Two major legal battles between borrowers andservicers are reachingtheir climax, and the Supreme Court will have the final say as it is called upon to answer two key questions: How does the statutory prohibition on servicers acquiring properties through auctions they themselves have initiated apply? Are funds and servicers required to have recorded the market value of each loan included in a securitization when legal proceedings are initiated against the debtor?
At a time when non-performing loans totaling 80 billion euros continue to “languish” off-balance-sheet following the securitizations underthe “Hercules”plan, borrowers and servicers find themselves in daily confrontations in courtrooms.
Loan management companies are rushing to auction off properties, borrowers are responding with objections, and the courts are called upon to interpret the relevant legislation and the legal arguments from both sides, though these interpretations are not always clear-cut: often the borrowers’ arguments are accepted, and the auctions are canceled by the courts.
The “mother of all battles”
The “mother of all battles” in the courts concerned the legality of servicers initiating proceedings against borrowers and was decided by the Supreme Court (full plenary session, decision 1/2023), after lower courts had issued conflicting rulings. The question was whether servicers, which had been established under a special law of 2015, had the legal standing to take legal action regarding securitizations that had been conducted under a law of 2003.
The Supreme Court ruled in favor of the servicers, determining that the two laws can be applied in conjunction, and thus they have the legal standing to take legal action. If it had not done so, banking executives say, the entire structure of securitizations under the “Hercules” plan would have collapsed.
This does not mean, however, that the disputes over the judicial interpretation of the legal framework for “non-performing” loans have ended. Court rulings that could tip the scales in favor of borrowers on critical issues continue to be issued in the first and second instances.
As Cepal CEO Theodoros Athanasopoulos emphasizes on Euro2day.gr, for two major legal issues, it is now only a matter of time before the Supreme Court’s rulings clarify the situation.
“No home in the hands of a servicer”
During the great economic crisis, the slogan “no home in the hands of a banker” was often heard. The 2015 law on servicers reflected this slogan to some extent, as it explicitly prohibited servicers from acquiring properties through auctions that they themselves had initiated. However, how this slogan—“no home in the hands of a servicer”—is applied in practice will ultimately have to be decided by the courts.
The very structure of “Hercules” securitizations raises legal questions about how the law is applied. As servicer executives explain, behind every securitization lies, in addition to the servicer and the Irish company that acquired the loans from the bank, a special-purpose real estate company (REOco), which formally belongs to the bank that transferred the loans.
These companies have specific characteristics: the banks are the shareholders, but they are not consolidated on the banks’ balance sheets (meaning the banks do not realize any direct profit or loss from their operations). They are financed through borrowing from the securitization itself.
Their purpose is to acquire properties linked to securitized loans when there is no interest in purchasing them at auction.
“It is a safety mechanism for auctions related to securitizations,” a senior executive at a loan management company emphasizes to Euro2day.gr, noting that this ensures properties do not remain unsold, thereby opening "loopholes" in recoveries, on which the success of the "Hercules" plan ultimately depends, so that the government guarantees covering the securitizations do not fall through.
Furthermore, the same executive notes, REOco companies act as a safety mechanism for real estate prices: as a rule, they purchase at a slightly lower price than the starting price, while the law allows the price at auction to drop to as low as 65% of the initial price.
Real estate companies bear all the costs required until a property is finally sold to a buyer. Their goal is not to profit from this process themselves, but to ensure that securitizations do not lose revenue. In fact, at present, expenses significantly exceed sales revenue, and REOcos are posting losses.
As the same executive points out, this practice is well-established internationally. In Italy, where a securitization plan backed by state guarantees was first implemented, the REOco model was not initially envisaged, but the need for a safety net later became apparent, and REOcos were introduced.
This need is far more critical for Greece, say the servicers, where “non-performing” loans had exceeded 50% of bank portfolios, with all that this implies for the impact on real estate.
The banks’ real estate companies have already acquired more than 6,000 properties, according to servicers’ estimates—a number that is not insignificant but carries little weight in a market where more than 110,000 real estate transactions take place each year.
