Developers Guaranteeing the Banks

[Brizo1983]

Hi,

New to the forum great site. I work in financial services in the UK and I understand the reason why the developer gives the bank a guarantee in terms of the title deeds issue. My question is what happens if an individual does essentially go into full arrears/bankrupt? Does the bank then call in that guarantee to developer and it becomes the developers responsibility to then persue?

If so then is it actually in the developers interests to potentially buy back distressed properties for a reduced price. I understand this would only work if the remaining amount of the loan could be paid back to the bank but I am interested to know the process

Thanks
Brian

[Nigel Howarth]

Hi Brian and welcome to the forum.

The way it works is as follows:

The developers mortgage the land on which they are building to help fund their projects. When a buyer comes along and purchases a property built on that land, the property they are buying cannot be used as collateral for the mortgage.

To get around this problem, the developer acts as the guarantor for the buyer's mortgage with the bank. If the buyer defaults on his mortgage repayments, the bank will will first go after the buyer to get its money. And if they get a judgement from a Cypriot court, that judgement can be implemented in another EU member state, which means that the buyer's assets in his home country could be at risk.

If the bank gets nowhere with the defaulting buyer, they will pursue the mortgage guarantor (the developer) for payment. The developer could then pursue the defaulting buyer if they wished. But probably what would happen is that the developer would market the property again.

The problem is that property values have fallen considerably over the past two or three years and it is unlikely that the developer would be able to sell the property at a price that would enable him to repay the bank.

The situation is made worse because the property market is very depressed and developers have thousands of unsold properties on the market. Because these properties are not selling, developers are having difficulties in maintaining their own mortgage repayments (I have an unconfirmed report that the Cyprus Government has introduced an 'interest repayment amnesty' for developers facing this problem and I am trying to get this confirmed and details).

The bank guarantee is a separate issue. It's a form of insurance policy that the developer (more usually the buyer) can take out with the bank guaranteeing the performance of the developer. So if the guarantee were to say that the developer will deliver the Title Deeds within four years and he fails to achieve this, the buyer can a sum of money back from the bank. The cost of these guarantees is around 1.8% per annum of the amount insured.

Regards,

[crystal]

Hi Nigel,
I know our developer has been doing this with the Alpha bank,
As he has still to sell 3 on our complex and we know for a fact he has gauranteed mortgages on other developments and the buyers have returned to Uk and the mortgage are not being paid, this worries me.

I have heard he is at his wits end trying to sell the remaing 3 on our complex, the 1 person on ours with a mortgage guaranteed by him, have paid it all off except for a small sum and luckily they are paying.

If the bank goes after him for the other mortgages on other developements would our house be uinder threat as well, if anything happened.

thanks

[Nigel Howarth]

Hi crystal

Acting as a guarantor is a very common practice. If the bank gets nowhere pursuing the defaulting buyers, it could pursue the developer - but I think what is more likely to happen is that the developer will sell the property again (once he has the necessary court orders, etc) and repays the bank.

Regards,