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Another Eurozone Country Bites the Dust
Wolf Richter www.testosteronepit.com
Real estate in the Republic of Cyprus has been popular with foreigners who own about 100,000 homes—in a country with 803,000 people. The British alone, whose colony this was until 1960, own more than 60,000 homes. Turns out, real estate is Cyprus' national sport sponsored by dumb money. But now it has become a nightmare that is unraveling the finances not only of expat home owners, but also of developers, banks, and the government. Yet it's hushed up. By comparison, the banks' impending losses on Greek sovereign debt, significant as they are, seem outright manageable.
"The most common mistake people make when buying property in Cyprus is to use a lawyer who has been introduced or recommended to them by a property developer," says Nigel Howarth who has helped foreign property buyers in Cyprus for more than 10 years. Foreign buyers are sitting ducks. They're unaware of the local business culture and don't suspect that their lawyers are in cahoots with developers--aided and abetted by the banks.
The country acceded to the Eurozone in 2008, but it's already in a heap of trouble. A recent loan agreement with Russia of €2.5 billion will keep it afloat for a few months into 2012. Then it's bailout and haircut time. On October 27, Standard & Poor's cut Cyprus to BBB. The big problem: exposure of its banks to Greek sovereign, corporate, and bank debt. But not a word about the title-deed scandal and the billions that evaporated with it.
As in the U.S., after years of speculative overbuilding, the real estate market is collapsing. Building permits are down 40.2% for the first eight months of the year and 49.4% for August. Home prices have dropped for six consecutive quarters, according to the Central Bank. The steepest declines were in the coastal regions favored by foreigners. Of the 45,000 unsold properties, many are unfinished, and some are essentially abandoned. The Cyprus Property News points out that they "were built for buy-to-flip investors and are unsuitable for permanent living."
Prices would have dropped even more steeply if the banks had dealt with their non-performing loans. But instead of pressuring developers to sell properties to service their loans, they're pressuring appraisers not to reduce values so that loans appear to be adequately secured.
These kinds of issues have cropped up in the U.S. as well. What's unique in the collapsing housing bubble in Cyprus is a title-deed scandal of unimaginable proportions. And it has embroiled waves of foreign buyers.
"The bulk of the problems stem from the archaic Ottoman land law still in existence in Cyprus which allows these dubious practices," writes the Cyprus Property Action Group. Insufficient industry regulation and lacking enforcement of consumer protection laws also play a role.
The scheme works this way: A developer takes out a mortgage on the land but hides it from foreign buyers. The bank retains the title deed as collateral. When the developer sells the property, the buyers' lawyer, who is in cahoots with the developer, doesn't perform a title search and doesn't "discover" the original mortgage. Buyers, assuming that their part of the property is free an clear, either pay cash or take out a mortgage. The developer pockets the money instead of paying off the original mortgage. The bank goes along because it can collect interest on one or two mortgages. But it retains the title deed as collateral for the original mortgage, and the buyer never sees it.
Throughout, buyers are told by everyone, including the government, that a buyer of immovable property is absolutely protected once the sales contract is lodged with the Cyprus Land Registry, and that they don't need the title deed.
Meanwhile, as the property is still under construction and buyers are overseas, the developer strikes again. Alan Waring, an international risk management consultant, explains:
"Some cases have also involved alleged 'double selling' fraud whereby the developer sells a property to Party A, fails to lodge the contract with the Land Registry, and then sells it again to Party B (possibly for a higher price) but fails to reimburse Party A."
Proving fraud in court seems to be impossible. In a recent double-selling case, the judge ruled against the plaintiff: lodging of a sales contract at the Land Registry does not mean that buyers "automatically and in perpetuity have become the ‘owners’ (as they mean it) of the residence," she wrote. Hence, only possession of a title deed confers protection against double selling.
But the bank still holds the title deed as collateral for the original developer mortgage, and it has the right to foreclose on the property. Under normal circumstances, it takes a bank between 9 to 12 years to obtain control over the property. So banks extend and pretend until the developer goes broke. Then they move to recuperate a property that one or two other "owners" have paid for.... A nightmare. And no legal resolutions are in sight.
The numbers are stunning. In this tiny speck of a country with 803,000 people, about 130,000 properties are still awaiting their title deeds. If the average value of these homes is €150,000, then nearly €20 billion worth of properties might be in dispute, many of them with more than one mortgage and more than one owner.
