Bizness Lounge

(Bloomberg) -- Magda Szczukiewicz, who supports a family of three in Warsaw, said she hoped for the best when getting a Swiss franc-denominated mortgage in 2007. Her timing couldn’t have been worse.
The financial crisis caused the zloty to plunge in 2008 and her payments to jump again after Switzerland’s unexpected decision to end its currency cap on Jan. 15. After seven years of payments on her 300,000 zloty ($81,000) loan, Szczukiewicz now owes about 485,000 zloty on a small apartment worth about 15 percent less than the purchase price.
“All I can do now is keep paying higher installments since I can’t sell or rent the apartment with a profit and move to a bigger place,” said Szczukiewicz, 31, who works in marketing at an insurance company. This is “keeping me from deciding on having a second child.”

The Szczukiewicz family is among 575,000 Polish households with franc mortgages, or almost half of all home loans. About 30 percent of them are now underwater, said Mieczyslaw Groszek, deputy head of the Polish Banks Association. These borrowers are stuck -- unable to
buy another property -- because of the losses they would suffer, adding to the woes of a housing market in Poland that’s depended mainly on Polish cash buyers.
“The major impact of the Swiss franc-denominated debt issue on the housing market is a restraint of demand as holders of such loans won’t change their apartments in the mid-term,” said Marcin Krason, an analyst at Warsaw-based property and research agency Home Broker.

Lending Drops

Szczukiewicz, who lives with her boyfriend and 3-year-old daughter, bought the apartment in Warsaw’s Mokotow district in 2007, when home prices were at a record high in Poland. She got a franc-denominated loan from Polbank EFG SA, now owned by Raiffeisen Bank Polska SA, because of the low rate, covering 80 percent of her flat’s value.
Polish banks led by PKO Bank Polski SA awarded a record 57.1 billion zloty of mortgages in 2008 before the currency’s decline prompted lenders to limit foreign currency loans. Home loans dropped 32 percent the following year and probably totaled 38 billion zloty in 2014, according to the bank association’s report on its website.
Home loans may further decline this year because borrowers are unlikely to return to the market and banks “significantly increased” margins on mortgages, Marta Jezewska-Wasilewska, a Warsaw-based analyst at Wood & Co., said in an e-mail. Banks, which used to give mortgages for 110 percent of the value of a home, have also boosted down payment requirements to 10 percent from 5 percent in 2014 following new regulations meant to decrease risk for borrowers and lenders.

Cash Buyers

“This will cause a further slowdown of new home loans this year, adding to the economic uncertainty in Poland and insecure employment situation that impacted last year’s mortgage sales,” said Halina Kochalska, an independent housing-market analyst. “Additionally, there is no threat of house prices going up, so no pressure on potential buyers to rush.”
Since Szczukiewicz bought her home seven years ago, prices have fallen in many parts of Poland. Investors buying homes with cash have given a boost to the market, driving sales to a record 43,000 apartments last year, a 19 percent gain over 2013.
They have sought higher returns on properties as low interest rates made other investments or bank deposits less appealing. Poland’s central bank in September cut the benchmark rate to 2 percent, the lowest ever, to spur an economy that expanded 3.3 percent in the third quarter from a year earlier.

Currency Plunge

Krason, the analyst, said he expects home purchases with mortgages to keep falling while cash sales may lift the market slightly this year.
Borrowers like Szczukiewicz, who said she was aware of the risks of a franc mortgage, are awaiting help from banks which made the loans. After the Swiss National Bank ended its currency cap, the zloty fell 22 percent against the franc, boosting Szczukiewicz’s monthly payments by about that percentage to about 1,800 zloty.
Banks, including Poland’s largest PKO and Bank Zachodni WBK SA, have offered to pass on Switzerland’s negative interest rates to borrowers, refrain from demanding additional collateral, extend loan maturities as well as cut currency spread for clients having difficulty with debt repayments.
“This is a kind of a situation nobody could have foreseen,” Krzysztof Pietraszkiewicz, head of the banks association, said. “Everybody is partly responsible for that mistake: banks, as they were not prudent enough; clients, as they agreed that they accept the risk not really understanding what it meant; and, finally, the authorities who hadn’t acted early enough to stop it.”

Loan Conversions

Government leaders, who face a general election later this year, have said banks need to absorb more of the financial pain now shouldered by franc-mortgage borrowers and their families, who comprise 4 percent of the population of 38 million.
Deputy Prime Minister Janusz Piechocinski said Wednesday that the Polish government won’t emulate Hungary, which faced a similar mortgage crisis. Hungarian Prime Minister Viktor Orban last year ordered banks to convert $14 billion of foreign-currency loans into forint at a lower exchange rate.
Piechocinski, who also heads the Economy Ministry, said banks should consider giving customers the option to convert their loans to zloty on demand at the central bank’s rate on the day of the request, with no additional cost. Piechocinski also urged banks to let borrowers suspend mortgage payments for as many as three years and cap monthly payments at their level in December.

Trimming Budget

“Lenders should assume risk if the Swiss franc appreciates to a new peak, while borrowers should give back benefits when the franc is at record lows,” Piechocinski said. “We want both sides to bear currency risk symmetrically.”
Still, the government won’t introduce any regulations protecting Swiss-franc borrowers as long as banks try to help them cut the cost of their installments themselves, Finance Minister Mateusz Szczurek said on Radio TOK FM on Monday.
The measures proposed by the lenders alone should help cut monthly payments to a level close to what borrowers had paid before SNB’s decision, the banks association’s Pietraszkiewicz said Thursday. If these actions don’t lower payments enough, banks will offer other options, he said.
Szczukiewicz, the flat owner, is now trimming her budget to find the extra 300 zloty she now has to pay each month on her home loan.
“I sat at my excel table, where I have a detailed expense plan and cut here and there to find the additional 300 zloty a month,” she said. “I will spend less on going out for coffee or on culture.”