Temporary suspension of mortgage foreclosure: Citizens' problems will remain unsolved, while the country's economy may suffer - საერთაშორისო გამჭვირვალობა - საქართველო

Temporary suspension of mortgage foreclosure: Citizens' problems will remain unsolved, while the country's economy may suffer

26 July, 2013

On 11 July 2013 a group of Georgian MPs initiated legislative amendments to the Law of Georgia on "Enforcement Proceedings" and the "Civil Code of Georgia". The draft law intends to declare a moratorium until 1 February 2014 on mortgage foreclosure. This means that if a person mortgages his/ her real estate property as security when borrowing money from a bank, microfinance organization, or  private individual, and then does not pay off the loan, the creditor will be unable to recover their money from the mortgaged property until 1 February 2014.

We believe adopting this initiative is unacceptable due to several reasons:

  • Firstly, postponing the enforcement of realization of mortgaged property until 1 February 2014 will not solve the problems of people who have failed to fulfill liabilities towards financial institutions. These people will still have to pay off these debts.

  • Adoption of these amendments will greatly undermine the Georgian financial sector and the stability of financial transactions in the country in general. Many financial institutions, especially microfinance organizations whose operations depend on mortgage loans, will face significant financial problems should this legislative initiative be adopted, as they will be restricted when reclaiming the loan.

  • These regulations will create an unfavorable environment especially for the operations of small and medium financial institutions; this may even lead to cuts in this sector’s  workforce.

  • Financial institutions will also have difficulties in meeting the obligations made before the creditors and depositaries because they will be unable to reclaim the loans for 7 months.

  • Postponement will presumably affect the behavior of citizens who observe the terms of contracts executed with financial institutions. It is logical if they no longer want to fulfill such obligations, since during the period when such amendments are in force, financial institutions will be fettered in applying certain sanctions against them.

  • Amendments will make credits in the financial sector more expensive and less accessible, which has a general adverse effect on the country's economy, customers and jobs.

  • Issuing credits will become a high-risk operation for the banks, since for these 7 months it will be impossible to reclaim the money. All of this will reduce economic activities whilst these amendments are in effect. For instance, entrepreneur who is solvent and wishes to take credit for expanding business, may find it impossible to do so.

  • Furthermore, the draft law may threaten the trust which international financial institutions have in the Georgian financial system, and Georgia’s investment environment may consequently deteriorate. Foreign investment in Georgia will become difficult, since such unjustified regulations mean that international financial institutions can no longer trust Georgia’s decision-making process on financial policies.

  • Reduction of foreign investments in the economy caused by the aggravation of crediting terms will have an adverse effect on the country's economic development, and potentially result in increased unemployment.

We call on Parliament not to adopt the draft law, and to treat with caution any future initiative that may potentially undermine the stability of the country's financial system. We do acknowledge the need to reform this sector, however, and welcome relevant initiatives put forth by the authorities in this respect. Yet, these changes must be staggered and relatively painless for the country's financial system. Furthermore, it is vital that financial institutions are actively involved in the reform of this sector.

Moreover, it should be questioned whether this initiative was driven by elections and if administrative resources are used for election purposes. Such unreasonable initiatives, which are in fact solely focused on gaining the voters' will rather than on solving the problem, point to an abuse of administrative resources during the pre-election period.

Author: TI Georgia