The banks aren't talking. And they aren't writing down their assets to reflect the layers of mortgages that are worthless. Developers are going bust. The money they pocketed has disappeared. Expat homeowners who don't hold title deeds are terrified of losing their homes, even if they paid cash. There are no legal processes in place to resolve this. Estimates of the missing money range from €3 to €6 billion—enough to take down all Cypriot banks. By comparison, the banks' exposure to Greek sovereign debt is estimated to be €4.2 billion, of which only half will have to be written off.
In response to the impending haircuts on Greek debt—and not to the title-deed scandal, which continues to get hushed up in the hope that it will somehow go away—the Cabinet approved draft bills to recapitalize its banks and create a fund to stabilize the banking system. But there is no money to put into the fund (see EFSF, so leverage it?). A package of austerity measures has been approved. It includes such stalwarts as cutting 1,100 already vacant positions in the civil service and reducing entry-level salaries for civil servants by 10%. However, the government did blink in the title-deed scandal and revised some of the Ottoman property laws—a great example of too little too late.
"It wouldn't surprise me that all those who bought properties in Cyprus might in the end be forced to pay additional money if they want to keep what they already paid for," said my source in Cyprus.
And in Greece? "Tax fraud is a national plague," said Greece's finance minister after he found that Greeks owed $50 billion in back taxes. But it's complicated.... Greece's Extortion Game.
Wolf Richter www.testosteronepit.com
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The Turks will take the rest of Cyprus when the time comes and all these paperwork snafus will be forgotten. Bayonet trumps paper title every time.
Cyprus is a story to watch. There is a lot going on behind the scenes. The first is they have struck gas. Lots of it. Maybe as big as the Israeli find a few years ago.
The second is that the Russians have given Cyprus a E2.6b "no strings attached" bailout loan.
The Turks are involved now that money is involved. We may see Cyprus go to the front page sometime soon.
http://www.ukipmeps.org/blog_view_5228_Cyprus-to-get-%60no-strings-attac...
OH wow. I just watched a story a few days ago about 3 brit families hanging out in homes there. they run a generator for 12 hours a day and have had many hospital food poisonings from lack of contnual refrigeration.
And you do a story about food poisoning and this guy does a story about cyrpus and now you know something new about cyrpus.
That's just way to syncrhonous for my tastes.
EXCELLENT ARTICLE !
I am sure ..if it was possible to scratch the surface of Gouvernmental /Public Life in all of the current WESTERN nations now standing on the brink of Bancruptcy ... MY GUESS is .. that we would find similar GREEDY exploitation of the general populace by the POLITICAL POWERS WHO ARE and their ENTOURAGE : The COURTS , The CIVIL SERVICE , hand in hand with The FINANCIAL ELITES , The BANKS , The MONEY LAUNDERERS , etc
Basically there is NO LAW worth its name anymore in the Western world . LAW is what those who have the POWER want it to be and there is and has been for a long time .. everywhere in the western world ... a willing CORRUPT JUDICIAL BODY to enact the BIDDINGS of the MASTERS
The general population was snared into the Property Bubble by holding the eternal human dream of RICHES without WORK in front of it . Most took the bite ! And forgot what property is for normal common people : A Place where You LIVE sheltered from NATURE , raise You family , find rest and security NOT an object of SPECULATION
Interesting piece, Wolf
Though not the same, Ecuador has a similar problem---dumb money buying like it is in the US of A. Dumb money is what sharks wait for and they are having a feast all over the globe at this time.
Thanks om
I live in Spain, which has endemic corruption with regard to banks, realtors, lawyers, etc. People discover every day that the house they thought they owned does not belong to them, etc. There is nearly always a crooked lawyer at the bottom of it. And often a crooked, conniving govt employee. The thing it is essential you remember is that in all the club med countries they have no framework of law that you can turn to. They have what looks like a framework, and there will be plenty of lawyers who will offer to help you recover your money, but there is in fact no framework. Anything goes. Including your house.
foxenburg & the tower
I've heard about this problem in Spain and might want to write an article on it. If you have information, links, or experiences that might be helpful, please contact me through me website. Thanks!
It's incredible, the EU has regulated the curvature of a banana, but they haven't regulated the lows regarding common trading and financing of homes. How should that work if any country has own pitfalls waiting for a suckers.
Same experience, been living in Spain for 5 years I've seen it all. That's why i never bought any property, anywhere. Renting gives you the best security and convenience. I have never understood the urge to "own".
To Wolf Richter
Excellent article, I sometimes get asked about foreign property, so this is very useful info.
As I stated before, there is so much secrecy in the EU countries in regard to what they truly owe that soon we will see that it's not possible to bailout anything.
