Lajos Kósa and Antal Rogán: Suggestions to ease the pain of mortgagors

As is the Fidesz government's wont, the eight-point proposal for the relief of mortgagors who are in financial difficulty due to the serious weakening of the Hungarian currency was not prepared by the appropriate ministry after careful consideration and consultation but was presented out of the blue by two members of parliament, Lajos Kósa and Antal Rogán.

It was on September 9 after a meeting of the Fidesz parliamentary delegation that the draft was made public. The eight points are the following:

(1) The terms of a contract cannot be changed if such a change is disadvantageous to the borrower.

(2) The arbitrary raising of the interest rate is forbidden.

(3) The median exchange rate should be applied.

(4) Paying off the mortage early should not carry a financial penalty.

(5) If requested, the length of the mortgage should automatically be extended by five years.

(6) Creation of a clean slate: the maximum the bank could demand from the debtor would be the current value of the property.

(7) In case of an extended inability to pay, the bank could not demand extra interest, late fees, or any other penalties.

(8) For the sake of fairness the above proposals are not applicable to commercial real estate or a second or third dwelling.

Tamás Erdei, president of the Hungarian Banking Association, announced the following day that the Kósa-Rogán package is unacceptable and that some of its stipulations are most likely unconstitutional. Erdei emphasized that before coming out with these proposals there was no consultation with the Banking Association. According to him negotiations between the Fidesz delegation and/or the government must commence immediately because "several suggestions of the legislators undermine on several points the current laws governing civil contracts." He continued by observing that some of the suggestions contradict passages of the "ethical codex" recently signed by Hungarian banks.

He called some of the suggestions "outright nonsense" that turn upside down the legal prescripts of contracts between banks and their clients. For instance, the automatic extension of the length of the mortgage constitutes an arbitrary breach of contract which is forbidden for the banks. He foresaw a situation in which people would default in order to be eligible for the automatic lengthening of their mortgage.

Then came the legal experts. According to István Lövétei, a constitutional lawyer, if the state interferes with the terms of a contract it must bear the cost of the loss incurred by the injured side. He specifically objected to the application of the median exchange rate when calculating mortgage payments. The contracts as they now stand contain a reference to the exchange rate of purchase and the exchange rate of sale. The state in this case would arbitrarily change the current contract signed and sealed. Gábor Török, professor of civil law, thinks that the law could prescribe the margin between the buying and selling price which is, by the way, currently 15%. That could be changed but there is still the problem with retroactivity.

What Hungarian experts didn't mention is the arbitrary raising of rates. For Americans it is hard to understand what this actually means. Here we have fixed-rate mortgages and variable mortgages. Naturally, the bank cannot raise the interest rate on a mortgage if a person borrows money at a fixed rate. But a variable mortgage will depend on the current interest rates.

The two gentlemen tried to explain away their lack of consultation and promised to talk to both sides soon. First, they talked to the representatives of the borrowers who were naturally not satisfied even with the Kósa-Rogán proposals. They would save absolutely every borrower, not just mortgagors. They went so far as to argue for the extension of assistance to those who have difficulties paying their gas or electric bills. Or those who took out a loan to buy a new plasma television.

Most people consider the suggestion that the banks couldn't demand more money from the borrower than the current value of the property beyond what banks could tolerate. One must keep in mind that at the moment there is a moratorium on eviction. Thus the banks would be helpless in recouping their money. Some experts think that this particular suggestion is so absurd that it is not even worth seriously discussing.

Tomorrow Kósa and Rogán will meet the representatives of the banks. One would think that the bank leaders and their lawyers could easily handle this duo, but knowing Kósa and Rogán it will be not an easy task to make them understand why the banks are objecting to some of their demands.

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Paul Haynes
Guest

Thanks Eva, interesting stuff.
My initial reaction was that these were all good points (although I did wonder exactly how the government was going to impose them – and just how they were going to decide when an interest increase was “arbitrary”).
But reading through the rest of your post gave me a lot of second thoughts (why isn’t life as simple as Fidesz seems to think it is!). And also made me wonder, yet again, why the Fidesz machine, that operated so smoothly and effectively for years, now seems to have broken down completely.
Rather ironically (or perhaps not) what this sort of Fidesz proclamation most reminds me of is the ’10 points’, ’12 points’, etc so often issued by revolutionaries at times like the 56 uprising. All very agreeable points, but often ones that leave you wondering just how they would implement them if they ever did get power.
But the odd thing is that Fidesz already HAS power – total power – so why is it behaving in this way?

