Status of HG-I policy component -- with annex A : alternative approaches to the further development of housing finance in Hungary

This report comments on the status of the policy component. The Agreement calls for the best efforts of the GOH to accomplish eight specific policy reforms in the area of housing finance. Each reform is reviewed in the report, which notes accomplishments and outstanding issues. The GOH Housing Policy Concept speaks about a choice between a "German-style" and an "American-style" secondary mortgage market. The German-style involves the creation of new private lending entities which would issue special bonds to fund their mortgage holdings. The American-style involves the creation of a government sponsored second-level institution that would issue bonds to fund the purchase of mortgages from banks and other lenders. Annex A frames the choice between these approaches in the context of what is actually done in Germany, the US, and several other countries. It is concluded that the most successful systems for lending at a variable interest rate (as in Hungary) are private institutions which have access to both deposits and, when desirable for reasons of liquidity or cost-of-funds, bond funds. In effect, commercial banks would normally fund mortgages out of deposits, but have access to a government sponsored institution for short or medium-term loans against their housing loans. The banks would get the benefit of bond-based funds when it is useful but would not have the competitive disadvantage of having only bond-based funds to rely on. The bond issuer would get the benefit of the good collateral value of the mortgages (as in the German system), without having to deal with the credit risk. (Author abstract)