Now I'm sure that none of the local politicians are having their skids greased somewhere in this process. Please don't tell me that they are corrupt too.
Cyprus uses English Common Law so something is inaccurate here.
http://ec.europa.eu/civiljustice/news/docs/study_resid_jurisd_cyprus_en.pdf
Things are really more complex in Cyprus due to the political situation there. For once half of the island is occupied by Turkey it is my guess that there is high probability of the Ottoman land law to be applied there. Furthermore since the government of the Turk-occupied part is not recognized by anyone (apart Turkey that is) it is almost impossible for someone that has an ownership title from it to take any legal action in case of fraud.
I hope Cypriots manage to get it together and solve this. Its really a petty for such a beautiful place to be divided like that.
looks like cyprus having a russian oligarch population is now half greek half russian and totally mafia.
any Country/society with Law, a Judicial System and lawyers you can take it as a 100% certainty has a Mafia installed
Bruce Krasting's earlier ZeroHedge article on how Cyprus' economy was devastated by the destruction of the major station, after poorly-stored explosives were detonated, and other matters ... from back in September:
http://www.zerohedge.com/contributed/whats-cyprus-war
My Cypriot developer went bust in 1983, taking my 50% deposit with him.
A couple of years later, the Gov contacted me saying a new developer was willing to finish the apartment complex but required a $50k deposit (2.5 x the original 50% deposit) and another $50k upon completion. And BTW, all of us random purchasers would have to agree to these terms for the project to go forward.
I remember my developer muttering over and over, "There are no real banks on this island," and "This place needs some real bankers."
Looks like they got some real bankers since then.
Funny thing is in Ireland a similar scam was in effect except it was the opposite. Lawyers were buying property and mortgaging multiple times for the full amount. The loophole was it's the responsibility of the buyers Lawyer to lodge the mortgage info with the land registry. The mortgages would be obtained from various banks for the full amount. Not just Irish banks BTW.
Now here is where it gets fun. The shit head bankers are now scrambling to get liens on properties ahead of the other shit head bankers by trying to rewrite hstory with help from other corrupt Lawyers by backdating mortgages and trying to foreclose as fast as possible ahead of other scumbag bankers.
P.S. In some case Lawyers were mortgaging their clients properties without the clients knowledge.
Corruption at the highest level of govt.
All friends of Bono Hewison who helped push Ireland in the EU.
Sorry libertarian supply-side Milton Friedman-ites......your destructive economic ideology is not only being discredited and disgraced WORLDWIDE....it's creating anger from those who suffer from your EVIL DESTRUCTIVE "ideology".
don't worry Ayn Rand-ians.....when it all comes down you won't be too hard to find .... besides, I'll be the one pointing you out in the crowd for (re)education.
Think that through. Pointing people out for re-education makes you a collaborator. Know what happens to collaborators?
Vlad? Is that you???
The Streeter Camps are built on the foundations of The Regulatory State. You don't get to have your regulations and blame Ayn Rand too.
Hmm, interesting comment considering Tyler and most posters here are followers of the Austrian school... to hell with Friedman,
I agree. That's not very friendly. How do you "point out a Randian" in any public square anyways? "He's the guy muttering to himself while everyone else is plotting and scheming."
Its bullish for gold.
There is no escape into real estates during currency collapse.
The only remaining fantasy land is Germany where everybody is getting a mania of saving its savings by leveraged buying properties. Let see how long it takes to reveal the ugly side of the reality.
Last time it was BitCoin when we had leveraged buying mania. Where are they now?
Rob Prechter (Worst Gold predictor in the World of 2010) of Elliott Wave International (Worst Investment prediction service in the World 2010) was peddling BitCoin... he last showed an Elliott Wave 5 pattern in their share price as a sign of confiddence... but of course that determines a top so why wasn't he predicting the following crash and advising his Idiot Wave followers to get/sell out?
But that's Bob for you ...a bit (lot) of a fraud
"you've lost your house, buy gold!" with what exactly? you are now "flat broke." let me guess: "food prices are really high in Cypress too."
I have relatives who live in Cyprus. They built an "economic disaster proof" house in a village by a water dam. All solar, earthquake proof, natural energy, resource recycling (grey water system) etc. I think they will manage... but the others... not so much.
In that case they will soon find a Russian on their doorstep "urging" them to sell, for a symbolic price...
The current global financial crisis is certainly focusing attention on corruption in a big way. The different societies and cultures are addressing corruption in their own ways. We are seeing a shotgun approach to address national corruption. I suspect the different societies will take note of what corruption fighting/fixing practises work (globally) and revamp their value systems to incorporate those success stories. It won't be a trip along a straight line. For some, there will be a lot of forward and backward movement before they get with the program. Politics and democracy will provide the impetus for change.
