Austrians Plea to Lenders for Relief From Franc Loan LossBoris Groendahl and Alexander Weber
Michael Kiener was set to buy his first home in the Upper Austrian city of Marchtrenk, using a 131,000 euro mortgage with monthly payments of about 900 euros, when he got bad advice.
An independent financial adviser persuaded the technology salesman in 2008 to take out a franc-denominated mortgage from Austrian lender Sparkasse Oberoesterreich because interest rates were lower for the Swiss currency. The adviser also convinced Kiener to make loan payments into an investment fund and let the gains reduce the principal. His monthly installments were cut to 575 euros ($628).
The plan blew up as the franc rose and the fund fell, leaving Kiener with at least a 30,000-euro loss seven years later.
“One day I told my bank manager, ‘there’s nothing but red numbers on my accounts,’” Kiener said from the 93 square-meter apartment that he recently sold to limit his financial damage. “Everything I earned went straight into the debt service.”
Hundreds of thousands of Austrian borrowers like Kiener have been smacked by both currency and investment losses on the same mortgage. Touted by advisers starting in the mid-1990s as a way to lower borrowing costs, foreign-denominated loans and funds have caused them to increase since the 2008 financial crisis.
About 150,000 home loans in Swiss francs and Japanese yen are still outstanding, or about 17 percent of all household mortgages, and most of them are paired with funds investing in everything from stocks to life insurance policies.
“It’s not a glorious chapter in the history of the Austrian banking industry,” said Helmut Ettl, co-president of the country’s bank regulator, Finanzmarktaufsicht.
The Swiss currency traded at 1.55 per euro on average between 2000 and 2008, the period when most of the mortgages were taken out, according to data compiled by Bloomberg. Investors seeking a safe haven sent the franc surging, especially after the collapse of Lehman Brothers Holdings Co. in 2008.
For several years, the Swiss National Bank artificially held the rate at 1.20 francs. Since policy makers set the franc free on Jan. 15, it has soared and now trades at 1.05 against the euro.
The value of a 100,000-euro loan taken at 1.55 francs jumps to 148,000 euros at the current exchange rate.
Three out of four of the roughly 29 billion euros of foreign currency loans require borrowers to pay only the interest to the lender. Homeowners put the principal, which is due in full on maturity, in a fund.
Borrowers who relied on life insurance policies to repay their mortgages are mostly on track to meet the target value on maturity, according to Thomas Uher, the head of the domestic unit of Erste Group Bank AG, Austria’s largest bank. But the riskier vehicles, such as mutual funds and even single stocks, have missed their goals of annual returns of 6 percent to 7 percent over the lifetime of the mortgage, particularly in the seven years after the financial crisis.
Single-stock vehicles often invested in Austrian real estate companies like Immofinanz AG or Meinl European Land. The shares of Meinl European Land, now Atrium European Real Estate Ltd., peaked at 21.33 euros in June 2007, before plunging as much as 94 percent by March 2009. The shares are now trading at 4.34 euros, 80 percent below the all-time high.
Shares of Immofinanz plummeted as much as 98 percent between April 2007 and November 2008 and are still 73 percent below the peak.
Kiener, the salesman, had borrowed 214,000 francs to get the 131,000 euros he needed to buy his apartment. Under pressure from his bank to reduce risk in 2010, he sold his mutual fund at a loss and changed to monthly repayments, which rose to as much as 850 euros per month -- 48 percent more than his initial rate.
His mortgage has shrunk to about 174,000 francs. But at today’s rate, that equals 165,000 euros, or about 34,000 euros more than what he originally borrowed.
The difference between the projected value of the Austrian borrowers investments and their franc mortgages at maturity was 5.4 billion euros in mid-2011, according to an Austrian central bank estimate.
The central bank is surveying banks for a new estimate now and expects the gap to have narrowed, spokesman Christian Gutlederer said. That’s because markets recovered since 2011, the year when the euro crisis peaked, and because banks have encouraged lenders to switch out of the funds.
“If the funding gap doesn’t close, many borrowers are in the danger getting their house auctioned off,” said Peter Kolba, head of the legal department at consumer protection agency VKI. “People are very much in despair.”
