Hungary Eyes Gradual Phasing Out of FX Mortgage Loans

Hungary’s government plans to phase out foreign-currency mortgages over the next three to five years and cut borrower’s monthly payments by as much as 20 percent, Economy Minister Mihaly Varga said.

“We must be careful not to sink the banking system” as several banks would be unable to handle losses similar to those triggered by the early repayment plan, Varga said in an interview on public television M1 today.

Banks in Hungary lost $1.7 billion during a 2011 program that allowed the early repayment of foreign-currency mortgages at below-market exchange rates in a lump sum. More than 156,000 borrowers repaid their loans under that program.

Prime Minister Viktor Orban’s government, which faces elections in 2014, promised to ease the burden of Hungarian households with foreign-currency mortgages after earlier initiatives failed to help about half a million borrowers holding almost $17 billion in such loans.

Installments soared with the forint’s plunge in the financial crisis, making one-fifth of these loans non-performing, according to central bank data.

Hungarian banks, which have until Nov. 1 to present their own solution, are set to miss the deadline, Varga said yesterday. The Economy Ministry is working “full force” on the relief plan and is holding constant talks with the central bank, while the cabinet will discuss the proposals on Oct. 30, he said.

Falling Shares

OTP, Hungary’s largest lender by assets, have fallen 9.7 percent since July 16, when the government announced plans for a fourth program in two years to help foreign-currency borrowers. OTP gained 0.6 percent to trade at 4,543 forint by 9:20 a.m. in Budapest.

OTP competes with mostly foreign-owned banks including UniCredit SpA, KBC Groep NV, Erste Group Bank AG, Intesa SanPaolo SpA and Raiffeisen Bank International AG.

The relief plan, which should cut monthly repayments by 15 percent to 20 percent beginning next year, would spread the costs between banks, borrowers and the state, Varga said today.

The ministry is seeking a solution based on consensus, “but if this costs banks even a single forint they won’t be on board,” Varga said.

Hungarians held 1.81 trillion forint ($8.6 billion) in foreign-currency mortgages at the end of June and another 1.68 trillion forint in foreign-currency home-equity loans, which can be used for purchases other than homes, according to central bank data.

The loans account for 13 percent of the country’s economic output, according to data compiled by the European Bank for Reconstruction and Development. About two-thirds of Hungarian mortgages are denominated in Swiss francs.