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Shadow housing

Česká spořitelna's new low-documentation mortgages could be boon to workers in gray economy

By Riva Froymovich
Staff Writer, The Prague Post
June 20th, 2007 issue

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Česká spořitelna (ČS) offers a list of potential clients for its recently introduced no- or low-documentation mortgage.
It includes those who earn their money in tips, on commission, in cash, through a small business, through self-employment or in secret.
Not made explicit is the obvious category of Czechs and foreign nationals who don’t declare those earnings. This group generates between 10 percent and 20 percent of the country’s gross domestic product, according to Finance Ministry estimates.
But, the low-documentation mortgage “in no way supports, nor has been conceived to support, the ‘gray economy,’ ” stressed Pavel Kühn, the bank’s deputy director for mortgage banking.
“We are coming to the aid of all those whose financial situation permits them to regularly make mortgage payments, but who would not be provided with a mortgage through approval in the usual way,” he said.
Some clients’ official income statements don’t represent their “actual financial situation,” Kühn said.
Other banks abroad and in the Czech Republic, such as Raiffeisenbank, ČSOB and Hypoteční banka, have similar programs. Their lists don’t include member of the informal or gray economy either. They add home buyers who earn no money but have inherited cash, immigrants from outside the European Union, those without a birth or social security number, and relocated empty nesters living off their pension.
Clients can apply for no- or low-documentation mortgages even if they lack the usual paperwork — typically, a tax return or an employer’s verification of income. ČS’s program allows clients to choose how to corroborate their income, so long as they promise to make their regular payments.
Candidates can offer to partially document their income by demonstrating the ownership of property, including stocks or real estate, or a previous investment that earns some profit. Alternatively, they can provide no documentation and sign an affidavit that states their income was not earned through illegal means.
Bolstering the verity of that affidavit, a new act will come into force by the end of this year that institutes an increased level of customer due diligence. It entails the ongoing monitoring of business relationships and scrutiny of repayment amounts to ensure they are consistent with the bank’s knowledge of customers and their source of funds, said Deputy Finance Minister Milan Šimáček.
“We do not think that the mortgage without declaration of income is primarily targeted on people from the gray economy,” he said.
To be sure, clients applying for the low-documentation mortgage often earn their money legally. However, they may fail to pay taxes or file official records for that income, or not have the proper licenses to make a living off that activity — all part of the gray economy.
It is estimated that between 25 percent and 50 percent of the adult Czech population will be involved in some form of undeclared work for years to come, according to Peter Katuščák, an assistant professor at the Center for Economic Research & Graduate Education at Charles University (CERGE-EI).
“This constitutes an attractive market to tap into,” he said.
ČS’s Kühn said in an interview with Hospodářské noviny that applicants for the low-documentation mortgages could constitute 20 percent of all the bank’s new clients, adding 4,000 to 5,000 mortgage customers.
Since offering money to people who can’t or won’t prove they earn it regularly is associated with greater risk, the interest rate on the mortgage is about 1 percent higher than for standard mortgages, he said. ČS also requires a banker’s lien on the property in question and an increased level of equity invested by the client before the mortgage is drawn.
Murky estimates
The government is unclear as to whether the gray economy is growing, decreasing or stagnant. Its unregulated nature makes it difficult to gauge, according to several government ministries.
“For the Interior Ministry, the ‘black’ economy” — money made through illegal activity — “is the priority,” said ministry spokeswoman Hana Malá.
The Labor and Social Affairs Ministry also said it does not monitor the rise or fall of the gray sector because it borders on illegality, according to spokesman Štěpán Černoušek.
“There are no statistics, because it is gray,” he said.
As for the Czech National Bank, it monitors bank activities through “prudential regulation,” which “does not deal with the question to whom banks operating here should or should not provide their services,” said spokeswoman Pavlína Bolfová. Banks are simply required to act prudently and abide by the law.

Riva Froymovich can be reached at rfroymovich@praguepost.com


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