Hungary's Government Mulls Mandatory Mortgage Conversions

Hungary’s government is considering automatically converting as much as $8 billion worth of foreign-currency mortgages into forint loans, an official said, in a pre-election push to relieve pressure on borrowers.

The government and central bank may contribute to a plan that seeks to cut both principal and interest payments, Economy Ministry State Secretary Gabor Orban said in an interview published today by Budapest-based magazine Heti Valasz. Borrowers may choose to opt out, he said.

Making the conversions obligatory would be Prime Minister Viktor Orban’s most comprehensive move yet to reduce the stock of foreign currency loans and help Hungarians burdened by mortgage payments that soared after the economic crisis weakened the forint. The mortgages -- mostly denominated in Swiss francs -- amounted to $8 billion at the end of June, and 16 percent were non-performing, according to central bank data.

Participation in the plan should be “mandatory, but if someone wants to opt-out, there will be a possibility for this as well,” State Secretary Orban said, according to Heti Valasz, citing limited take-up in previous plans.

The forint strengthened 0.4 percent to 299.55 per euro by 4:27 p.m. today in Budapest. OTP Bank Nyrt., Hungary’s largest lender, was unchanged at 4,280 forint, erasing earlier losses.

Swallowing Losses

Orban effectively banned foreign-currency mortgage lending after assuming power in 2010. The forint plunged 15 percent against the euro in the second half of 2011, the most in the world, after the government temporarily allowed foreign-currency mortgages to be paid back in a lump sum at below-market exchange rates, forcing lenders to swallow losses.

With an election approaching next year, the government is in talks with banks over the new plan, which the ministry’s Orban said last month excludes foreign-currency home-equity loans. Those loans amounted to $8 billion at the end of June, according to the central bank data.

Under the new plan, “it’s not at all certain” that borrowers will be able to convert the loans “at preferential exchange rates,” State Secretary Orban said.

The government and banks may discuss two proposals at an Aug. 27 meeting, Portfolio.hu reported, without citing anyone. One would be to convert foreign-currency mortgages into forint at market exchange rates, with lenders and the government splitting the cost of reducing principal and interest payments, the website said. The central bank would use about 5 billion euros ($6.67 billion) of its reserve to help banks convert foreign currencies into forint under the plan, Portfolio said.

Another option would be to phase out foreign-currency mortgages over several years, Portfolio said.

Central Bank

The central bank didn’t immediately reply to e-mailed questions seeking comment about the potential role of the MNB in the latest plan. Its participation would be “professionally justified,” State Secretary Orban said in the Heti Valasz interview, as converting foreign-currency mortgages into forint would reduce the Magyar Nemzeti Bank’s foreign-currency reserve requirement.

The government may channel funds away from an existing “exchange-rate barrier” mortgage program, which attracted only 40 percent of eligible borrowers, into a new forint conversion plan, the ministry’s Orban said. The barrier plan keeps installments fixed, and the difference between the fixed and market exchange rates accumulates in an account whose costs are divided among borrowers, banks and the government.

OTP Bank Nyrt., Hungary’s largest lender, competes with mostly foreign banks, including KBC Groep NV (KBC), Bayerische Landesbank, Erste Group Bank AG (EBS), Intesa SanPaolo SpA (ISP), Raiffeisen Bank International AG (RBI) and UniCredit SpA. (UCG)

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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