Austrian Franc Mortgage Pain Worsened by Financial ToolsAlexander Weber and Boris Groendahl
Austrians’ losses on Swiss franc-denominated mortgage loans were exacerbated by stop-loss orders and investment vehicles used for repayment, regulators and consumer advocates said.
Since 2008, when Austrian regulators curbed foreign currency lending, 120,000 borrowers have repaid their loans or converted them into euros. Some of the 150,000 outstanding loans had so-called stop-loss orders that trigger an automatic conversion when the value of the franc against the euro crosses a certain threshold.
On Jan. 15, after the Swiss National Bank got rid of its three-year-old cap of 1.20 per euro on the franc and volatility spiked, the exchange rate was often far from the thresholds customers had agreed with their banks.
“Instead of limiting the losses, these stop-loss orders maximized them,” said Thomas Hirmke, a counselor at Austrian consumer information association VKI. In some cases, loans were converted at a rate below 1 franc per euro, while the limit had been set at a little below 1.20, he said.
VKI advisers noticed a significant number of inquiries about stop-loss orders in the past few days, but it’s difficult to say how many loans were converted this way, Hirmke said.
Swiss franc-lending “isn’t a glorious chapter in the history of the Austrian banking industry,” Helmut Ettl, the co-president of the FMA regulator, told reporters in Vienna on Jan. 20. “Most of our warnings didn’t have any effect.”
The Swiss franc’s 19 percent-rise against the euro since the SNB’s shock decision is also increasing the gap between borrowers’ outstanding debt and the value of the investment vehicles used to service the loans.
Loans denominated in Swiss franc and Japanese yen became popular with Austrian households in the mid-1990s because they offered lower interest rates. By 2006, the share of foreign currency loans rose to 31 percent of all household lending, according to the central bank. After the latest currency moves, Austrian households’ Swiss franc loans still amount to about 29 billion euros, the FMA said.
Most of the credit was sold as bullet loans. Instead of reducing the debt over time, borrowers made regular payments into investment vehicles consisting of a life insurance policy, stocks or bonds. In 2011, the Austrian central bank put the gap between these funds and the accumulated repayment obligation at the end of maturity at 5.4 billion euros.
Rising prices for stocks and bonds helped increase the value of these funds since then, thus narrowing the gap, Ettl said. Yet the franc’s latest surge against the euro means the debt side of the equation swelled and once again widened the shortfall to the savings vehicles.
With more than half of Austria’s Swiss franc loans maturing in more than 10 years, the top choice at the moment may be to remain calm and to do the math, Ettl said.
“There’s no reason for widespread panic. You have to individually see when the loan is due and where the savings vehicle stands,” Ettl said.