Nevertheless, the figure of 6,000 properties is by no means insignificant when narrowed down to a smaller subset—namely, property transfers conducted through auctions.
It essentially confirms that real estate acquisitions by REOco companies accounted for a significant percentage of the total properties sold through auctions, as private buyers could not be found for many of them.
“Stop” from Thessaloniki
Until now, there were no serious legal doubts as to whether REOcos—companies with a distinct legal personality from servicers—could acquire properties through auctions.
However, a ruling by the Single-Judge Court of First Instance of Thessaloniki adopted a different interpretation, according to which servicers, securitization funds, and banks’ real estate companies essentially belong to the same group of interests. Consequently, the statutory prohibition on servicers acquiring real estate must be applied.
If this interpretation is ultimately accepted by case law, as the servicers anticipate, the securitization structure will begin to crumble. In auctions, where failure rates are known to be very high in Greece, REOcos will not be able to intervene to acquire the properties and resell them at a later date, resulting in lost revenue for the securitizations and the risk of their business plans derailing.
In the Thessaloniki case (decision no. 48352/2025), which is expected to reach the Supreme Court, the court annulled a forced property auction, ruling that the company that bid and acquired the property was essentially acting as a “vehicle” for the very management company conducting the auction, thereby circumventing the law’s explicit prohibition.
The case concerns the auction of a small apartment in Thessaloniki. The foreclosure and auction were expedited by a servicer acting on behalf of a foreign fund. The property was awarded to REOco—a company affiliated with the servicer and located at the same address—for a price one euro higher than the starting bid.
The borrower who filed the objection claimed—and this was accepted by the court—that the creation and operation of the purchasing company (REOco) was intended solely to circumvent the law, which prohibits servicers from acquiring properties from the auctions they themselves initiate.
Representatives of servicers note that this interpretation is not, however, the prevailing one, as there are other rulings, such as Decision 5151/2026 of the Single-Judge Court of First Instance of Thessaloniki, that take the opposite view. In any case, legal certainty will only exist once the matter reaches the Supreme Court.
The second legal “landmine”
A legal issue that could have even greater implications, affecting all securitizations and the corresponding legal claims, has recently been raised by court rulings that once again challenge the legal authority of servicers to pursue legal action.
These court rulings highlight a procedural obstacle of great substantive importance: a servicer is not authorized to proceed with a foreclosure auction unless the documents it has filed indicate the price at which the loan was transferred from the bank to the securitization fund.
Servicers argue that if this legal argument is accepted, it will spell the end of legal proceedings in the context of securitizations. According to international practice, which they claim was also applied in Greece, securitizations have calculated only the total value of the transferred loans, without specifying the individual value of each loan.
Lawyers representing the borrowers argue that the issue is not merely a technical one (a transaction without consideration is not permitted under the Civil Code), but may also concern the substance of the speculative practices that the servicers are alleged to employ.
If, for example, a loan with a book value of €100,000 was transferred for €10,000 and the servicer claims, say, €80,000 from the borrower, this may constitute evidence of profiteering contrary to good morals.
The reasoning behind court decisions that uphold debtors’ objections is based on the following points:
- Under the Securitization Law (Law 3156/2003), for a loan portfolio to be legally transferred from a bank to a fund (so that the transfer is effective against third parties), the sales contract must be registered using a special form (“summary”) with the Athens Registry of Pledges.
- Under the Civil Code (Article 513 CC), the price (consideration) is a fundamental and essential term of every sales contract.
- If the registered summary does not state the purchase price of the receivables, and instead contains a mere reference to the complete (but unpublished) private agreement, the registration is deemed invalid.
- Since the registration of the contract in the public registry is defective, the transfer of the loan is considered legally incomplete and has no legal effect. In other words, the fund does not become the legal owner of the claim. Consequently, the servicer acting on its behalf lacks the legal standing to issue a payment order or to initiate foreclosure proceedings.
A pivotal decision on this matter, at the appellate level, is Decision 303/2024 of the Athens Single-Judge Court of Appeals. The Supreme Court now has the final say; if it does not overturn the reasoning behind this decision, it will give borrowers a… nuclear legal weapon to block foreclosures by servicers.