The high ratio of loans over 90 days past due, i.e. nonperforming mortgage loans, is the legacy of the crisis and the excessive lending that preceded it. The volume has continuously grown over the past six years and by the end of 2014 accounted for one quarter of the total mortgage portfolio, affecting approximately 140,000 debtors. The degree of exposure within the entire system of financial intermediation is nearly HUF 1,450 billion, nearly 5 per cent of GDP. Terminated contracts now account for over half of the total portfolio, which may essentially lead to execution and thus the loss of the property for debtors. As a result, this is currently one of the most pressing issues for financial stability and a major social risk in Hungary. A deep analysis and broad understanding of the issue is indispensable for finding the proper solution.

Despite the importance of the matter, we know little about nonperforming mortgage loans. This study aims to provide a comprehensive picture of the attributes of these loans after settlement and forint conversion on the basis of individual data. The data clearly show that the heart of the matter in terms of both wealth and income is the excessive level of debt. For over 80 per cent of customers, the total debt amount (outstanding principal and arrears) exceeds the advanced loan amount. Since the onset of the crisis, the amount of principal debt has increased substantially compared to the real estate collateral pledged, currently amounting to 110 per cent on average or 140 per cent if we calculate the indicator based on total debt. The severity of the issue is further exacerbated by the fact that 70 per cent of nonperforming debtors live in smaller cities and localities, primarily in regions where the marketability of properties is limited. As a result, the prospects of a new start after selling the collateral may be limited for debtors.

In examining nonperforming loan transactions, it is also essential to analyse income positions in depth, mainly in light of the potential rectification of the loan transactions through sustainable restructuring. Nearly two thirds of nonperforming transactions have income subject to personal income tax, but the excessive repayment instalment relative to monthly income is a serious problem in the majority of these cases. Another aspect of the situation is that taxable income (including the income of co-debtors) does not necessarily include all sources of income. The fact that somewhat over one third of debtors with no declared income have partially met their annual debt servicing obligation for last year testifies to this fact. At the same time, it is important to mention that for 10-20 per cent of nonperforming debtors, the underlying cause of nonpayment may primarily be low willingness to pay, as these debtors would be able to meet their debt servicing obligation based on their incomes.

The findings of the analysis show that significant restructuring reserves are visible in the portfolio, and up to 70,000-80,000 debtors could be placed on a sustainable debt repayment trajectory. This, however, would call for a more pronounced and active restructuring practice, while banks must take care to prevent concessions made to nonperforming debtors from eroding the willingness to pay of performing debtors.

A number of administrative burdens, particularly among terminated loans, make the resolution of the problem difficult. Successful restructuring also hinges upon customers’ greater willingness to cooperate. A further source of uncertainty is the extent to which customers are willing to cooperate in the course of sustainable restructuring. Based on the findings of the questionnaire-based and the focus group surveys, nearly half of debtors do not see losing their homes as a real threat, despite being aware of the consequences of nonpayment, and nearly one sixth of customers reject all available solutions. Nevertheless, on a positive note, according to the majority opinion, individuals carry responsibility for the prevailing situation, and a solution must be sought in cooperation with creditors.