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Hungary central bank to discontinue mortgage bond purchase program

The National Bank of Hungary (MNB) said it will not continue beyond the end of the year a HUF 100 billion mortgage bond program it launched in early February.

The MNB will discontinue the program as it sees no chance for any significant change in low-growth forint mortgage lending and, consequently, forint mortgage bond issues in 2011, the MNB said in a statement on its website.

The program, meant to prop up forint market liquidity and thereby forint lending, has partially lived up to expectations, the bank said. But it failed to give the hoped-for boost to the long-term forint funding of domestic banks.

The program helped to narrow spreads of mortgage-back bonds compared to government securities and boosted secondary market turnover. The secondary market spread of forint mortgage bonds narrowed to 80-150 bp by the end of 2010 from 150-200 bp in 2009. Secondary market turnover, excluding the MNB's purchases, rose more than 50% during the period.

Primary purchases of the bank fell, however, far below the MNB's expectations, as only one mortgage bank (FHB Bank) involved the central bank in the re-offering of one single bond series, to the tune of a combined HUF 7.3 billion.

Secondary market purchases went as planned, the bank said, with HUF 27.4 billion in mortgage bonds on the secondary market purchased to date under the program.

The MNB put part of the blame for the lower-than-expected mortgage-backed bond issuance to the slow growth of forint mortgage lending in 2010. Besides, mortgage banks usually refinanced their low-growth lending from shorter-term funding and not through mortgage bonds, the bank said.

 The bank expects no significant turnaround in these conditions, citing the continued moratorium on evictions and the changes affecting the private pension fund system among others.

The MNB will hold its last secondary market purchase tender on December 8. Banks may still initiate the MNB's primary market purchases up to 20% of auction sales under the earlier conditions by December 31, 2010.

The MNB will operate its bond lending facility related to the mortgage-bond series issued under the program until March 16, 2011.

The central bank noted it was ready to reconsider the launch of a similar purchase program if forint-based lending gets momentum and banks want to increase lending while maintaining the maturity match on their balance sheets. (MTI – Econews)