Cyprus’ foreclosure framework supports financial stability, says CBC

Foreclosures remain a last resort, CBC analysis finds Cyprus’ foreclosure framework has helped produce a significant number of consensual settlements while keeping repossession of primary homes relatively limited, according to a piece of analysis published by the Central Bank of Cyprus (CBC) on Tuesday. The analysis, written by Marianna Christoforou, an officer in the CBC’s Risk Analysis Section, examined the country’s foreclosure legislation, safeguards for borrowers and the role of the system in managing non-performing loans (NPLs) and protecting financial stability. “Foreclosures should not be promoted as an end in themselves, but should operate as a last resort tool,” Christoforou wrote, arguing that the framework is intended to encourage responsible borrowing, protect depositors and strengthen financial stability. The CBC analysis said a large stock of NPLs can restrict banks’ ability to provide new financing, increase risk-management costs and affect funding costs, with potential knock-on effects for borrowers who continue to meet their obligations. The current framework has developed significantly since the banking crisis of 2013, with major changes introduced in 2018 to make foreclosure procedures faster and more transparent while balancing the rights of lenders and borrowers. Borrowers have several safeguards before a mortgaged property can reach the foreclosure stage. Mortgage lenders must first follow the CBC’s code of conduct, assess whether the borrower can repay the debt and consider realistic restructuring options before terminating a credit facility or taking steps towards foreclosure. The process then requires a series of legally prescribed notices, giving borrowers time to respond and seek a solution. The first formal notice is sent when a borrower has been in arrears for more than 120 days. Introduced as a mandatory requirement under 2024 legislative amendments, the notice sets out the arrears and total debt, interest, charges and expenses, the legal basis of the claim, a deadline for compliance and information on restructuring options. If the borrower does not respond, a second notice is issued, providing another deadline and warning that the lender will move to the next stage of the foreclosure process if there is still no compliance. The second notice must also inform the borrower of the right to complain to the Financial Ombudsman. A final foreclosure notice is then issued if the borrower continues not to respond. It sets out the final amount owed, refers to the previous notices, provides a final deadline and explains that the lender will move towards the next stage of the foreclosure process, including publication of a sale notice. The final notice also has to inform the borrower of the right to complain to the Financial Ombudsman. The deadlines between the notices are set by law and are intended to give borrowers sufficient time and information to respond. Borrowers can challenge the actions of a mortgage lender through the courts or through the Financial Ombudsman, although taking a case to court does not automatically suspend a foreclosure unless a court orders this. Changes introduced through the 2026 Courts Amendment Law have also strengthened the role of District Courts in disputes involving borrowers, guarantors and creditors, including disputes over excessive charges, unfair contractual terms and the sale of a primary residence worth up to €350,000. For eligible borrowers, an appeal seeking to cancel the final foreclosure notice must be filed within 45 days, while the substantive case should be heard and decided within 12 months unless the court determines otherwise. The framework also allows eligible borrowers to seek help from the Financial Ombudsman through an out-of-court process. Under recent amendments, eligible borrowers can complain to the Ombudsman about the amount claimed after receiving either of the two later foreclosure notices. If the Ombudsman issues a decision that both sides accept as binding, a period is provided for the parties to agree on restructuring or repayment. If no agreement is reached within the prescribed period, foreclosure proceedings are suspended for a specified period if the borrower wishes to seek help from a licensed insolvency adviser. Borrowers can also approach an insolvency adviser independently of the Ombudsman process. However, eligible borrowers must choose between the Ombudsman procedure and a court appeal seeking to cancel the final foreclosure notice, rather than pursuing both simultaneously. The data show that relatively few foreclosures involve primary homes. From January 2022 to March 2026, primary homes accounted for just 6 per cent of completed foreclosures, despite an increase in primary-home foreclosures in recent quarters. Agricultural land was by far the largest category, accounting for 61 per cent of all foreclosures, followed by completed or unfinished houses and apartments at 18 per cent. The overall number of foreclosures has remained relatively stable since 2024, although the composition of the properties involved has varied slightly. The number of foreclosure notices issued or served has also remained high, despite declining in recent quarters, with no clear evidence of a substantial reduction. The fact that fewer final foreclosure notices are issued than earlier notices suggests that only a smaller share of cases ultimately reaches the first auction stage. “Large part of the cases is either settled consensually between the mortgage lender and the borrower, or delayed because of legal action, negotiations or other procedural factors,” Christoforou wrote. The data show that around 30 per cent of cases resulted in consensual settlements between January 2022 and March 2026, while another 5 per cent remained under active negotiation. The market value of mortgaged properties resolved through consensual agreements during the period was approximately €2.30 billion. Agricultural land accounted for 42 per cent of properties settled through consensual arrangements, followed by primary homes at 22 per cent and houses or apartments at 21 per cent. The share of primary homes and other residential properties settled through such arrangements has increased in recent quarters. Christoforou therefore concluded that the foreclosure framework has contributed substantially to consensual solutions for borrowers’ debts, rather than simply resulting in properties being sold. The Financial Ombudsman protection mechanism for eligible borrowers, which has been available since 2024 and was strengthened in 2026, has so far been used only to a very limited extent. According to the analysis, this may indicate that the main difficulty in these cases lies in borrowers’ ability to repay rather than disputes over the amount legally owed. Christoforou said the framework had demonstrated its role as a mechanism for managing credit risk while providing safeguards for vulnerable borrowers, including through state support schemes such as Rent against Instalment. “A coherent, functional and reliable foreclosure system is a key pillar for preventing, limiting and resolving potential NPLs,” she wrote. The analysis also highlighted the importance of being able to recover the value of property used as collateral within a reasonable period, since assumptions about collateral values and recoverability affect banks’ capital requirements and provisions. It also referred to a June 12, 2026 opinion by the European Central Bank (ECB), which warned that recent amendments to Cyprus’ foreclosure framework could weaken payment discipline, financial stability and public finances, potentially increasing credit risk and leading to tighter lending criteria and higher borrowing costs. The CBC analysis concluded that the effective and uninterrupted operation of the foreclosure framework is fundamental to maintaining financial stability and confidence in the credit system.