Bancherul - BANCI / ENGLISH / Magyar Nemzeti Bank: Government’s home rescue programme carries risks

Some elements of the five-point agreement between the Government and the Hungarian Banking Association, announced on Monday, may pose risks to financial stability and are likely to impair banks’ ability to lend. The goal of the MNB is to highlight the risks lurking in the home rescue programme and make proposals for mitigating them, said the MAGYAR NEMZETI BANK in a press release.

One lesson foreign currency debtors have learned during the financial crisis is that foreign currency borrowing involves substantial exchange rate risks. Fixing the exchange rate for a temporary period may create false illusion and misperception of safety for debtors that they can get rid of exchange rate risk. The stronger the exchange rate at which it is fixed compared with its current level, the longer it will take for households to reduce their debt and for Hungary to reduce its indebtedness and financial vulnerability, given that any debt resulting from the exchange rate differential, accumulating on a loss account, is essentially an additional forint-denominated loan.

Fixing exchange rates is equivalent to debt restructuring with rescheduling and temporary reduced debt servicing available for all debtors who have no difficulty meeting their obligations and are not in need of social support. However, those borrowers will face increased instalments on their loans after the expiry of the grace period, unless the forint appreciates. Fixing the exchange rate at a significantly different level from the current market rate will reduce debt servicing burdens temporarily, which may lead to increased consumption financed by borrowing. The risk is that many debtors will spend their additional disposable income gained by the fixed exchange rate to consume rather than save, and will be unprepared to pay possible higher monthly instalments than initially after the grace period expires. Part of debtors who meet their obligations on time may easily become defaulted after the grace period expires, if they are not circumspect and cautious. Due to these risks, the MNB proposes to the Government to offer the opportunity of fixed the exchange rate only to those in need or struggling with debt servicing difficulties.

The definitive abolishment of the moratorium on foreclosures and evictions is necessary and indispensable. The moratorium makes it more difficult and expensive to provide mortgage loans and reduces inclination to service debts. If upheld over longer term, the moratorium would cast doubts on the entire system of mortgage lending. Moreover, the moratorium is unlikely to solve the problems of those who are unable to service their debt even after it is restructured. Rather, it will provide only temporary relief to find a solution. Establishing a National Asset Management Company, or moving into a new home combined with interest subsidy may help such debtors; however, an informed opinion about the likely effects of the interest subsidy programme related to changing homes and the National Asset Management Company cannot be made, due to a lack of adequate detail.

Implementing quotas on foreclosures of repossessed property after the moratorium is lifted, first proposed by the Magyar Nemzeti Bank, would be an important step toward reducing social tensions and managing portfolio risks that have been accumulated so far. The flood of the properties of defaulted borrowers would lead to a supply shock and sharp decline in house prices on the housing market. The Bank has already noted that it would be useful to establish a quota which is capable of providing support to a recovery in lending though portfolio cleaning, but does not place excessive strain on the housing market. In the Bank’s view, the quotas established jointly by the Government and the Banking Association are too low, as they do not allow banks to free sufficient funds from portfolio cleaning to provide new lending. Introducing too low quotas imposes similar risks to those imposed by the upholding of moratorium. The value of collaterals backing mortgage loans is likely to fall, while banks’ books are overwhelmed with non-performing loans, which in turn will impair banks’ ability to lend and may adversely affect economic growth. In order to avoid such risks, the Bank proposes to the Government to consider introducing a higher quarterly foreclosure quota of between 5% and 10%, which would be reviewed regularly in light of real estate market developments and progress with portfolio cleaning.