Vol 1, No 13
20 September 1999
C S A R D A S:|
Oh Give Me a Home...
In the last few months in Hungary, there has been a steady increase in the number of enquiries concerning mortgages, and the amounts that potential clients are seeking to borrow are higher than before (due to a boom in real estate prices). Whereas last year, the average amount borrowed lay somewhere between HUF 500,000 and one million (USD 2000 and 4000), the corresponding figure for this year lies between HUF one and two million. This new interest can be explained in part by optimistic economic forecasts dating back to the beginning of the year, when it was predicted that interest rates on mortgages would fall substantially by the early autumn. These hopes were dashed as the months progressed. In November of last year, for example, the monthly repayment on a home loan of HUF one million (USD 4000) with a running time of five years worked out at HUF 30-32,000 (USD 125-135). This year for an identical loan, the monthly repayments had hardly changed at HUF 28-30,000 (USD 115-125).
Interest rates are punitive, which means that it is not worth taking out a loan over a protracted period of time. If a prospective homebuyer were to borrow HUF three million from the Foldhitel es Jelzalogbank (FHB, or Land Credit and Mortgage Bank) over 15 years, he would pay back HUF 48,000 (USD 200) per month. However, if he were to borrow the same amount, spreading it over 20 years instead, his monthly repayments would only drop to HUF 46,000 (USD 190). At the present juncture, the FHB offers the most attractive rates of any financial institute in the country, recently cutting its interest rates from 23 per cent to 19.7 per cent. For the client brave enough to sign up to repaying the loan in full without rescheduling it over five years, a lower rate of 16.5 per cent applies. The FHB does not allow the loan to be paid back before the running time of the loan comes to an end, even if interest rates have fallen in the interim. Such rigidity acts as a deterrent to some, propelling them into the arms of the commercial banks, where even higher interest rates are the norm.
The largest of the commercial banks in the home loans sector is the OTP (Orszagos Takarekpenztar, National Savings Bank). Since March, the OTP has lent over HUF five billion (USD 21 million) in mortgages. From 1 June, it reduced its interest rates for home loans (which may be used for renovation work as well as purchase) from 25 per cent to 23 per cent, responding to a move by its rivals, the Kereskedelmi es Hitelbank (Commercial and Credit Bank), and Postabank (the two competitors cut interest rates on home loans on 15 May and 26 April respectively). All is not as rosy as it seems, however. The OTP was forced to take tough action on defaulters earlier this year, taking a lot of flak in the media.
The origin of the problem, which has assumed epidemic proportions, dates back to the days of the government of Jozsef Antall. In 1990, Parliament abolished the favourable interest rates on home loans, replacing them with market rates. The reasoning behind this was that the aid provided by the government represented too severe a drain on the budget. Including loans taken out before the collapse of Communism, there are at present some 100,000 people who are at least one year behind with their repayments, often through no fault of their own. The OTP suspended its recovery actions against many debtors in the expectation of receiving state aid in accordance with a decree adopted in April of last year (see below). However, this was not before 40,000 cases had been brought to court and several thousand dwellings had been auctioned off.It was generally assumed that the OTP-appointed debt recovery firms would not be charitable. Taking no account of the individual debtors' personal circumstances (number of children, being made redundant, not having enough to make ends meet) opened up the prospect of thousands of families being turfed out on to the streets. Helping them out before matters deteriorated to this stage would, as Csilla Halasz points out in her series of articles on the subject, end up costing less to society as a whole than bailing them out once they had become destitute.
Szilard Sasvari, a member of the ruling coalition party, FIDESZ (Young Democrats), submitted a private member's bill in order to address the housing situation. He did so on behalf of the Housing Policy Strategic Workshop, which is comprised of architects, economic and financial experts, mayors as well as politicians, that had been set up by his party. In his view, Hungary could not thrive if the most basic right, that of setting up a home, could not be guaranteed. This necessitated a radical revamping of existing policy, tailoring it to meet the real needs of families. Certain elements of past policy could be expanded upon, however, such as the right to claim back VAT (which would have the added bonus of discouraging moonlighting in the building trade). According to Sasvari, the system of compulsory VAT invoices on construction goods should be extended to cover services. Local authorities should be given greater incentives to spend money on housing, matched by funds from the central budget, thereby allowing decisions to be taken more effectively at a local level. A greater rationality in spending would result as the local authorities are in contact with the families they wish to help.
