The government and banks announced on Monday that borrowers with mortgages denominated in Swiss francs, the most popular currency for lending in Hungary before such products were banned, could choose to make repayments at a fixed rate of 180 forints to the franc until the end of 2014. The rate is about 17% stronger than the present market rate. Rates were also fixed for euro- and yen-based loans in the agreement.

Fixing the rate temporarily gives borrowers “the false illusion…they are free of exchange rate risk” and is “nothing more than a substitute forint-based loan”, the MNB said. It could also encourage borrowers to spend any income saved because of the fixing, thus boosting borrowing based consumption, and leaving the borrowers unprepared for possible higher payments after 2014, it added. The central bank suggested the government limit the possibility of fixing the rate on the loans to those Hungarians in difficult social situations having trouble making repayments on their loans.

The MNB said it could not take a position on part of the agreement between the government and banks that establishes a national asset manager to buy the properties of troubled borrowers, allowing them to continue living in their homes as renters, as well as a part that gives interest subsidies to borrowers who exchange their homes for smaller properties because of a lack of detailed information.

The MNB said quotas on auctions of foreclosed homes under the agreement were too low and should be raised to 5-10% of bad mortgages, and should be reviewed on a regular basis in the light of developments on the property market and in the quality of the portfolio. The bank noted it had proposed the quotas in the first place, but such low limits would present the same risk as leaving the moratorium on foreclosures in place.

Under the agreement, the quota is to be set at 2% between October 1 and December 31, then rise to a quarterly 3% in 2012, 4% in 2013 and 5% in 2014.

The MNB said lifting the moratorium on foreclosures was “necessary and unavoidable”, adding that it “makes mortgage lending more difficult and more expensive, and damages borrowers’ propensity to make repayments”.

Retail borrowers with foreign currency-based mortgages saw their repayments rise as the forint weakened during the crisis, prompting Hungary’s previous government to introduce moratoriums on foreclosures and evictions by lenders. The moratoriums have been extended several times, most recently until July 1, 2011.

Overdue payments on Swiss franc-based loans affected more than 90,000 homes at the end of last year, about a quarter more than the number of homes that were bought and sold during the year, according to MNB experts.