Eva S. Balogh
Guest

Paul: “But reading through the rest of your post gave me a lot of second thoughts (why isn’t life as simple as Fidesz seems to think it is!).”
Yes. Someone who is not totally familiar with the banking system and finances in general (like myself) can’t see these issues in their complexity.
By the way, after I wrote my piece I discovered an article in today’s Bloomberg on the same topic, but with the emphasis on the banks’ woes. Here is the link:
http://www.bloomberg.com/news/2010-09-16/hungary-s-mortgage-relief-plan-may-punish-lenders-after-biggest-bank-tax.html
These suggestions are surely very popular with the people but they may hurt the banks and through them the Hungarian economy.

Pásztor Szilárd
Guest
Eva: first, thanks for posting on this subject, regardless if you did so because of my request or not. This entry is one extremely rare example where I share some of your points. But read on. I asked you to review these 8 points because I was curious how far could you go in twisting it and turning this obviously rightful endeavour of the government against unfair bank behavior into something of a malicious and evil deed of the Orbán administration. Partly to my surprise, this time it was less so than your usual strained effort. Now on to the topic: 1. I think the very first thing to admit is that these points protect the clients’ interests, exactly what a government’s action should do. 2. Bank practice, because of a lack of legal control, is violently foul in Hungary. Where in the world, except maybe third world countries, could one imagine that banks push ALL risk onto the clients while emerging profitable from every single crisis? In the U.S., mortgage crisis occurred because the “clean state” (point 6) is practically in effect. It is obviously a must to lay this in law: conractors, in accordance with the principle of… Read more »
Anita
Guest

“But the odd thing is that Fidesz already HAS power – total power – so why is it behaving in this way?”
Because listing points makes them look firm and determined. They are all about rhetoric and not about solving issues. They don’t bother to think through the solutions they offer thoroughly; they are only interested in creating an image of a government who is in charge and acts fast and firm.
Since the average citizen does not understand the complexities of economic and political issues, the strategy seems to be working. Rhetoric can carry you a long way…. for a while. In the end, though, decisions made hastily without any professional expertise will backfire… I’d think.

Anita
Guest

The above post was reply to Paul Haynes.

Mark
Guest
It seems highly ambiguous to me. The points that interested me were: 1. I think this is difficult to object to. However, it seems to me that the existing contracts are likely to give the lender considerable leeway. Therefore I can’t work out what the advantage or purpose of this rule is. 2. What precisely is an “arbitrary” increase in the interest rate? Because no figure or upper limit is specified this point could really mean anything. 3. Certainly this will disadvantage banks as it is about making them carry the cost of converting the money backwards and forwards from HUF. But while in theory it might slightly help the borrower (what is more likely is the banks will recover the moneys elsewhere) it isn’t going to solve the underlying problem, which is translation risk. In other words if HUF falls against CHF the monthly payment for the borrower will rise. The only solution to this is the outright conversion of the mortgage to HUF, but this is not what is being suggested. 4. I don’t see what grounds the banks have for complaint. In fact given Hungary’s gross debt burden the law should be giving proper incentives to borrowers… Read more »
Anita
Guest

@Pásztor Szilárd: ” In the U.S., mortgage crisis occurred because the “clean state” (point 6) is practically in effect.”
There are plenty of people her in the US who owe more to the bank than the value of their property. Exactly because property values decreased after they took out the loan.
I think this is the latest how the government is trying to help this people:
http://www.rwbpress.com/2010/09/16/underwater-mortgage-refinancing-and-principal-reductions-through-fha-short-refinance-plan/
There is no “clean state” in there anywhere.

Vladimir
Guest

I’ve always seen part of Fidesz’s gameplan is to use their current gov’t power to make the current situation untenable to make the multi-national financial companies get out. Many Fidesz loyalists already come from this “boys club” sphere where one doesn’t have to be necessarily smart or good at management to make very good money, especially if you have powerful political allies.
I fully expect that the quasi-private mandatory pensions will be a nice issue to score some poltical points with nationalist-minded in the next year or so. They’re all mostly now held by big financial companies and surely Fidesz loyalists would like to be in on this easy money.
Regarding the 8 points, when reading them I was asking myself why the fairer points hadn’t already been spelled out in the law already.