On the question of how to enable average income families to pay the prohibitive interest rates, Sasvari placed his hopes in economic instruments: "Up to now, the main concern has been the absence of low interest-rate sources within the credit sector. This is being remedied by the FHB's issuing of debenture bonds, which may be purchased by institutional investors. In the interests of boosting the sources available, we have to consider allowing private pension funds and building societies to purchase these bonds as well. At present, these institutions are obliged to hold their savings in government securities." Alongside this, Sasvari proposed amendments to existing laws that would introduce greater competition into the market. The target for interest rates would be 15 per cent.
In attempting to tackle the problems of the housing sector in Hungary by producing a new plan, Sasvari and his allies were saddled with the legacy of decisions taken in the past. One such decision, examined in detail below, encouraged a culture of non-payment. Hard-line debtors cynically allowed arrears to accumulate in the full awareness that, once the provisions of the decree entered into force, they could off-load a substantial proportion of their debt onto the state.
The decree in question represented a stopgap solution to problems that were becoming increasingly acute. Over 40 per cent of those who took out their loans before Parliament's decision to introduce market interest rates under the system referred to as "old home credits" were unable to keep up their payments. The OTP deals with 250,000 such state-guaranteed contracts with a total value of HUF 30 billion (USD 125 million). 90,000 of these contracts are in the process of being dissolved. Since they are state-guaranteed, the bank will receive the amount due to it, even if it fails to recover the debts directly.
The situation vis-a-vis credits allocated between 1989 and 1994 is slightly better. The total value of these is HUF 65 billion (USD 270 million). The OTP has 290,000 contracts dating from these years and one in five of these clients are counted amongst the ranks of defaulters. The lion's share (80 per cent in certain cases) of the monthly repayments on these reduced-rate loans was paid off by the state over a period of five years. Only then did the trouble begin. After the five years had gone by, the aid provided fell by half, leaving the hapless borrower to pay back a far heftier sum than he was accustomed to. Forty thousand families belonging to this group of debtors received final reminders from the OTP in the course of the summer.
According to an OTP spokesman, greater payment discipline became the norm after 1994. Although eight to nine per cent of clients are late in making their payments, only six per cent are deemed to be chronic defaulters. What we can observe here is that borrowers are gradually becoming accustomed to the new parameters and, as a result, are changing their lifestyles and methods of budgeting.
The OTP has also tried to demonstrate greater flexibility by adopting a new package of measures to make debt recovery more efficient. Clients who took out their loans between 1989 and 1994 and who had failed to make their payments for three months were called to the local branch by mid-June. They were confronted with a choice either to pay the arrears in full or to agree on a rescheduling plan for the debt. Refusal to accept meant the immediate suspension of the credit facility, with the bank selling the outstanding balance to OTP Factoring, which would then start recovery proceedings.
The plight of home loan defaulters was examined by the parliamentary ombudsman, Katalin Gonczol, after she was inundated with letters of complaint primarily from people who had taken out their loans prior to 1989. The grounds for complaint were that the changes to the contract were imposed on them by the then government, leaving them in the lurch, with the prospect of their homes being sold at public auction. The ombudsman's response was to goad the government into action. In April 1998, a special programme to help those who had fallen behind with their utility bills and their home loan repayments was adopted in the form of a government decree. The government would offer assistance to those defaulters whom the local authorities deemed deserving. By the 31 December 1998, local councils had to create the necessary framework for this to be achieved. If local authorities provided assistance, they could claim back 55 per cent of the total cost incurred from the central budget. Local authorities situated in areas considered to be particularly deprived were entitled to a higher refund of 80 per cent.
Four hundred local authorities decided to participate in the programme. The vast majority of them only saw fit to provide support to people who were in arrears to the utilities rather than to the banks for their home loans (creating a distinction reminiscent of Victorian Britain's value judgements between the "deserving" and the "undeserving" poor). Of a total sum in excess of HUF 900 million (USD 3.8 million), only HUF 220 million (USD 900,000) has been laid claim to by the local authorities, prompting the Ministry of Social and Family Affairs to propose an amendment to the original decree. The aim of the amendment was to extend the deadline within which local authorities were required to put the rules in place so that they could benefit from the scheme. On 8 June, the Minister, Peter Harrach, announced that the new deadline would expire on 30 September. Households in debt would have until 31 December to sign new contracts. This would make them liable for only 30 per cent of the repayment, with one half of the remainder to be paid by the government and the other half to be paid for by the local authority.