The Swiss National Bank, which investigated Austria’s mortgage practices, concluded in a 2008 research paper that the franc-lending was pushed by financial advisers, who received sales commissions on the products used as repayment vehicles for the loans.
“These may provide the advisers with monetary incentives to prefer pushing Swiss franc loans,” the economists led by Christian Beer said in the SNB’s working paper.
Johann Massenbauer, a veteran of the Creditanstalt bank who set up his independent financial advisory in 1993, was a pioneer that helped turn Austrian home buyers into currency speculators.
Massenbauer took a yen-denominated 5.5 million schilling ($437,600) loan, the first of its kind for an Austrian retail customer, on Nov. 23, 1993. Three months later, his debt had swelled by 10 percent as the Japanese currency rose against the schilling.
That experience didn’t stop Massenbauer from praising foreign-currency loans as a good option for home borrowers in an article in Gewinn, the country’s most widely read retail investor magazine. The article helped spark interest in the mortgages throughout Austria.
The mortgage worked out for Massenbauer. By the time he fully repaid his loan in 2003, a year after the schilling was replaced by the euro, he’d gained 60,000 euros. Over the life of the loan, he converted it into different currencies several times to reduce his payments.
“It was a wild ride,” Massenbauer said in his office in downtown Vienna.
He said banks promoted foreign currency loans because they could charge higher fees and interest-rate spreads on them. Massenbauer didn’t anticipate that these loans for sophisticated investors would become a mass-market product.
“I wanted it to be a product for the high society, for people who, if properly advised, understood it and were mentally and economically prepared for it,” he said.
Regulators, even as they issued warnings against foreign currency lending, did little to restrict it. By the 2000s, mortgages in currencies like the yen and franc became the standard in Austria, luring borrowers with lower interest rates. Franc loans to households peaked at 54.7 billion francs ($55.8 billion), equivalent to 13 percent of the Austrian economy, in December 2008.
That’s when the central bank hit the emergency brake, ending the provision of foreign currency loans in Austria. The global credit crunch made Austria’s exposure to them a threat to the entire banking sector, as the strong franc increased the risk of borrowers defaulting.
Austrian franc borrowers did catch one break. Unlike Hungary and Croatia, where the franc mortgage boom coincided with a real estate bubble that burst, Austrian prices started to rise after the financial crisis as investors bought real estate to protect their wealth.
That has helped prevent defaults on franc mortgages. The rate isn’t significantly higher than on euro-denominated mortgages, according to the FMA.
Today, Austria is chipping away at a mountain of foreign currency debt. Almost 60 percent of foreign currency mortgages, which are almost entirely franc-denominated, mature in more than 10 years from now.
The government has ruled out helping borrowers like Kiener with tax benefits or forcing banks to absorb losses, as happened in Hungary. Instead, officials have appealed to banks and borrowers to find their own compromises.
Consumer protection agencies say Austrian banks, which were rescued during the credit meltdown, should be liable for bad advice and credit terms that put borrowers at a disadvantage.
“The deals were totally out of balance,” said VKI’s Kolba. While the banks “made a great profit and safeguarded themselves, the clients were totally unsecured.”
Austrian banks made the franc loans in good faith at the time, according to Franz Rudorfer, head of the banking industry chapter of Austria’s Chamber of Commerce. Lenders are now working with borrowers to find solutions, including converting loans into euros or switching out of repayment vehicles, he said.
A few days before the central bank let the franc rise in January, Kiener said he had thought about converting his loan into euros and then repay it with money from selling the apartment.
“At least I would have come out of the whole thing debt-free,” he said. “When I heard the news, I was paralyzed for 24 hours.”
Kiener agreed to sell his property for about 30,000 euros more than the 120,000 euros he’d bought it for in a deal he expects to complete next month. Even after the sale, he will still owe about 15,000 euros on his mortgage.
Kiener said his lender denied his request to forgive the remainder of his loan.
“We don’t want to be helped with tax money, all we want is that the banks also share the burden,” he said.