Coping with the legacies of subsidized mortgage credit in Hungary

The authors examine alternatives for dealing with the initial conditions of housing finance facing countries making the transition to a market economy and moving toward a more efficient and equitable system. They focus on the problem of restructuring the stock of housing loans that exist at the time a new regime is implemented. Almost without exception, the stock of housing loans is yielding heavily subsidized rates, and its market value is significantly below its book value. Hungary makes an interesting case study. The mortgage portfolio inherited from past regimes makes especially clear the perverse implications of housing finance systems based on across-the-board subsidized interest rates. The authors propose a general approach to finding options to reduce the fiscal burden implicit in the subsidized housing loan portfolio. They identify mechanisms to reduce the interest subsidy embodied in that portfolio as well as mechanisms to spread the associated losses among those benefiting from the subsidies as well as among other parties. Clearly any residual subsidy must be absorbed by the government and ultimately by the population in the form of increased taxation or decreased availability of public services. The problem is complex and no obvious, easily implementable solutions emerge. But delaying action could hardly improve the situation.