Opinion of the European Central Bank of 5 April 2012 on foreign currency mortgages and residential property loan agreements (CON/2012/27)
Date: 2012-04-05
Institutions: European Central Bank
Subjects: Hungary, exchange rate, financial stability, foreign currency, loan, mortgage, national law, redemption

EN 

ECB-PUBLIC 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 5 April 2012 

on foreign currency mortgages and residential property loan agreements 

(CON/2012/27) 

Introduction and legal basis 

On 12 March 2012, the European Central Bank (ECB) received a request from the Hungarian Ministry for 

the National Economy for an opinion on a draft law modifying the rescue scheme for foreign exchange 

borrowers (hereinafter the ‘draft law’).  

The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the 

Functioning of the European Union and the sixth indent of Article 2(1) of Council Decision 98/415/EC of 

29 June 1998  on  the  consultation  of  the  European  Central  Bank  by  national  authorities  regarding  draft 
legislative provisions1, as the draft law relates to rules applicable to financial institutions insofar as they 

materially  influence  the  stability  of  financial  institutions  and  markets.  In  accordance  with  the  first 

sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council 

has adopted this opinion. 

1.  

Purpose of the draft law 

The  draft  law  amends  Law  LXXV  of  2011  fixing  the  exchange  rates  for  the  repayment  of  foreign 
currency loans and the administration of the enforced sale of residential property2 (hereinafter the Law) 

that,  in  July  2011,  introduced  a  scheme  to  fix  loan  instalments  on  a  temporary  basis  by  collecting  the 

additional debt arising from the difference between the actual and fixed exchange rates on a separate loan 

account, which was to be repaid after 36 months. The ECB was not consulted on this Law. On 10 October 

2011, the Law was amended to allow eligible debtors to repay mortgages early at exchange rates fixed by 

the  Government,  implying  a  significant  reduction  in  the  principle  amount  of  the  mortgages.  The  early 

repayment scheme expired on 29 February 2012. 

On  30  December  2011,  the  relief  scheme  was  again  amended  by  inserting  an  article  into  a  legal  act 

regulating  a  materially  different  subject  matter,  Law  CCIX  of  2011  on  water  utilities.  This  amendment 

provided relief for holders of foreign currency mortgages who on 30 September 2011 had been in default 

1  
2  

OJ L 189, 3.7.1998, p. 42. 
According  to  Law  No  LXXV  of  2011,  debtors  may  opt  for  a  36  month  application  of  a  fixed  exchange  rate  of  forint 
180/1  Swiss  franc,  forint  250/1  euro  and  forint  200/100  yen.  During  that  period,  they  will  receive  a  credit  line  to 
accumulate  the  difference  between  the  fixed  and  actual  exchange  rates.  After  the  period  of  application  of  the  fixed 
exchange  rates,  debtors  must  repay  the  accumulated  difference  on  a  monthly  basis.  Law  No  LXXV  of  2011  also 
introduces a quota for the forced sale of properties 

 
 
 
 
                                                 
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for  more  than  90  days  with  an  arrear  amounting  at  least  to  the  Hungarian  minimum  wage.  The  debtor 

could  request  conversion  into  a  mortgage  denominated  in  forint.  In  addition,  25%  of  the  clients’  debt 

outstanding on 15 May 2012 would be cancelled, provided the total market value of the real estate serving 

as collateral did not exceed HUF 20 million at the time of contracting the foreign currency mortgage. The 

ECB was not consulted on this amendment. 

The latest draft amendments to the Law aim to make the initial scheme more attractive to debtors unable 

to repay their foreign currency loans under it. 

The  draft  law  also  extends  the  scope  of  debts  qualifying  as  a  foreign  currency  loan  to  debts  under  a 

financial  leasing  contract.  Furthermore,  it  extends  the  scope  of  the  exchange  rate  barrier  scheme  to 

debtors with loans up to HUF 20 million. It also extends the scheme’s application period from 36 to 60 

months and introduces the concepts of ‘highest exchange rate’ and ‘exempted part of the debt’. 

