Non-performing loan

A non-performing loan (NPL) is a real estate loan in which the borrower is significantly behind on principal or interest payments, leading the bank to conclude that repayment is seriously at risk. In banking practice, a loan is typically considered non-performing if the borrower has been in default for more than 90 days. Non-performing real estate loans can have consequences that threaten a borrower’s livelihood-up to and including the foreclosure of the mortgaged property.

Causes and Identification

Non-performing loans often arise from:

• Unforeseen financial setbacks (job loss, divorce, illness)
• Over-indebtedness due to an excessively high debt-to-income ratio at the time of purchase
• Rising variable interest rates on adjustable-rate loans
• Prolonged vacancy in investment properties
• Significant depreciation of the property, leading to a shortfall in collateral

Banks internally classify loans into risk categories. As soon as a bank classifies a loan as “watch” or “non-performing,” it is transferred to an intensive monitoring team or a workout department specializing in the management and resolution of problem loans.

Borrowers often notice the transition to NPL status through a change in the bank’s communication: Instead of the usual account manager, employees from the restructuring department or the workout division suddenly get in touch. This is an important signal that calls for immediate action.

Options for Borrowers in Crisis

If a real estate loan gets into trouble, the borrower generally has several options available:

• Deferral or payment extension: Many banks are willing to grant a temporary payment extension or enter into a deferral agreement in proven cases of financial distress.
• Debt restructuring: Restructuring the loan with an extended term, lower installments, or an adjusted interest rate
• Voluntary sale: Before a foreclosure auction takes place, a voluntary sale can often yield significantly higher proceeds
• Debt-to-equity swap: In individual cases, the bank’s claim is converted into equity (for corporations)

Important: The sooner borrowers reach out to the bank, the greater the room for maneuver. Waiting significantly weakens the negotiating position and shortens the time available for alternative solutions.

NPL Portfolios and the Market for Non-Performing Loans

Banks can sell non-performing loans to specialized investors (so-called NPL funds or debt acquirers). For the borrower, this results in a change of creditor-the new creditor assumes all rights under the loan agreement and can pursue enforcement. NPL investors are often interested in reaching quick agreements and are willing to negotiate if the borrower makes a realistic settlement proposal.

The bank must notify the borrower of the sale of a non-performing loan (Section 496 of the German Civil Code) unless the sale is made to credit institutions or certain financial service providers. In certain cases, borrowers have a right of first refusal on their own claim-this can serve as a negotiating strategy to settle the debt at a discount.

Practical Tip for Property Owners in Nuremberg and Franconia

If a real estate loan in Nuremberg or the surrounding region runs into trouble, swift action is crucial. We recommend consulting a specialist attorney for banking and capital markets law as well as a real estate agent at an early stage to analyze the disposal options-in particular, whether a voluntary sale can prevent a foreclosure auction with significant discounts.

In Nuremberg, even problematic properties often fetch significantly better prices on the open market than at a foreclosure auction, where bidders factor in the risks accordingly. A realistic selling price above market value is the best argument to present to the bank. We support owners in such situations with confidentiality and respect.

Frequently Asked Questions

When is a loan considered non-performing?

According to the guidelines of the European Banking Authority (EBA), a loan is considered non-performing if the borrower has been in default for more than 90 days or if, for other reasons, it is unlikely that they will be able to meet their payment obligations without the collateral being liquidated.

Can the bank initiate foreclosure immediately?

No, the bank must first provide notice within the prescribed timeframe and declare the entire amount due. Only then can an enforcement order be obtained and foreclosure proceedings initiated. This process typically takes several months to over a year-enough time to explore alternatives and negotiate an orderly solution.

Is a voluntary sale possible for a non-performing loan?

Yes, and it is often significantly more advantageous than a foreclosure, where substantial price discounts below market value are common. The bank must agree to the sale if the proceeds do not fully cover the secured claim (a so-called “short sale”). In such discussions, an experienced real estate agent and an attorney can assist as negotiators.

Regulatory Framework: EBA Guidelines and Bank Obligations

The European Banking Authority (EBA) has issued binding guidelines for dealing with non-performing loans. According to these guidelines, banks are required to develop a forbearance strategy at an early stage-that is, to explore measures to support the borrower before the situation escalates. These include extending loan terms, deferring interest payments, suspending payments, or restructuring the loan.

These obligations exist not only in the borrower’s interest but also in the bank’s own interest: non-performing loans tie up equity, weigh on the balance sheet, and require costly administration. An early, amicable solution makes more economic sense for both parties than a protracted foreclosure proceeding.

Borrowers should know that they have the right to receive and review the calculation basis for accrued late payment interest and costs. Errors in interest calculations or excessive processing fees do occur and can be challenged in the event of a dispute.

Foreclosure: Process and Consequences

If it does come to foreclosure, the process is regulated by law in the ZVG (Foreclosure Act). Key steps:

1. Termination of the loan by the bank with a notice period
2. Enforcement title: The bank obtains a title (a notarized declaration of subordination of the land charge often suffices as a title)
3. Application to the local court for a foreclosure auction
4. Market value appraisal by an appointed expert
5. Public notice and auction date (usually 6-12 months after the application)
6. Award to the highest bidder, at least 5/10 of the market value at the first auction

At a foreclosure auction, prices are generally achieved that are 20-40 percent below market value-bidders take into account the risk associated with the property, potential lease agreements, and the administrative burden. For the affected owner, this is the worst economic solution, which is why all alternatives should be explored as a priority.

Schufa and Consequences for Creditworthiness

A non-performing loan-and certainly a foreclosure-leaves lasting marks on the Schufa and other credit registries. An entry for late payment typically remains on record for three years after settlement; an entry for foreclosure may remain visible even longer.

The consequences: follow-up loans are significantly harder to obtain, rental applications may fail, and in some professional fields, Schufa entries can have repercussions. It is therefore always worth seeking an agreement with the bank-including a partial debt waiver if the proceeds from a voluntary sale do not fully cover the outstanding debt. In practice, banks are often willing to negotiate if communication is transparent and offers are realistic, because an out-of-court settlement is cheaper and faster for them than a foreclosure auction.

Back to the Real Estate Glossary.