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Foreign investor, properties in Poland, walk away from mortgages?


mglaze 1 | 20
6 Jul 2011 #1
Hi, I am a foreign investor (from the UK), and I purchased three properties in Poland in 2007-2008. The properties have been built and rented out, and all purchase agreements are complete. Unfortunately the mortgages were based in Swiss Franks (CHF) at the lowest point. Now, the change in the rate for CHF, combined with a bit of property value loss which has still not recovered, has lead to these mortgages costing far more than they are worth. I am paying at least twice the amount on the mortgage payments, compared to the rental income each month. And the total value of the mortgage loans outstanding is so far beyond the actual value of the properties, that I cannot imagine this ever correcting itself in the next few years, or even in the next 10-15 years. The CHF continues to go up, and so do my monthly payments, and it is becoming impossible to keep up with the payments. Even if I keep these properties for 10+ years, I don't really see any way for them to be profitable now.

So what happens if I just walk away? I have read a lot about how the legal system is very different in Poland than in the UK, and how there is no concept of Polish bankruptcy, defaults, etc. I have property in the UK, and I have read that the Polish bank could come after my UK assets, since I have no other assets in Poland. But realistically, what will happen if I just stop making any more payments? I have just received my final disbursements from my mortgage, so I don't have much more to gain from continuing to make these payments, unless CHF is going to make a fairly rapid decline and fall back the 50% it's grown against PLN over the last couple years. And it just continues to grow so I don't see that happening any time soon.

Can this even really affect me outside of Poland? If I just stop sending money, stop making payments, etc. - and leave the bank to sort out the mess? What are the negative consequences I could face? I'm sure there are plenty of other people in my situation as a foreign investor, and probably even more as local property owners in Poland. What are all the rest doing? I consider myself fairly responsible and have always paid my debts and honored my responsibilities - so if someone like myself is considering such an extreme course of action, I think times must be getting quite desperate!

Thanks
poland_
6 Jul 2011 #2
and leave the bank to sort out the mess?

Firstly, you invested to make a profit, so why should the bank be responsible for your loss. Investments can go up and down. I see two options,

1. Man up, hold and ride it out, hoping your other investments will compensate
2. Find another investor, to buy your real estate at a deep discount and take the hit.

Can this even really affect me outside of Poland?

Yes, they will come after you, with a click of a button they will find all your other assets.
Wroclaw 44 | 5,386
6 Jul 2011 #3
I'm sure there are plenty of other people in my situation as a foreign investor, and probably even more as local property owners in Poland.

a few local folk are feeling the pinch, yes.
peterweg 37 | 2,321
6 Jul 2011 #4
Currently its costs quite a lot to pursue someone back to the UK, I heard £20k mentioned so if your debt/assets are less than that you maybe ok.

However, the EU is an free market for capital etc. so I expect them to introduce legislation making it easier to pursue debtors across the open borders. So in the next 10-20 years you could get a visit. And you are professional investor not a consumer so you will be treated more harshly, in principle.

You can go bankrupt in the UK. In Poland the debt would pass onto your children..
poland_
6 Jul 2011 #5
You can go bankrupt in the UK. In Poland the debt would pass onto your children..

Peterweg read what mglaze has posted, he purchased three properties in Poland as an investment in 2007/08. Now his real estate is under water, he wants to find a way to renege/default, leaving the problem with the lender. The only advice this man should be given is to contact his mortgage lender/bank and find a solution.

a few local folk are feeling the pinch, yes.

As Wroclaw, previously mentioned there are other people out there in the same position as mglaze, dealing with their financial problems.

Classic " Greece" mentality here.
alexw68
6 Jul 2011 #6
so if someone like myself is considering such an extreme course of action, I think times must be getting quite desperate!

Someone who massively overleveraged, in other words. Which makes sympathy for your suggested mode of action extremely limited.