The draft law provides for the State reduction of the scheme’s financial burden on financial institutions. It 

specifies the highest exchange rate in 270 forint/Swiss franc, 340 forint/euro and 3.3 forint/yen, beyond 

which the State undertakes to reimburse a posteriori on a quarterly basis the full amount of debt resulting 

from exchange rates in excess of the highest exchange rate. The concept of ‘exempted part of the debt’ 

covers  any  fees  and  interest  on  the  loan  if  the  exchange  rate  exceeds  the  fixed  exchange  rate  of  180 

forint/Swiss franc, 250 forint/euro and 2.5 forint/yen. 

Furthermore, the State undertakes to reimburse the financial institutions a posteriori on a quarterly basis 

half  of  the  exempted  part  of  the  debt  that  cannot  be  enforced  in  a  foreclosure  procedure.  Financial 

institutions  are  prohibited  from  charging  interest  on  the  exempted  part  of  the  debt  and  the  part  of  the 

instalment obligation that resulted from the exchange rate exceeding the highest exchange rate fixed by 

the  draft  law.  Finally,  the  draft  law  provides  for  an  additional  interest  subsidy  for  public  sector 

employees. 

On 14 March 2012, the Minister for the National Economy tabled six amendments to the draft law before 

the final parliamentary vote, including amendments T/5842/20 to 25. Contrary to the 30 December 2011 

version of the draft law, amendment T/5842/25 extends the scheme to debtors with loans drawn against 

real  estate  collateral  of  up  to  HUF  30  million,  compared  with  the  cap  on  the  initial  amount  of  the 

mortgage of HUF 20 million. At the same time, amendment T/5842/23 inserts a new Article 10/A(1) into 

the Law providing relief for foreign currency debtors in default for more than 90 days at 30 September 

2011 for at least an amount corresponding to the minimum wage. These debtors may request conversion 

into  a  forint  mortgage  loan  and  25%  of  their  debt  outstanding  on  15  May  2012  may  be  cancelled, 

provided that the total market value of the real estate serving as collateral did not exceed HUF 20 million 

at the time of contracting the foreign currency mortgage.  

Amendment  T/5842/24  complements  Article  3(4)  of  the  Law  by  introducing  the  following  application 

schedule for eligible debtors to apply for conversion of their foreign currency loans:  

- 

- 

from the Law’s entry into force: public sector employees, 

from 1 June 2012: other foreign currency mortgage holders,  

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- 

from  1  September  2012:  other  foreign  currency  mortgage  debtors  with  a  non-specified  purpose 

loan. 

The ECB was not consulted on these amendments to the draft law, which were incorporated in the final 

version adopted by the Parliament on 19 March 2012. Since the final adopted law had not been published 

by  26  March  2012,  the  ECB’s  opinion  is  based  on  the  draft  law  sent  by  the  consulting  authority, 

supplemented by amendments from the Hungarian Parliament’s on-line database. 

2. 

The appropriate time to consult the ECB 

The  consulting  authority  submitted  the  draft  law  to  the  ECB  on  12  March  2012,  in  a  letter  dated  28 

February 2012, without requesting an urgent procedure or setting an express time limit for the submission 

of the ECB’s opinion. On 19 March 2012, the Hungarian Parliament adopted an amended version of the 

draft law. 

The  ECB  again  reiterates  its  position  that  even  cases  of  particular  urgency  do  not  relieve  national 

authorities from their duty to consult the ECB and to allow sufficient time to take into account its views 

in  accordance  with  Decision  98/415/EC.  Any  substantive  amendments  to  the  draft  law  have  to  be 

submitted to the ECB to allow it to adopt its opinion on the most recent text. Furthermore, the process of 

adoption  of  the  draft  law  should  have  been  suspended.  The  ECB’s  observations  on  the  provisions  on 

which it was consulted do not eliminate the breach of the consultation obligation. The ECB expects the 

Ministry  for the  National  Economy  to give  due  consideration  to honouring  its  obligation  to  consult  the 

ECB in the future. 