Paul Haynes
Guest

The original phrase was ‘clean slate’, ‘clean state’ was a typo of Szilárd’s.
I assume Anita realised this, but I thought it worth pointing out in case it was confusing any non-native English speakers (or in case this phrase doesn’t mean anything outside the UK).
Apologies if this comment sounds patronising.

Paul Haynes
Guest

Eva’s Bloomberg link is worth checking out, by the way.
Anita might be right when she wrote “listing points makes them look firm and determined. They are all about rhetoric and not about solving issues”.
But for me the echo I get here is election campaigning. Could it be that Fidesz have spent so long, and put so much effort into, trying to destroy the Socialists by promising the earth, that they just can’t stop behaving like this?
But, let’s assume they do know what they are doing and they do manage to get all this into law, what then happens if this package isn’t enough? After all, if you lose your job, or still can’t pay your mortgage, even after extending it for 5 years, what happens then?
If Fidesz is serious about looking after its supporters who were daft enough to mortgage themselves to the hilt in Swiss francs, sooner or later they are going to have to start providing government money to keep people afloat or bail them out. And where’s that money coming from?

Mark
Guest

Paul Haynes: “If Fidesz is serious about looking after its supporters who were daft enough to mortgage themselves to the hilt in Swiss francs, sooner or later they are going to have to start providing government money to keep people afloat or bail them out. And where’s that money coming from?”
They need to restructure these debts for the sake of social stability and the economy. They could have used bank tax revenues to create a fund to do some of this, and that might have made the bank tax economically sensible. But they will need support from the international financial organizations to have any chance of saving the middle class. And persuading the IMF and the EU was always going to be a challenge (Gyurcsány remember tried to persuade the EU in 2009 and failed). Obviously I’ll leave others to decide whether FIDESZ’s antics have made it more likely that they will suceed where Gyurcsány failed.

Paul Haynes
Guest
Just how big is this foreign mortgage problem? I had assumed it was something that only affected those well enough off to start with that they could afford large houses, second homes, fancy extensions, etc. But, from the way you’re talking, it sounds like Swiss franc mortgages were much more widely taken out. And, talking of class, how exactly does this factor into the Hungarian political situation? My nose for such things, although finely honed for the British environment, just doesn’t work in Hungary. I get the feeling that the middle class is much smaller than in the UK, so, presumably, it is of less importance to the politics of Hungary. I had assumed that the working class (or classes) were the overwhelming majority in Hungary and therefore it was them who were critical to a party’s success. Unless, of course, the problem here, as so often, is one of definition. My in-laws are a family of doctors and teachers, and so unquestionably middle class by British assumptions, but just about everyone else I know in Hungary, even the richer ones, I would class as working class. In Britain, in recent times, politicians have lived or died by the impact… Read more »
Pásztor Szilárd
Guest

@Paul: these 8 points are about a lot more than your persistent opinion on Fidesz “just playing for their own voters”. These mortgages in foreign currency are an ENORMOUS amount in Hungary. In fact, MOST of the existing house loans are swiss francs. And many of these families are literally in grave danger.
It is important to emphasize that we’re not talking about risks of HUF volatility or the like. We’re talking about unfair banking practice where factors such as volatility are simply an excuse for banks to burden their clients. Typically, when these loans were taken, a swiss franc was worth 160 HUF. Now it is about 220, this amounts to a 37% increase, but monthly repays have been usually doubled.
Point 6 is the single most important one, despite most opinions here being against it. It is about distributing risks between banks and clients. I cannot see how this can be opposed by anyone.