I have three properties, bought between 2006 and 2008, all in Swiss, and at the moment the low cost of CHF 3-month LIBOR is offsetting most of the exchange rate rise. This wasn't the case briefly in 2009 when the payments on one of them went from a standard 1600 per month to 2600 from April to July (I think), but that is a brief exception to the payment trend. I make a token contribution to the mortgage (50-100 per property per month) simply because it keeps the rental cost low enough that students stay over the summer and I don't have empty rooms for 2-3 months.

Speculate to accumulate, sure; but if you went in feet first without a thought for downside risk, take the loss as you ought to. And invest within your means next time.
poland_
6 Jul 2011 #7
Historically low interest rates on loans in Swiss francs have led consumers in major Central European countries such as Poland, Slovakia, Hungary and the Czech Republic to acquire substantial loans, particularly mortgages, in francs. Currently, 53 percent of outstanding mortgages in Poland and about 60 percent of those in Hungary are denominated in francs.

thetrader.se/2011/06/30/swiss-franc-and-the-possibility-of-huge-mortgage-defaults-in-central-europe/
peterweg 37 | 2,321
6 Jul 2011 #8
Leverage currency and property speculation, very risky.

You cannot buy shares on credit, never mind using a foreign currency. Its illegal due to the excessive risk. So why do people do it on Property?

Peterweg read what mglaze has posted, he purchased three properties in Poland as an investment in 2007/08. Now his real estate is under water, he wants to find a way to renege/default, leaving the problem with the lender. The only advice this man should be given is to contact his mortgage lender/bank and find a solution.

He's entitled to know the situation. I think its very unlikely he can walk away and his specific figures will tell him that. I don't need to.
alexw68
6 Jul 2011 #9
So why do people do it on Property?

You can buy shares on credit - sort of. That's how shorting works, under the bonnet.

Anyway, why can you buy property on credit? Because property has always cost more than x yearly salaries for the vast majority of homeowners. Some sort of offsetting of the costs becomes inevitable in that context. If you don't have this system the ownership concentrates into the hands of landlords or the government (social housing projects) with the predictable problems that generates - the most conspicuous of those being, if I am a stakeholder in my own property, the likelihood is that I will maintain its condition. If not, I the tenant (and to a large extent, the actual owner) lack the incentive to fix all but the most pressing structural problems. In sum, home ownership: a good thing.

OK, so why foreign currency mortgages? Because the PLN money markets are ridiculously illiquid (they are not, or were not, traded on the open markets) and so the cost of borrowing in PLN was, and still is, considerably higher than for other currencies due to this operational limitation. See my post above for what this has meant in practice on my properties - FX risk offset by low percentages, it's still either cheaper or not noticeably more expensive than a loan for the same amount taken in PLN.
OP mglaze 1 | 20
6 Jul 2011 #10
Wow, a lot of great feedback and discussion here. Thanks very much guys, this is all quite helpful.

To clear up a few points...

I understand that some people may have moral/ethical concerns about defaulting, walking away from obligations, etc. In fact I do too, but as an investor I would also like to look at this situation from a purely economic point of view as well, and then weigh the costs/benefits of the various points of view. So morality and ethics aside, I am curious about the actual consequences of such a course of action in practice.

In regards to being "massively overleveraged" etc. - let's be clear - yes of course that is a frequent occurence in today's market, and is a source of a lot of pain. And yes, my investments are "leveraged" as well. However, I could simply liquidate some of my other assets to cover the loss and get out of this position completely, so no I don't feel that I am "overleveraged" from that point of view. However, the sums required to accomplish this are significant, and as a percentage of the original investment, the loss would be severe (over 100% of the actual property value, and something upwards of 500% of initial investment I suppose). With such extreme losses, I am open to rather extreme solutions, and if there is a very low probability of feeling any actual pain from just walking away, then economically it wouldn't make any sense to take any further loss on my portfolio.

I should add that I am a US citizen, and although I am resident in the UK today, I could easily relocate back to the US if that would avoid trouble. In fact, a good chunk of my investment portfolio is US based, and therefore presumably harder to be reached from banks in the EU?