3. 

Financial stability and risks associated with foreign currency loans  

3.1  The ECB has pointed out on several occasions the risks associated with foreign currency loans3. In 

particular, they represent a major risk to financial stability in several Member States in central and 

eastern  Europe,  particularly  in  Hungary  where  the  share  of  foreign  currency  loans  is  among  the 

highest  in  the  Union.  The  ECB  points  in  this  respect  to  the  analysis  of  such  risks  made  by  the 

European  Systemic  Risk  Board  (ESRB)  and  to  the  ESRB  recommendations  for  addressing  such 

risks  contained  in  Recommendation  ESRB/2011/1  of  21  September  2011  on  lending  in  foreign 
currencies4. 

3.2  While  noting  the  importance  of  complying  with  the  rule  of  law  and  ensuring  legal  certainty,  the 

ECB observes that the draft law is the latest effort by the Hungarian Government to provide relief 

for distressed foreign currency borrowers and thus ease the burden on the Hungarian economy.  

3.3  The ECB notes that the Hungarian authorities have found a common position with the Hungarian 

Banking Association including, inter alia, on burden sharing between banks, the Government and 

holders  of  foreign  currency  loans.  This  is  a  welcome  development  from  a  financial  stability 

3  

4  

See in particular the ECB Financial Stability Review of June 2010 and Opinion CON/2011/87. All ECB documents are 
available on its website at www.ecb.europa.eu.  
OJ C 342, 22.11.2011, p. 1. 

3 

 
 
                                                 
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perspective.  While  previous  amendments  to  the  Law,  especially  those  related  to  the  early 
repayment of foreign currency loans, had a significant negative impact on financial stability5, the 

current amendment may, in contrast, have a favourable impact on banks’ asset quality, at least in 

the  short  to  medium  term.  However,  the  long-term  implications  of  the  scheme  for  borrowers’ 

financial  position  and  banks’  asset  quality  will  depend,  among  other  things,  on  exchange  rate 

movements during and after the period of exchange rate fixing. 

3.4 

In addition, the ECB considers that, by allowing borrowers to service their debt for a period of 60 

months  at  fixed  exchange  rates  substantially  below  current  market  rates,  the  Law  may  weaken 

customers’  risk  awareness  during  the  fixation  period.  This  may  represent  a  potential  risk  for  the 

banking system’s stability when the scheme expires and the instalments to be paid by clients will 

increase to service the debt accumulated on the separate loan accounts. It is therefore important for 

banks  and  authorities  to  ensure  that  clients  are  fully  aware  of  the  possible  implications  of  a 

potentially  sizeable  increase  in  their  monthly  instalments  at  the  end  of  their  participation  in  the 

scheme. In this regard, the Hungarian authorities could consider appropriate measures to enhance 

clients’ risk awareness and to encourage them to build up sufficient financial reserves that could be 

used to service their debt in the future. 

3.5  The  ECB  reiterates  its  earlier  concerns  as  regards  the  potential  adverse  effects  of  Law  LXXV  of 

2011 and its amendments, with possible negative implications for the long-run growth prospects of 

the economy. 

3.6  Overall, the ECB calls for an update of the analysis of the impact of Law LXXV of 2011 and its 

amendments  on  public  finances,  the  financial  system  and  the  real  economy  including  possible 

cross-border effects.  

3.7  Finally,  the  ECB  calls  for  further  dialogue  between  the  authorities  and  financial  institutions  and 

proposes in this regard due consideration of the interests of the general public, including financial 

institutions  and  the  authorities  responsible  for  ensuring  the  stability  of  the  financial  system  in 

Hungary, in the process of developing secondary legislation, as referred to in Article 7 amending 

Article 11 of Law LXXV of 2011. 

This opinion will be published on the ECB’s website.  

Done at Frankfurt am Main, 5 April 2012. 

5  

See CON/2011/87. 

4 

[signed] 

The President of the ECB 

Mario DRAGHI