The Hungarian central bank has said it expects to launch a mortgage bond purchase programme after changing the country’s covered bond model from one requiring specialist banks to one allowing universal banks to issue, representing a U-turn on its previous position.

“The bank seeks to promote lending to the household sector by introducing a universal mortgage bond purchase scheme,” said the release from the Magyar Nemzeti Bank (MNB) last Wednesday (15 February). “Mortgage bonds are a key factor contributing to an improvement in the maturity match between assets and liabilities.

“In the bank’s view, a universal structure for mortgage bond issuance may foster the development of a more efficient mortgage bond market.”

Market participants said that although they welcomed a second Hungarian covered bond purchase programme, a move away from the specialist banking principle was inadvisable.

“I’m really surprised that the central bank governor has brought this topic back,” said a treasury official at a Hungarian issuer. “The central bank did a comprehensive survey in 2010 from which the result was that it was absolutely unfounded that the commercial banks should be allowed to issue covered bonds.

“The benefits cannot counter the values that we might destroy,” he said.

In the MNB’s report on financial stability in November 2010, it concluded that it did not believe a change to the prevailing system of covered bond issuance was “topical or imminent”, but it did add that the central bank would revisit the issue on a later date.

“According to our projection, banks’ potential to issue covered bonds based on future forint mortgage loan portfolio does not reach a marketable level,” it wrote last November 2010. “Although the existing foreign currency denominated loan portfolio represents an adequate issuance potential, the banking system’s willingness to issue covered bonds is low, mainly because alternative short term foreign funds are more beneficial from cost perspective.”

Máriás György, head of treasury at OTP Jezálogbank Zrt, said the issuer viewed the change to the mortgage bond legislation as negative.

“We think that the present legislation functions well,” he said. “It is based on the German Pfandbrief legislation prior to 2005, which works well because we can issue on the European market where the investors understand our current plain vanilla legislation and structure.

“It’s not rational to change the structure when it will take years to re-educate investors.”

He said in the financial stability paper of 2010 it was written that market conditions were not conducive to changing the structure.

“There haven’t been any changes to structure during the crisis,” he said, “so there is nothing to prove a change now would not be dangerous.

“Costs of the legislative changes are unpredictable due to the prudential aspects and high expectations of investors as far as the legal framework is concerned. Although the idea to re-start the covered bond purchase programme is warmly welcomed, this does not mean that legal changes are necessary as well.”

The idea follows a first Hungarian mortgage bond purchase programme that was announced on 8 February 2010, during which the MNB bought Huf7.25bn (Eu25m) in the primary market and Huf27bn in the secondary. The programme ended on 31 December 2010.

The Hungarian treasury official noted that the 2010 programme – which did not include extending purchases in the primary market to commercial banks – was absolutely successful.

“You could see spread tightening during the programme,” he said. “FHB Mortgage Bank could issue more that year, and at a tighter spread.”

Johannes Rudolph, HSBC Trinkaus head of covered bond research, said he thought a second programme was a positive step forward.

“If you look at the first programme, I think it had a better feature for primary market purchasing than what the ECB did, because they were not involved during the bookbuilding process – they let the market set the price, and then they moved.

“They didn’t influence market prices.”

He noted that he did not understand why MNB was revisiting the issue of moving away from the specialist banking principle after it had concluded in 2010 that this was not a viable move.

According to the MNB, the mortgage bond purchase programme is expected to be launched within one month of the date on which the required amendment of the regulation is passed.

“We do not yet know anything about this programme,” said György at OTP, “such as how much the central bank will buy, or conditions on maturities.

“The devil is in the details, and we will have to see.”

György said the previous programme was not effective because the MLB only bought 10% of issues.

“The banks weren’t able to place such huge amounts of covered bonds because there was no market,” he said.

Moody’s yesterday (Monday) said the proposal for a universal purchase programme, along with other central bank liquidity measures, is credit positive for Hungary’s banks because the initiatives aim to improve banks’ maturity and currency mismatches.

The rating agency noted that only three Hungarian mortgage banks can issue mortgage bonds, and that the MNB’s goal is to improve banks’ access to longer term funding for forint mortgage lending via purchases of covered bonds in the primary market.