I am also open to the concept of declaring bankruptcy in the UK, but I would like to understand if that is really a last resort or if there are other better options available to me.

At this point I am just doing fact finding and exploratory work. Until now, the costs involved in just keeping this loss going over the last couple of years have not been severe enough to show up on my radar of priorities, but now as CHF continues to grow against PLN, the cost is also becoming a higher priority. I have in fact already made all the mortgage payments for this month (yesterday) and have not planned to discontinue any payments as of yet. So please don't get the idea that I have already jumped off the moral/ethical ledge as it were.

Also just to add one point to the morality/ethics argument - honestly the banks were not doing a tremendous job of explaining the risks (or even the mechanics) of these CHF-based mortgages when I first signed up. The explanation given to me was more along the lines of "with PLN, you get 8-9%, with CHF you get 2-3%, take your pick...". So yes of course I am responsible for my own decisions, but the lack of clarity on those offers was also a contributor - therefore I feel less concerned about taking the moral highground down the line with the outcome of all this.
poland_
6 Jul 2011 #11
Have you explored the possibility of a UK Ltd holding company for your assets in PL.
OP mglaze 1 | 20
6 Jul 2011 #12
I actually have a Ltd co in the UK already, and have been considering how to transfer all the assets to the company. I suppose I will need to investigate this further..Thanks
Wroclaw 44 | 5,386
6 Jul 2011 #13
2. Find another investor, to buy your real estate at a deep discount and take the hit.

this seems to be the only answer to me. it will keep u on the right side of the law and not blot your copybook.
OP mglaze 1 | 20
6 Jul 2011 #14
Sorry, I was not aware it was a crime to default on a mortgage. At least not where I'm from.
Wroclaw 44 | 5,386
6 Jul 2011 #15
I was not aware it was a crime to default on a mortgage.

i understood u wanted to walk away from repayments.

i also understood you were looking for an escape route in the uk or america.

my bad.
OP mglaze 1 | 20
6 Jul 2011 #16
Right, all I'm saying is, this isn't a matter of staying on the "right side of the law" or anything like that - there is nothing illegal or criminal about not paying your mortgage. At least not in the UK or in the US. And I hope not in Poland (?)..
Wroclaw 44 | 5,386
6 Jul 2011 #17
And I hope not in Poland

i don't know the law on this to be honest. but something tells me the banks will chase you.

edit: isn't there a way that the bank can take over the property. or is that the loss you are talking about walking away from.
pweg
6 Jul 2011 #18
And I hope not in Poland (?)..

I'm not certain, however if you bounce a check in France you can get a jail sentence for fraud and Polands laws are loosely based on French Napoleonic code.

As for running away from the debt, its probably down to how much it is. If its more than £20K I'd expect they would track you down in the UK. What happens in the US I don't know, but I know UK banks have found a man in Thailand who left a £20K debt.

Is it worth it if you can find a way to deal with the debt? Poland's economy is growing fast and you may recover faster than you expect. In two years things could look completely differ ant can't say that about the UK/US).
vndunne 43 | 279
6 Jul 2011 #19
Maybe a good start would be to go and talk to your lender to see if your borrowings can be re-negotiated e.g. payment over a longer period etc. I have no idea what the banks' approach to this is but there surely is no harm in asking. And if they seem somewhat un-cooperative, at least then you can get an idea as to what their action would be should you default on yourr mortgage.

Since arriving in poland nearly 9 years ago there has been good times and bad times for holder of CHF mortgages in poland. Maybe if you can come to some aggreeement in order to weather the storm, it would be in both your interests i.e. you and the bank. (though i cant guaruntee the bank will see it that way)

Also just to add one point to the morality/ethics argument.

