One of
pre-election campaign promises made by president Duda and the bevy of
politicians he hails from was a bail-out for FX mortgage borrowers ensnared into toxic loan agreements and trapped in their unsellable properties for years
to come.
In January
2016, exactly a year after the Swiss currency had been freed to float, Mr
Duda’s office laid out a proposal of converting CHF mortgages into PLN at a
“fair rate”, different for each debtor and reflecting benefits received by debtors
on account of favourable CHF/PLN rates before September 2008 and lower interest
rates in CHF (for broader explanation in plain language click here and scroll
down to the third paragraph from the bottom). The proposal has been assessed as
hazardous for the Polish banking system and… shelved. Five month on, the sketch
of the solution has not developed into a draft law ready for legislative
process… Which is reassuring, since if Mr Duda’s experts are mindful of dire
consequences of banks going under or loss of trust among foreign investors,
they have held back from pursuing it and set out to reshape the proposal…
On Tuesday
the “CHF task force” held a fifty-one minutes long conference, during which
they attempted to outline the major conclusions of their work on the bail-out
scheme until now. I will be nasty, but I will exercise my right to speak it
out… This was one of the most ludicrous conferences I have ever seen in life. I
have got accustomed to listening to politicians who speak a lot and say nothing.
This time self-styled economic experts have told a story of guys who met up
several times to sip coffee, munch biscuits and waffle on quandaries of
benighted individuals who wanted to chase their dreams too much…
OK, the
malice cap has been reached, time to move on to what audience have been spared,
namely details…
The
participation in the bail-out will be voluntary, what in practice means some
better-off borrowers might not decide to get rid of their Swiss Franc burden,
in practice they will continue to bet on depreciation of CHF in years to come.
I personally know people who accumulate savings and hope one day they pay off
their whole mortgage with one shot at favourable CHF/PLN rate.
The
bail-out package consists of several measures distressed debtors could choose
between, however I still cannot make out whether they are mutually exclusive or
not.
One
interesting measure which could theoretically be implemented with another one
is the obligations to lenders (banks) to refund the borrowers the overpaid
currency spreads. I came, I saw, I did not understand at all. This concept
leaves more questions than answers. Firstly, what would constitute an overpaid
spread? Banks naturally earn on difference between rate at which they buy and
sell foreign currencies, whereas the problem with the CHF mortgages was that
spreads were far higher than reasonable (bid-ask spread often above 6%)… So
would lawmakers define a reasonable spread banks had been entitled to charge,
or would they set National Bank of Poland rate as benchmark? Secondly, would
banks give this money to borrowers’ hands or would they obligatorily prepay
mortgage loans? Thirdly, would the refund include penalty interest accrued for
period between it had been unduly charged and the day of refund? Fourthly,
would the measure cover also instalments paid after August 2011 (enacted
swiftly the PO-PSL government in reaction to soaring Swiss Franc) when the
anti-spread law (amendments to the banking law) came into force?
Fifthly,
facing the truth, the banks were not prohibited by the law to rip off
borrowers, so would reversing it be interpreted as violation of the precept
that law is not retroactive?
The concept
of the “fair rate” has been revisited in the presentation. The expert spoke of
four variants of the fair rate, however decided to share only two of them with
the audience. One draws on the algorithm presented in January 2016, the other
would additionally take into account current well-being of a borrower, with
debt-to-income ratio (percentage of after-tax income spent on instalments) a
key criterion. The very concept of what is “fair” and for who gives ample room
for disputes and will most likely by one of moot points if works on the
bail-out scheme move on.
Another
measure, whose legal feasibility is questionable, is the option for a borrower
to extinguish their mortgage debt by renouncing ownership of the mortgaged
property. In Poland mortgage debt has recourse nature, i.e. a debtor is liable
for it with all their present and future assets. Such scheme again casts doubts
whether law does not work retroactively (a bank when it was granting mortgages,
relied in creditworthiness assessment on claim on debtors’ assets and income).
Incidentally, introduction of pure non-recourse mortgage lending under which a
lender could recover from collateral only, could civilise Polish mortgage
lending, but at the expense of higher cost of such debt, being the compensation
for lenders for relinquishing the recourse to debtors.
The
professors mentioned in passing 30 billion PLN as the total cost of their
proposal (which one exactly?). No one still knows how their arrived at that
figure, but to be honest, to my best knowledge none of the figures presented by
any participant of the CHF debate has been backed by substantive calculations
or estimations holding water.
The experts
(I pull a grumpy cat’s face when I write this word, as Poland’s current ruling
elites lack backing of competent experts) also claimed the effects of the
bail-out would be spread over around 30 years, yet failed to explain how such
spreading over time be brought into line with International Financial Reporting
Standards which proscribe to recognise a loss in full amount in the period an
entity learns it is going to incur the loss. One of the task force members
murmured something about SPVs and securitisation as tools for spreading the
cost over time. A word of explanation here… SPVs are used by banks to remove
loans from their balance sheets. Some assets (pools of CHF mortgage loans) are
swapped for other assets – cash. Hence a bank has its problem solved
immediately, provided it sells portfolios of loans to SPVs at face value. If it
sells dicey loans at discount, it recognise a loss (or pre-sale write-down)
immediately. At this stage the story is not over. An SPV which buys dicey loans
from banks must pay cash for it. Cash is an asset which must be funded with
equity or liabilities. Who would then provide equity or liabilities? Whoever it
would be, they would be exposed to sizeable haircut in their investment, as
SPVs would absorb the losses on loan conversions into PLN…
The
Tuesday’s proposal has been slated by nearly everyone. Economists criticised it
for lack of details (during the conference the task force experts were
struggling to answer most questions asked by the audience). Disgruntled
debtors, who put faith in Mr Duda’s promises, also do not perceive the unveiled
concept of the bail-out package as a step forward.
I suppose
PiSites and Mr Duda know well only time may solve the problem of CHF loans and
therefore they play on time. Month by month outstanding debt declines as
borrowers make repayments and so the scale of the problem diminishes. They
fully realise if they run out of money, voters will knock them out of power (if
voting regulations are not tampered with), so their spending spree fortunately
has halted after 500 PLN child allowance programme kicked off. I bet works on
the draft law will drag on for months and by the end of this year the legal
framework will not be passed.
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