How a large percentage of properties in auctions are acquired by banks' REO companies and why this practice circumvents the law

Legal Insight

October 2024

Giorgos Psarakis, LL.M. (mult), PgCert

Summary Banks and Servicers, through connected Real Estate Owned (REO) companies with minimal capital and significant debt, are purchasing properties that are auctioned. The legislator’s provision and the question raised by the "11" members of the New Democracy party in Parliament. An attempt to interpret and apply Article 5 of Law 5072/2023, which prohibits the acquisition of properties through auctions by Servicers.

According to the law on the transfer of "non-performing loans" and their management, "EDADPs (i.e., Servicers) are not allowed to acquire, through transfer, assignment, voluntary liquidation, or auction, real estate connected with the credits they manage" (Article 5, Paragraph 5, Law 5072/2023). This provision introduces an explicit prohibition on Servicers from acquiring ownership of real estate related to the claims they manage. The purpose of this regulation is, obviously, to protect the debtor's interests from the risk of not following the legally prescribed process of seeking a viable solution for settling the debt and not exhausting all options to achieve this before proceeding with enforcement actions and auctions. In other words, by prohibiting the acquisition of real estate by Servicers linked to loans and credits they manage, Servicers are indirectly encouraged to prioritize debt settlements over forced execution/auction. Therefore, when the Servicer does not have the option of acquiring the property itself, it may move toward long-term settlement solutions, thus assisting financially weaker debtors.

However, these Servicers appear to be connected (in the sense of IFRS and IAS) with banking groups. Therefore, while the Servicer is not allowed to bid and acquire the property at auction based on the above law, it seems that, in principle, a company within the same group as the Servicer may place bids. Moreover, it is noteworthy that in the 2023 report of the Board of Directors of a well-known Servicer, the companies of the bank group cooperating with the Servicer are explicitly characterized as related parties (due to the bank’s shareholding in the Servicer’s capital).

Furthermore, the members of the Board of Directors of these REO companies often also serve on the Boards of the Servicers, while their share capital is at the minimum level, i.e., €25,000. For instance, a very well-known REO has a share capital of just €25,000, while all of its operations are loss-making, and its liabilities to third parties amount to €175,761,000. At the same time, it has assets worth approximately €94 million in real estate acquired through auctions, funded by the very bank that is its shareholder, and not through its own capital. As shown in its financial statements, "On May 10, 2021, it entered into a lease agreement for office space for the period from April 29, 2021, to September 30, 2032, with a monthly rent of €102." Hence, we are talking about an REO company with assets of approximately €94 million, leasing its office space for €102 per month.

Thus, in the above case, we have the following situation: the Servicer is a company connected to the bank, and the REO company, which bids in the auction, is similarly connected to the bank (as a subsidiary). Is this practice, therefore, contrary to the prohibition on Servicers acquiring properties through auctions? Does the same outcome that the legislator sought to avoid now occur indirectly through the use of other corporate structures?

This disreputable practice is being highlighted by journalistic investigations and parliamentary scrutiny. For example, Reporters United published an investigation before the summer titled "Auctions – Exclusive: The Dark Path of Properties from Auctions – Systemic Banks Collect Properties," where a specific bank was asked to respond to the practice of acquiring properties through its subsidiaries. In its response, the bank's press office stated, among other things, "In general, the acquisition of properties by the liquidator (whether it is a bank, an investor who has purchased non-performing loans, or a debt management company acting on behalf of investors) is common practice and is followed across Europe when there is no interest from third-party buyers." However, it seems that the press office had overlooked that in Greece, according to the law (see above), the acquisition of properties by Servicers through auctions is not permitted.

In the context of parliamentary scrutiny, 11 MPs from the government’s parliamentary group submitted a question on September 17, 2024, titled "The property of borrowers, guarantors, and small- and medium-sized enterprises is unprotected," which included the following statement: "Recently, another practice was publicly reported with evidence. The bank sells the loan to the fund at a price lower than the loan's nominal value. The fund, through the Servicer, demands from the borrower the nominal value of the loan plus interest and auctions the property – the residence. The property is acquired at auction by a real estate company with the same name as the fund that bought the loan, which is a single-member limited company with the bank that transferred the loan as its sole partner. In this way, the bank secures the profits of the funds, which are not taxed in Greece. Throughout this process, the borrower is legally unprotected and unable to intervene, losing their home." At the end of their document, they concluded with the following question: "Will the reported practice of banks securing the profits of funds by acquiring borrowers' properties through auctions be investigated?" The General Secretariat of Financial Sector and Private Debt Management responded to this question as follows: "Also, Law 5072/2023 explicitly states that debt management companies 'are not allowed to acquire, through transfer, assignment, voluntary liquidation, or auction, real estate connected with the credits they manage.'" Thus, the General Secretariat itself seems to link this prohibition with the practice of participation by REO companies connected to banks in auctions.