Dont meant to be harsh but i dont think you will get too much sympathy with this argument. You seem like an educated individual and you would have been expected to review the risks invovled in your investments. And would a more detailed explanation have changed your mind, realistically?
poland_
6 Jul 2011 #20
there is nothing illegal or criminal about not paying your mortgage. At least not in the UK or in the US. And I hope not in Poland (?)..

In Poland, if you default, the bank/lender will repossess your property and sell it on a best efforts basis, you will have no control on the price, it will be sold quick and short. The differential between your mortgage and the price your property is sold, will still be your debt, you will be chased for your debt,you will incur all types of costs. If you further default on your debt, this is when the lender/bank could consider it a crime on your part.
catsoldier 62 | 596
6 Jul 2011 #21
Someone always pays the price when somone else defaults, usually it is the ordinary joe soaps who pay at the end. Job losses, tax hikes, interest rate hikes, austerity measures, wage cuts, less hospital/public services, smaller pensions for old people due to taxes and smaller returns. :-(
Wroclaw Boy
6 Jul 2011 #23
This is no surprise i started a thread in 2008 about this very issue, the writing has been on the wall for a long time. I can tell you that 90% of mortgages awarded between 2006 and late 2008 were denominated in CHF. So youre not alone, this is more a problem for the banks than you, 10's of thousands have defaulted, many foreign investors have literally disappeared off the radar, realising that a drop in property prices in adition to negative currency fluctuations just doesnt make economic sense, not even in the long term. Like the old saying "if you owe the bank 10k you have a problem, if you owe the bank 10 million they have a problem". At some points banks just write of losses and then go begging to the government for a bail out.

Can this even really affect me outside of Poland?

Who knows, at some point they may catch up with you.

1. Man up, hold and ride it out, hoping your other investments will compensate

Man up my ass, hes not going to come good on these properties for a long, long time. Man up has nothing to do with it, you can man up in a fight, man up in bed, if you cant pay you cant pay. What a ridiculous thing to say.

2. Find another investor, to buy your real estate at a deep discount and take the hit.

Thats even worse. Find a mug you mean.

Yes, they will come after you, with a click of a button they will find all your other assets.

BS, youre a banker you would say that.

The only advice this man should be given is to contact his mortgage lender/bank and find a solution.

Whilst that is the correct thing to do i dont think he should, banks only provide an umbrella when its not raining and take it away when it is (winks to BM), they'll simply shaft him more on the long run.

Speculate to accumulate, sure; but if you went in feet first without a thought for downside risk, take the loss as you ought to. And invest within your means next time.

Crap were not playing by our rules, these are the rules implemented by the powers that be. Nobody gets rich without taking risks and we all want the green stuff.

EDIT: he should have not been dazzled by the lucrative APR of the CHF though, but come on you see a property and get dazzling images of driving a Porsche and all the other shite. When he bought he probably expected to flip before the mortgage even kicked in. Ahh the old hindsight.

Talk about a brainwashed society.
EdWilczynski 3 | 98
6 Jul 2011 #24
First things first

You cant go Bankrupt in Poland....Your COMI (Centre of Main Interest) is the UK and so you would have to declare Bankruptcy in the UK.

Bankruptcy covers you EU wide....

Trust me fella.....If you really have to go Bankrupt then the UK is where you want to go Bankrupt.

Of all the countries to go Bankrupt in the UK is the best. Bankruptcy in the UK is seen as a chance at offering someone a chance at a normal life. Elsewhere in the world you are viewed as vermin.

As a result of "Bankruptcy Tourism" there were certain regulations put in place.

Example: There were record numbers of Germans going to the UK and going Bankrupt, then going home to Germany with all their debts wiped out.