Now, for a little context - Some winners and losers:
http://www.celebritynetworth.com/richest-politicians/presidents/muammar-...
http://www.celebritynetworth.com/richest-politicians/presidents/vladimir...
http://www.celebritynetworth.com/richest-politicians/tony-blair-net-worth/
"Politics and democracy will provide the impetus for change."
Keep sucking on that Govt FDA Approved Valium drip why don't you!
Politics has never provided change, it provides more of the same corruption and stifling of progress than any other, and all other, intstitutions combined. "Democracy" is just a word, a con word, consider yourself suckered
the only "value system" that works throughout history is called FREEDOM
everything else is 2nd or 3rd rate snake oil peddled by human scum and has failed many times over
Govt: the biggest Social and Economic mistake in History
Yes, unfortunately, change only comes when certain ways of doing things can not be sustained. In most cases, blood is spilt first.
Is Freedom best served as one freedom loving man or woman being chased by the mob, or by a group of freedom loving men and women? Once the group hits a critical size, there is no mob to worry about.
... By the people... for the people...
the reason there will be mobs is because the Law, the judges and courts, the US Govt and 'peoples representatives' have all failed...miserably
4 years on from the greatest vandalism and fraud in the US property market not a single Wall Street or Credit rating Agency crook has been arrested let alone cuffed, prosecuted and jailed... not a single politician has been struck out of office for the $1 Trillion in damages to the public purse
yet you return to your yearning for "politics and democracy" to sort it all out for you... hasn't Govt failed in America, Europe and every other bankrupted country on Earth enough times for you to lose faith in this most patently in-your-face corrupt and incompetent of all institutions???
You want it to be different next time? You think it'll change its spots? How much Valium are you on?
I like a bit of Mob Rule when the mobs target is accurate. Like "anarchy" it only lasts a matter of days... society gets the steam off its chests having meated out revenge and goes back to being a civil society which we most definately are when that shithole called Govt isn't being used by every crook in the country to abuse its (monopoly) position amongst us (that's anarchy)
America has given Govt 2nd, 3rd, even 4th chances... how long before you smell the stink and dump the crap in the dustbin and give freedom a chance ?
how do you know this kind of 'freedom' even exists, since there is really no historical example of it, as opposed to a cycclicalview of history in which ffreedom is just a phase ( now passing in the american case) of empire?
Michael C
the world of freedom already exists. It operates everyday outside your door making the world work. Freedom is hampered, intervened, buried in red tape and strangled by Govt intervention in those markets or businesses where Govt sticks its jack-boots.
If there was no economic freedom left America and Europe would already look like the USSR or North Korea.
There is a direct correlation/connection between the size and growth of the State and the contraction and destruction of free enterprise (and GDP). The Wests mushroom cloud explosion in the size of Govt and its spending and the size of regulations, law, legislation and its regulatory police is a mirror image of the growth in Communist Govt (or Fascist) in the USSR or communist China.
The Wests explosion of Govt is having the exact same impoverishing effect, the destruction of the productive (private) economy. Hence growing unemployment cues and asset destruction (deflation). The West has now reached a tipping point where the unproductive (Govt and its monopolists) have passed the point of the productive economy supporting it.
Politicians, academics, economists and journalists/commentators (systemic crones) think there's a difference between Western 'democratic' Govt and its Eastern communist counterparts. No there is not. They are both first, formost and forever monopoly institutions.
Monopolising decision-making in society or the economy, or the money supply, is the same criminal process wether you wave a red commie flag or the stars and stripes.
Monopolising is the exact opposite of freedom in society and in free markets. All monopolies seek to destroy the free market which is precisely what Govts mushroom cloud of law and legislation in the past 10 years has aimed to do and precisely why we are becoming ever less productive (poorer)
They have identical characters, identical centralist decison-making processes, are both identically destructive of the wealth producing private sector and have indentical end-games.. they wave different colour flags maybe but they are the same beast (a parasite amongst society)
Your explanation is a little too simplistic and a little too "high school confidential".
Times have changed. People's values have changed. No government is no answer.
Other than that, enjoy your Don Quixote existence. As George Bernard Shaw said:
"Reading made Don Quixote a gentleman, but believing what he read made him mad."
Regards being "too simplistic" i'd chuck that right back at you for your duller than dishwater response
"No Govt is not the answer"... er, why not? Everything Govt touches turns to crap (see USSR, North Korea, Europe and America now, see single issues like US property, healthcare, public transport, welfare, social security, shall i go on?)
