Will government's home protection plan rescue borrowers?

Will government's home protection plan rescue borrowers?

Contributed by Gárdos Füredi Mosonyi Tomori

June 17 2011

Introduction

"The biggest ticking bomb in the Hungarian economy is the situation of debtors whose
debts are denominated in foreign currencies." This assessment from Hungary's
minister of the economy followed Prime Minister Viktor Orbán's announcement that the
government has agreed with banks on the main points of a home protection action plan
to help homeowners who are unable to pay off their mortgages.
In a country of 10 million people, 1.2 million are burdened with foreign-denominated
debt, which represents around 70% of Hungary's total consumer debt. The 1.2 million
debtors include 130,000 who have been unable to pay their debts for at least 90 days.
The prime minister has described them as "victims of a previous era", promising that
"none of those who took out housing loans earlier will end up on the streets".

Key points

Fixed exchange rate scheme
Debtors who are fewer than 90 days behind on payments can choose to join a new
scheme whereby exchange rates for mortgage repayments will be fixed at Ft180 per
Swiss franc (the current rate is around Ft220), Ft250 per euro and Ft200 to Y100 until
the end of 2014. Economists calculate that at current exchange rates, this will result in a
reduction of around 20% in the amount due from debtors over this period. The
difference between the fixed and actual rates will be accumulated in separate forintbased
loan accounts and will become payable by the borrower from 2015.

Foreclosures
In 2010 the government prohibited foreclosures to prevent large numbers of people
from losing their homes (for further details please see
"Moratorium on eviction of defaulters: salvation or danger?"). This measure was initially
accepted by the parties affected. However, acceptance was gradually replaced by a
different attitude, which questioned the utility of a prohibition or limitation on the grounds
that it contradicted the essential principle of a mortgage and encouraged borrowers to
disregard their obligations, in turn making it difficult for banks to clear their portfolios,
free up capital and reactivate their financing activities. The lifting of the prohibition
against foreclosure was one of the banking industry's main demands.

The new plan replaces the prohibition with quotas which determine the number of
homes that banks may put on the market. In 2011 banks will be able to sell no more
than 2% of their 'bad' mortgage portfolio quarterly; this quota will rise to 3% in 2012, 4%
in 2013 and 5% from 2014 onwards. It is unclear whether these relatively low limits will
make a significant difference.

State asset manager
A new state asset manager will be created to purchase the homes of non-paying
debtors, who may then rent them. Banks will be allowed - or possibly required - to sell
these properties at between 35% and 55% of their original estimated value. The plan
provides for the new asset manager to build homes for people facing eviction.

Comment

Views differ widely on the viability and probable effects of the plan. The banks' primary
complaint is that the high bank levy was expected to be cut or repealed as part of the
deal (for further details please see "Will new bank tax kill the recovery?"). However, the
parties could not agree on this issue.

The general view is that the plan is a stopgap which only postpones the point at which
borrowers must face the problem, possibly on an even larger scale than today. The
Hungarian National Bank has warned that the temporary fixing of exchange rates will
create the illusion that borrowers can be freed from exchange-rate risk. Other experts
have observed that the government is effectively offering a financial derivative product -
with all the risks that attach to such instruments - and that borrowers ensure that they
are fully informed of the terms of the deal in order to make the best choice. However,
borrowers may gamble on the government extending the deadline again in 2015.

Many commentators have argued that the plan is unethical. To some, it undermines the
market economy principle for the government to use taxpayers' money to support
borrowers who assumed foreign exchange risk - and for many years enjoyed the
benefits. Such commentators maintain that the government subsidy should be given
only to borrowers who are in genuine and dire difficulties. The plan arguably addresses
the problem as a middle-class issue; many people who genuinely need subsidising
are too poor to consider taking out a bank loan.

Although the plan has been formally announced, forming an accurate opinion on it will
be difficult while so many details remain unclear. Further negotiations and fine tuning
are still needed. The government is working on a draft bill which will be submitted to
Parliament so that it can be passed into law before the summer recess.

For further information on this topic please contact István Gárdos at Gárdos, Füredi,
Mosonyi, Tomori by telephone (+36 1 327 7560), fax (+36 1 327 7561) or email (
gardos.istvan@gfmt.hu).

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