy and Olena Tkacheva. The central bank has started selling foreign currency to select banks at the below-the-market rate of Hr 7.8/$1 so that their mortgage clients could take advantage of lower installment payments. On Feb. 27, the NBU sold the first portion of $34.5 million to 12 banks.

Petro Poroshenko, deputy head of the NBU, suggested that the loan burden should be divided equally among the borrowers, banks and government. Appearing on the “Shuster Live” TV show, Poroshenko said that “33 percent must be paid by the borrower, and the government should provide incentive for the borrowers to do so. The next third should be borne by the lender by means of decreasing the interest rate, and the remainder of the loan should be paid by the government.” Poroshenko said ministries should step in.

But with government and banks in tough financial shape, little help may be forthcoming to borrowers, many of whom may end up defaulting on their obligations and losing their homes.
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