Govt is a shithole of corruption and a toilet of stupidity. What does your brain like about it?
Can i humbly suggest your brain is pickled in liberal garbage (idealism) floating in empty words such as words "democracy"? Do you think about these empty words and ideals you've swallowed any deeper than rice paper? Right so test your empty ideal of democracy against the grizzly reality of how much democracy you or anyone has got in this crumbling imploding bankrupt Govt system.
Has reality smacked home yet you have no say (let me repeat, fuck all) in anything Govt does?
Democracy is not the only stupidly dumb empty idea you've swallowed... and you call me simplistic!!
The monopoly and competition mechanisms are indeed simple. But they are also the most powerful forces at work on the planet, in nature and in mans world. If you though about them and thought them through you'd understand the staggering sophisication and force for good competition is, and the stupifying destruction monopolies (like Govt) produce.
Simplicity doesn't make these fundamental mechanisms of the Universe any less worthy. in fact their simplicity has been ignored by every politician, philospher, academic and economist for Centuries. Which is why all these intelligent people have been stupifyingly ignorant of why Govt is wrong and always produces nothing but garbage. It's also why Govt does not produce "democracy" because monopoly is the exact opposite of freedom, indeed the enemy incarnate of freedom
"Reading made Don Quixote a gentleman, but believing what he read made him mad."
Believing in Govt, despite all the historical and present experience (reality) it produces nothing but crap, makes you mad (delusional). Deal with reality mate, test your stupid empty beliefs against reality sometime (real experience is how we learn). Stop floating idealism around an empty unquestioning brain tht does not test these ideals against reality and your experience
...you might not talk such crap if you put reality/experience above fantasy/idealism for a change
thank you zero govt---- you have nailed it-- govt and its laws of self service is the bail-i-wick of two legged pieces of shit world wide.
Four legs good - two legs bad!
"The bulk of the problems stem from the archaic Ottoman land law still in existence ..." writes the Cyprus Property Action Group. Insufficient industry regulation and lacking enforcement of consumer protection laws also play a role.
Clearly the Cyprus Action Group are talking absolute bollocks and have grasped the wrong end of the stick.
it is the myriad layers of the Law, including opaque and ancient statute, that has created the problem. The Law and its middle-men (lawyers) is the problem and drectly at fault. The (deliberate) complexity concocted by politicisans, lawyers and vested interestes we see everywhere (see Huiman Rights or Divorce Law, both amongst the biggest shambolic farces on the planet).
Had there been no Law and no Govt registry office and no 'professionals' (middle-men like lawyers) a private seller would have sold to a private buyer in a simple direct transfer of title (or even better still a handshake). That is how title passes across the globe for $Trillions of traded goods every year (no Govt, no Law and no lawyers required). That is how $Trillions in title of goods passes from shop to shopper in hundreds of high streets in every country worldwide every day. That simple, that effective, that efficient (ie. the free market at work rather than the Govt and Law mangled market).
It is is imposition of the opaque shambles of Law, the sham industry of lawyers, the dorks at Govts Land Registries that is causing the problem where buyer cannot see clearly or ascertain title because he/she is dependent of institutions and 'professionals' to interpret title for them. The Law and its middle-men are conning the buyer. They are mis-using their positions to fleece and pull the wool over buyers
The sooner the Law is demolished, judges, courts and lawyers sent into the long-grass, Govt registry offices shuttered, the better for all of us ...let the free market work ($Trillions of goods passing title freely and directly between buyer and seller cannot and will not ever be bettered)
I somewhat disagree. There's real value and protection to consumers in a very simple recording system and with a legal requirement to record all deeds and all mortgages, essentially the system in most american states until the advent of the ridiculous MERS system.
I understand, of course, wanting to be free of lawyers. I'm not one and don't have any particular affinity for them.
But a system that requires recording of all mortgages and all deeds stops the double selling and lets everyone know where things stand.
$Trillions of goods changing hands/title B2B and B2C across the World without any central registry office, Govt, Law or lawyers required gives the lie to your statement
It's a working reality (check) ...are you familiar with reality?
Thanks Zero Govt for the great additional information and insider view.
I would like to add your comments and info to my original article on my blog so that my own blog readers can benefit from it too. Could you contact me through my blog?
Mr T
Feel free to add the post to your article and edit any spelling or dictionary errors you see fit. Accredit it as 'Zero Govt post on ZeroHedge.com' ok
Good website BTW ;)
+1
Yes, Wolf does have a great website.