I do have some sympathy......I don't think anyone expected the Swiss Franc to rise like it has.....I'm on the other end and am actually enjoying the fact the CFH is rising.
poland_
6 Jul 2011 #25
mglaze, has already admitted he has other assets in the US, so he is not some punter who got caught up in the hype, he knows what he has done and he is looking for a way out. As an American, he knows that on monday morning he could be waiting outside the banks doors in the US, ready to hand back his keys and deeds ( game over- move on)

I have no sympathy for the investors, on the other hand the young couple who got caught up in the hype, on their first 40 m2, deserve government help/assistance, as far as I am aware, this is being discussed by the Polish Government and a solution may be found. It was one of the topics recently, when the Swiss visited Poland.
Wroclaw Boy
6 Jul 2011 #26
But where do you draw the line though, on an adhoc individual basis? Banks dont care, they are corporate beasts.

My opinion on this matter comes down to what type of person mglaze really is. Is he the kind of rich twat that thinks hes above everybody else based on his financial power or an everyday bloke who's made it from scratch taking risks. I would estimate the latter in which case he's just playing the game like we all do to in order to provide a better life for ourselves and our families. If that is the case i sympathize and strongly suggest an extended middle finger with a come and get me attitude to the banking (mafia) cartel.
poland_
6 Jul 2011 #27
playing the game like we all do

Then he would roll his three properties into a UK ltd, solely for the purpose of providing a letting agency, NOT all businesses survive, its not about what you do, more how you are seen to act.
Wroclaw Boy
6 Jul 2011 #28
Create a UK LTD company and then go insolvent is that what you're saying? Its a viable alternative, especially interesting as the banks would shoulder the loss. I'm all up for shafting the banks, great idea.
OP mglaze 1 | 20
6 Jul 2011 #29
Thanks again guys, your advice is priceless. I'm going to speak to some mortgage brokers and some other friends I had from back a few years ago when these investments were kicking off.

In regards to "what kind of person mglaze is", firstly I guess the point I'm making is why does that factor into the equation at all? Whether I'm some poor sucker who got screwed once in his life, or I'm some rich sociopath milking the working class for all they are worth, ultimately I have an investment here that is digging into the red by the truckload, and I have to make a decision that makes the most economic sense for myself in the longrun. I don't think the bank will be asking themselves "what kind of bank is Bank X?" - they will make the decisions which make the most economic sense from their position.

Anyway, fyi I would say I'm in between those extremes. I'm not a minimum wage worker living week to week off a paycheck; neither am I a multi-millionaire or anything. Actually, these investments in Poland were my first real venture out into anything big, and were going to be a step towards a retirement portfolio. Since then I've had the opportunity to diversify and build up other investments a bit, but I'm still a relatively young guy and have a ways to go before we shall say I've "made it". I don't expect or need sympathy from anyone (well except those who are in the same situation, in which case it's mutual of course)..

The amount these mortgages are under water is far more than 20K. If this was a matter of a 20K hit or maybe even 50K, I would be inclined to just "ride it out" as you say, or perhaps even just pay it off and refinance everything, and flip it all to cut my losses. But by my estimates, I am over 100% underwater on these loans. It is no simple matter of riding it out. Yes, if CHF magically comes back to the level it was at, and simultaneously the Polish property market has a few stellar years of 10% or better growth, then things could change back in my favor. But people are talking about a double-dip recession now, and that just doesn't seem likely any time soon. CHF is in fact still hitting record highs right now, and who knows how much further this could go with Greece and all the rest.

I'm still hearing a lot of arguments which amount to "do the right thing". But this is not a case of morality or ethics for me. The bank is not going to do the right thing when it comes to screwing me over - they are going to do what makes the most sense economically. In short, this is business, not personal. I don't need moral advice - I need practical advice!

Regarding criminality - I don't think a bank decides when a "crime" has been committed - usually that is for governments, judges, and juries to decide.

I'm leaning towards the Ltd Co with insolvency route - that sounds better than declaring bankruptcy personally. I assume I basically need to sell the assets to my company in order to accomplish this? Will need to speak to a tax expert I guess. Presumably that would involve a sale, and therefore a capital gains tax? Well, small price to pay I suppose.
Wroclaw 44 | 5,386
6 Jul 2011 #30
please, let us know what happens.

advice for others in the same boat, if you will.


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