Guest
@Paul Haynes: You might be surprised to hear how much financing has been going on in Hungary via Swiss francs. Several of my neighbours and acquaintances have bought houses, apartments, cars, computers, tv sets – all on FX loans … Some very important points have not appeared here, I’ve written about some of them on realdeal.hu, but let me do it again: Those Swiss francs loans were taken out because the interest rate was much lower – to any economist this difference appears as a kind of insurance premium for volatility on the “weaker” side i e the forint. Bank people and customers should have known this or at least asked about this! In Germany loans are usually limited to 60 % of the collateral’s worth (conservatively estimated by the bank) – I remember that I had to supply additional collateral when I renovated a house. If you go over those 60 % the interest rate becomes much higher – this again is some kind of insurance premium. I don’t finance anything nowadays but I’ve read that even smaller consumer loans nowadays have interet rates varying between 5 and 15 % (in Germany again) – depending on the “Bonität” i… Read more »
Mark
Guest
Paul Haynes: “I get the feeling that the middle class is much smaller than in the UK, so, presumably, it is of less importance to the politics of Hungary. I had assumed that the working class (or classes) were the overwhelming majority in Hungary and therefore it was them who were critical to a party’s success.” You need to be very careful in making these kinds of comparison. If you adjust wages for the difference in purchasing power (to account for Hungary’s lower price level)then the purchasing power of the average Hungarian wage is about half that of its British equivalent (and at market exchange rates then they are just less than a third of their British equivalents). What you are seeing is the effect of lower consumption brought about by a substantially lower living standard. Class is not just about money but about occupation and culture too. Both Hungary and the UK are European societies and thus there are cultural similarities in both countries’ middle classes, but there are important differences. If you look at occupational structure in both countries the “working class”, defined as those in manual occupations accounted for a majority in both countries in the early… Read more »
Mark
Guest
wolfi: “Bank people and customers should have known this or at least asked about this!” In the UK fewer than 1% of mortgages are taken out in foreign currencies. The Financial Services Authority obliges banks and mortage brokers to issue a worked example of translation risk to applicants, to explain it, and to ask the applicant to sign to say they have understood the consequences of rate fluctuations on their payment. If this signature cannot be produced subsequently then a lender may find itself sued for misselling, and may be forced to compensate the borrower for the losses due to the exchange rate fluctuation. My impression is that consumer protection regulation in Hungary is way below the kinds of standards one sees in other European countries. This is suggested by the lack of health warnings on advertising and some of the stories I’ve heard about the actions of brokers. I too was incredulous when I first heard of the FX mortgage and loan craze back in 2004. Sensible lending practice would be only to lend money in the currency in which they receive the bulk of their income, precisely because of the translation issue. But then this was about the… Read more »
Half Hungarian
Guest

why this marxist blog is in english??? I see no foreigners here only hungarians struggling with english (so what’s the point) …very funny…..

Mark
Guest

Half Hungarian: ” I see no foreigners here only hungarians struggling with english”
You seem a little challenged with the language yourself.
First sentence – no capitalization at the beginning – “Why”, not “why”. “Marxist” and “English” are proper nouns and should be capitalized. You’ve also a syntax error – it should be “Why is the Marxist blog in English?”
Second sentence – you’re missing some punctuation I think – a semi-colon between here” and “only”. And “Hungarians” and “English” are proper nouns and should be capitalized.
Third sentence – “So” should be capitalized – always start a sentence with a capital letter. And you need a question mark at the end “?”
Not bad – you’ve written 23 words, and 9 basic grammatical errors in a sentence criticizing contributors’ English. Now why does that remind me of a scene from Monty Python’s “Life of Brian”?

John T
Guest

Half Hungarian – Methinks you are not very good at identifying foreigners. I’d guess the situation is the opposite to what you describe. Still, labelling this blog as Marxist gave me a chuckle.

Guest

@Mark:
You’re dead right!
This FX loans situation is unimaginable in any country in Western Europe – I wonder what will happen to the bank managers who allowed or even advocated this. At least one of the banks, namely the Bavariaan State Bank is in trouble because of the action of its Hungarian division.

Passing Stranger
Guest
I’ve heard several horror stories from banks in Hungary arbitrarily changing the terms of the loan, so quite frankly, they need to be quite strictly regulated. I also think there is nothing wrong in principle with providing a safety net for their homes until this crisis is passed. There is also a sensible economic argument. You don’t want to destroy a home-owning middle class, which also spends money and pays taxes. The issue with point 6 is obvious. This will cause people to speculate like crazy: they will buy houses in the safe knowledge that they can scoop up the profit if it comes, while the banks will carry any loss. That is no viable business model. It will cause banks to go bust, who will then need bailing out again… Just for the sake of the argument I wonder what would happen if governments would guarantee to jump in in the case of people defaulting on mortgages, similar to the way governments have propped up some banks. What sums of money would we be talking about? In case of a threatened foreclosure, governments could take up the difference between buying and selling price, and have the owners pay it… Read more »
John T
Guest

Passing Stranger – the idea in your last paragraph could be a runner if implemented sensibly.