Meanwhile, there is some resentment amongst local authority representatives concerning the government's approach, which they feel is merely decentralising the problem, passing the buck onto them. Local authorities are already struggling financially as it is: many of them are not in a position to provide basic services of the kind they are obliged to by law, let alone spend precious resources on debtors.
By the end of June, however, matters took a turn for the worse. The OTP finally lost patience with both the government and the defaulters, lifting its moratorium on debt recovery through auctioning off debtors' property. In her editorial on the subject in Magyar Nemzet (24 June 1999), Csilla Halasz reviews the implications of this development:
In these next few days, only families in the provinces will be able to hope that, out of pity, no one will turn up as customers at the auctions. There is nothing else for them to trust in. The bailiffs are afraid that a nationwide scandal will ensue in the near future as a result of the distraints. After an interval of many years, auctions will begin again in the capital from September.
To all practical intents and purposes, distraint on real estate had been broken off in recent years. Because of a huge backlog of work, the registry of title deeds had not recorded the right of distraint on the title deeds of homeowners in debt. Without this it was impossible to set a date for auction. Now, however, the backlog is being cleared away more quickly. Court-appointed bailiffs are receiving notifications from the registry office by the dozen, informing them that the office has recorded the right of distraint. On receipt of the notifications, the estimated value of the property is calculated and the parties involved, both debtor and creditor, are informed. The deadlines for appeals are set out and then the date of the auction is decided. A number of cases that have accumulated over the years will come up all at once, causing a major stir.
The problem is not with the distraints themselves, since in any normally functioning market economy, it has to be a matter of course that borrowers have to pay back their debts. It would be a problem if property auctions were restricted, and regulations used to place obstacles in the path of recovering debts. This would limit lending for home purchases as well as the financing of investments. In the case of the owners whose property is up for auction at the moment, however, we are dealing with a different phenomenon. The amounts of money that are being collected from them as debts are amounts that the individuals concerned are convinced that they do not owe. They are the people who took out loans to purchase homes prior to the collapse of Communism. These loans were interest-free or granted at preferential rates. In 1990, Parliament changed the rates of interest on their loans to bring them to market levels. Although some of the people affected by this took the matter to the Constitutional Court, the Court deemed the Parliament's decision lawful, referring to the fact that the support given was too great a burden on the state. Ever since, a number of the debtors have not been able to accept that a unilateral change to the terms of a contract was declared lawful. In his day, a leading figure in the OTP raised the issue of the need to consolidate the population of Hungary along the same lines as the bank consolidation. However, this idea did not meet with the approval of the decision-makers. In the recent past, the head of a local government association broached the subject of the state reassuming the burden it placed on the shoulders of home loan payers in 1990 because it had no other choice. These days, the economy is in much better shape, and the problems that forced Parliament to take that decision no longer exist. For the time being, these arguments have not found any resonance amongst politicians, even though the amounts involved are not enormous in budgetary terms. The total amount of home purchase loans taken out before the collapse of Communism is HUF 30 billion (USD 125 million), and 40 per cent of the 270,000 parties to the contracts do not repay regularly. In the worst case scenario, the outstanding debts do not amount to as much as HUF 15 billion (USD 65 million). This is a hefty sum of money, but if we realise that the annual budget for housing-related policy amounts to almost HUF 100 billion (USD 415 million), it becomes extremely difficult to understand why tens of thousands of families must have their houses auctioned off around them for the sake of HUF 10-15 billion (USD 40-65 million). The OTP is planning to terminate the contracts of 90,000 clients, something which these families cannot accept...
According to researchers, every developed country affords support to those who wish to buy their own homes. It is in the interests of the state that its citizens should have property, to which they can have recourse in straitened circumstances. Studies to work out the cost of taking care of the destitute are also being carried out. If we were to put these results side by side, we would see that it is unacceptable for the state to allow families to lose their property. Someone or other will have to pay more than just a few billion for this anyway.
In two weeks' time: the human cost of evictions, the new plan for housing and the scourge of squatters.
Gusztav Kosztolanyi, 18 September 1999
The sources used for this article were Magyar Nemzet, 13 January; 24 and 27 April; 5, 9 and 24 June; and 21 July.
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