21 December 2016
A growing and more developed mortgage bond market may foster structurally sound housing loan growth through the spread of fixed-rate credit products for longer tenors and a decline in interest expenses. In 2016, three new mortgage banks were established and several successful mortgage bond issuances took place. The Mortgage Funding Adequacy Ratio (MFAR), announced by the MNB in June 2015 and effective from 1 April 2017, ensures long-term, stable funding of household mortgage loans through mortgage bonds in the banking sector. However, growth in household mortgage lending requires the enhancement of stable funding requirements: following the Financial Stability Council’s decision, the required minimum level of the MFAR will increase from 15 to 20 percent from 1 October 2018.
In June 2015, the Magyar Nemzeti Bank adopted a decree with the objective of mitigating the maturity mismatch between forint assets and liabilities in the banking sector. The decree regulating the Mortgage Funding Adequacy Ratio (MFAR) requires Hungarian credit institutions to finance at least 15 percent of their outstanding stock of household mortgage loans with long-term, stable mortgage-backed forint liabilities from 1 April 2017. Since the announcement of the new regulation, market participants have made significant adjustments: three new mortgage banks were established in 2016 and the first mortgage bond issuances were made in autumn 2016.
Due to the pick-up in household mortgage lending and following the development of a mortgage bank and refinancing infrastructure, it has become necessary to tighten the MFAR requirement. Following the decision of the MNB’s Financial Stability Council, the MFAR regulation will be amended in four areas from 1 October 2018. The minimum required level of the MFAR will increase from 15 to 20 percent, which will further mitigate the maturity mismatch in bank balance sheets; the mortgage bond market may also deepen further thanks to the expected issuance of mortgage bonds. Under the enhanced regulation, the required minimum maturity of eligible liabilities will increase from one to two years, while mortgage bonds purchased by banks will be partially ‘netted’ against eligible liabilities in accordance with the decree. This will encourage market participants to raise stable funds at the systemic level outside the banking sector. Finally, from October 2018, mortgage bonds held by building societies will be considered eligible as genuine stable funding. The MNB has consulted a wide range of stakeholders, including the Banking Association and the European Central Bank, with regard to the amendments of the decree.
Banks will be granted a sufficient preparatory period to comply with the new requirements. Over the next year and a half, new mortgage bond issuances may amount to nearly HUF 600 billion. A growing and more developed mortgage bond market may foster structurally sound housing loan growth through the spread of fixed-rate credit products for longer tenors and a decline in interest expenses.
The text of the MNB decree is expected to be published in late December 2016 in the Hungarian Gazette.