Parliament passed on July 25 with its first reading a controversial bill ordering suspension till February 1, 2014 foreclosure of private homes of individuals with defaulted mortgage loans

The bill, which the critics say will deteriorate investment climate and have negative consequences on banking and financial sector of the country, was passed with 69 votes to 1.

According to the legislative amendments to the law on enforcement proceedings and civil code, enforcement of foreclosure and eviction of borrowers with defaulted mortgage loans from their homes, which were used as collateral for the loan, should be suspended till February.

The government was initially against of this bill, which was initiated by 49 lawmakers from the Georgian Dream (GD) parliamentary majority group.

But on July 25 government’s parliamentary secretary, Shalva Tadumadze, told lawmakers that the government was giving its approval on the condition that the suspension would apply only to bad mortgage loans that were created before August 1 and would not apply to mortgage foreclosures of legal entities – conditions, which were acceptable for sponsors of the bill.

Initially MP Popkhadze was offering not to apply suspension of foreclosure to those bad mortgage loans, which were issued by banks and microfinance institutions and to apply it only to foreclosures stemming from bad loans provided by private mortgage lenders. Many of those people, who were seeking loans, but failing to qualify for stricter lending criteria of banks, were turning to private mortgage lenders, which usually offer much easier access to loans, but also with much higher interest rates and consequently with higher risk of turning the deal into a bad loan and eventually leading to foreclosure.

Although there are no exact and reliable data on number of people facing an imminent threat of eviction from their homes for a failure to repay their mortgage loans (some say the figure stands at about 73,000), all the estimations from sources familiar with the matter suggest that absolute majority of bad mortgage loans and consequent evictions stem from loans provided by private mortgage lenders.
 
Proposal to apply suspension of foreclosures only to cases in which private mortgage lenders are involved was rejected by most of the GD lawmakers and the bill now also applies to banks and microfinance organizations.

Before the bill was passed, Giorgi Gakharia, a government-appointed business ombudsman in charge of taxpayers’ rights, released a statement earlier on July 25 condemning proposed legislative amendments.

“Adoption of this bill will worsen investment climate in the country and create problems to business sector in terms of attracting financial resources, because real estate under their ownership will become illiquid,” the statement reads and adds that the bill may also foster emergence of more bad loans as it can possibility encourage borrowers to stop making payments to lenders in the period when the moratorium on foreclosures is in force.

The business ombudsman has warned that it would increase credit risk and raise interest rates, which eventually would have negative effect on the economy.

“Such a provisional measure will fail to solve social problems of those individuals, who are targets of this bill [defaulted borrowers who face eviction from homes],” the business ombudsman said in the statement.

GD lawmaker, Gedevan Popkhadze, who spearheaded the bill, said during the discussion of the proposal at a parliamentary session on July 25: “I do not think threats listed in a statement of the business ombudsman are real.”

He also said that although the move might have some negative effect, but not “substantial” one, the fate of those people facing losing their homes should be a priority for the government.

“Our goal is to save people from being left without homes,” MP Popkhadze said. “I do not think that the economy will suffer substantial damage from this initiative and I also strongly believe that protecting these people should be a preference.”

Critics of the bill also point out to a failure of sponsors of this legislative amendment to table any specific measure that would help to address the problem in the long run. An inter-agency working group should be established to elaborate steps how to tackle the problem, according to GD lawmakers.

“This temporary measure will not help the situation. I am sure that six months later [when the moratorium period expires] 99% of those people who are now facing foreclosure will still be facing the same problem; nothing will change,” says Zurab Gvasalia, president of the Association of Banks of Georgia.

Only few UNM lawmakers were present at the parliamentary session on July 25. Akaki Bobokhidze, one of the UNM MPs present at the debates, criticized the bill, but said that he would vote for the proposal. Another UNM lawmaker, Mikheil Machavariani, said that the proposed bill was not a solution to the existing problem and would not vote for it. 

The bill has to be passed with its second and third readings and then signed by President Saakashvili before it goes into force.