György Matolcsy came up with a grandiose idea: Will 0% mortgage loans come from the central bank?

The essence of György Matolcsy’s criticism

According to the governor’s article

• Today, strong demand does not meet an equally strong supply in the housing market, either in terms of volume or spatial structure, so a change in supply is needed,
• raising the previous reduced VAT rate was a misstep, further weakening the supply side,
• In the current system, housing policy produces inflation and does not create a new home.

The essence of the “New Home Program

The article describes the main elements of the program:

• It would only support green home construction with a 0% loan that home builders and buyers could get (this would mean virtually all new properties going forward due to stricter energy efficiency regulations – ed.)
• In addition to families, the construction would also offer resources to real estate developers, with roofs.
• It could have a ten-year maturity, so it would not yet burden the central bank’s balance sheet in the long term.
• The total need for funds could be divided between the central bank and one’s own, family, friends, other banking sources and government subsidies (how, I don’t know).
• During the evaluation process, the prequalification of participants in the financial system can be used, whereby the central bank can pay a fee.
• State grants (like CSOK in Hungary), savings and other financial resources are taken into account in the credit assessment.
• The prequalification of financial service providers cannot take more than 5 days, the decision of the central bank within 5 hours, and the money transfer cannot take more than 5 seconds.
• The effective use of customer data requires complete and reliable credit information systems.
• The central bank source would provide an insurance contract instead of a mortgage.

With all this, he said, 30-40 thousand new homes, strong support for demographic change, 1 percent annual GDP growth surplus, 40-50 thousand new jobs completed.

International relevance?

Perhaps the most trivial part of the article refers to the basic implementation conditions, on the basis of which György Matolcsy would not introduce the program as a unilateral measure of the Hungarian central bank, but at the international level and with the cooperation of the government: “It would be necessary a twist. In the absence of this, it is not worthwhile for central banks to take action, because while change is necessary, it is not enough to strengthen the source side. “- he writes.

First reviews of the market

At first, our market sources expressed dissatisfaction with the ideas. The first criticism of the program, which seems legitimate to us, is the program

would mean the partial reversal of the single-tier banking system and the partial elimination of the commercial banking function, while the existing resources of the banking system and the liquidity supply instruments of the mNB Bank are also abundantly sufficient for the introduction of new facilities. credit,

the plan would exclude commercial banks from all or part of the actual financing and give them only a bias function. The central bank would carry out activities directly with an asset side operation promising 0% central bank interest income, which commercial banks can currently provide for FGS Hair (such as a central bank refinance program) and loans for babies (such as state-subsidized “personal loans”).

Another problem highlighted by the analysis of how the idea differs from the loans that are already on the market. Mainly in what we mentioned above: the source would be provided directly by the central bank, without going through the bank balance sheets. At the construction level, the closest relative of the new “green loan” may be the loan waiting for a baby that has existed since last year, since we can see several identities between the two:

• 0% interest rate (in the case of a loan waiting for a baby, this is provided by the state interest rate subsidy, the interest margin of banks is actually and generally between 4 and 5 per hundred,
• a loan size similar to mortgages, but without a home equity: in the case of baby loans, replaced by an equity guarantee with a 0.5% capital requirement, which is paid by clients (except for the moratorium period for loans previously taken when the state releases it),
• Insurance coverage may be linked to your repayment: Repayment insurance (usually in the event of loss of income) in the case of an awaiting baby loan generally has a monthly fee of 2-4 thousand forints.

Comparing a waiting baby loan raises two questions:

If we already have a 0% loan that is working well, shouldn’t we primarily think about expanding it, like building and buying new green homes?

or

Why not providing home equity for loans that could only be used for housing?

If only the central bank does not want to exercise mortgages on the mass of national households, anyone can say the latter. Of course, this would be understandable (especially if we think of home auctions, which bring a lot of negative publicity), but in relation to this, it is suggested that after the years of crisis

instead, there may be a more expensive solution for clients (see, for example, a mandatory insurance premium, perhaps a state guarantee fee), so what does it take to bypass the traditional financial intermediation system?

And our fifth question is, is it okay for the plan to give banks some role, prejudge them (as is still the case with most home loans today), and perhaps the banking system would provide some of the resources. However, the question arises:

What would a new credit market make more efficient if credit institutions, which do not manage credit risks in their core business as a daily practice, carry out credit assessment tasks?

It is feared that the omission of the banks will bring market efficiency to lending, not least, and the direct involvement of the central bank would replace activities that work well today.

There are no elements in György Matolcsy’s proposals that provide an answer to existing market failures. While the central bank president only mentions government failures in his article, he suggests replacing market mechanisms as a solution.

MTI / Zsolt Szigetváry