Mark
Guest
wolfi: “This FX loans situation is unimaginable in any country in Western Europe – I wonder what will happen to the bank managers who allowed or even advocated this.” Not quite. I’m interested in the story of how this happened, and there is an Austrian connection in the Hungarian case. Around about a quarter of all lending to households is denominated in CHF in Austria. This seems to have been going on since the 1980s, when banks developed this business in order to cater to the demands of those living in Voralberg who went to work in Switzerland. As you may know in the early 1990s there was considerable de-regulation and privatization in Austria, including in the financial sector and this took off at that point. As far as I can tell, in Austria, however, foreign currency loans are targetted at wealthy borrowers who require interest only mortgages and can rely on investment to repay the capital component of the loan. Furthermore, most of these allow the borrower to switch to Euros at any point, so I guess they are a flexible product aimed at the most creditworthy. With banking consolidation in come the Austrian banks into the Hungarian market.… Read more »
Guest

@passing stranger:
I’m not sure about the definition of “middle class” here in Hungary but I think my neighbours are part of the “working class” and they like more than a million other families (the number might even be higher than two million!) are deeply mired in those CHF loans …
@Mark:
Yes this reminds me of the old (Chinese ?) proverb:
May you live in interesting times …
At least this is a very intereting discussion.

Odin's Lost eye
Guest
Whether this is a communist blog or not is neither here nor there. What is important is the discussion of the topic in question. That is the “8 points in Fidesz’s proposal”. Because certain contributors are not singing its praises some of the rancid right call it communist! There is one important point which is ‘Retrospective Legislation’ is forbidden throughout Europe (and all other democracies). It is specifically mentioned, and by implication forbidden, in the in the European Charter of Human Rights. Point 1 is unfortunately one of those points. A contract of this type can only be changed by mutual consent and before such consent is given the full implications of the change must be understood by all! Point 2 this is a two edged sword – if the interest rate cannot be increased it equally cannot be decreased either. This is one of the differences between a fixed rate and a variable rate mortgage. It would prohibit variable rate mortgages and place a very high premium on fixed rate type. Point 3 you need to define ‘median’. There may be a translation problem here. How the **?/@@ do you calculate it and where do you get the values… Read more »
Mark
Guest

Odin: “Whether this is a communist blog or not is neither here nor there. What is important is the discussion of the topic in question.”
I’ve had the feeling for a while for someone has been trying to disrupt discussion on this blog, for reasons that are not self-evident – and this is heightened by the irrelevant, pseudo-scientific garbage that appears above. I wonder who is behind this, and why they show increasing signs of desperation in doing this. Perhaps, this is a kind of complement and a sign that people should really take the effort to read what is here.

Eva S. Balogh
Guest

Mark: “I’ve had the feeling for a while for someone has been trying to disrupt discussion on this blog, for reasons that are not self-evident – and this is heightened by the irrelevant, pseudo-scientific garbage that appears above.”
The best is to ignore them. That’s what I’m doing. I have no time to waste on Dr. David Duke and his ilk.

Guest

Wow! Just scrolled through this “dr uke” – he’s got everything in there from Marx to Lucas to Reich to Adorno …
But I’m just to tired, having helped my neighbour harvesting the grapes …
Everyone have a nice Sunday – hope to read more interesting stuff here next week!

Odin's Lost eye
Guest

Mark
The reasons for these attempts at disrupting this blog are that it is hurting someone by telling the home truths about what these buffoons are up to. As to it being communist I know that at least 2 persons on this blog who are definitely anti communist. One is me and I am anti socialist as well. If I could have voted in the UK,I would have voted “Conservative and Unionist”. The other did a ‘runner from those ‘little toads’ many years ago.
I have had a snuffle round for the good ‘pastor’ and have found him. Have a look for yourself and make of it what you can.
Woolfi
I hope your neighbours vintage is a good one. If it is poor me a glass and as I will be some distance away you will have to drink it for me.

Paul Haynes
Guest

Marxist?
As someone who failed to even get through the Communist Manifesto (which is only a few pages long), any ‘Marxist’ viewpoints I might express are purely accidental!
But, seriously, as far as I understand Marxism, I don’t see many comments on here that fit into that philosophy.
Can you imagine the chaos if the means of production were owned by the workers in Hungary?! In our block of flats, the 12 owners couldn’t even collectively organise the mowing of the grass this summer!

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