Swiss Franc Mortgages in Poland (second part)

Swiss Franc Mortgages and the so-called “Swiss Franc Act” (2015 and 2020)

In 2015 the so–called “Swiss Franc Act” was enacted aiming at providing financial support  to borrowers from the “Assistance Fund” who had suffered financial difficulties due to objective and enforceable circumstances (e.g. loss of jobs, change of economic situations) and were having problems with the repayment of monthly instalments. According to this new bill, the amount of monthly expenditure for mortgage repayments in relation to monthly income could not exceed 60%. The aid was foreseen for 18 months and its monthly value was set at the level of 1500 PLN. Many changes were introduced through this Bill restricting the conditions for granting mortgages in a foreign currency. However, in the period between 2007 and 2016, the exchange rate of CHF increased from 2.15 to 4.12, meaning by 90.5 % and this led to a situation in which the amount of debt was higher than the amount of  the value of the mortgage securing the repayment. The strengthening of foreign currencies was caused by the global economic crisis of 2008. According to KNF, the highest number of Swiss Franc mortgages, when LTV increased 100% in the portfolio of Swiss Franc mortgages, amounted to 51.1% in 2015. In 2017 the situation of Swiss franc creditors improved because of the strengthening of the Polish PLN and reduction of  the level of interest rates.

In 2020 the “Swiss Franc Act” was subject to the following changes:

• Extension of the assistance support up to 36 months,
• Increase of the assistance amount up to 2000 PLN monthly
• Relation of expenditure for mortgage  servicing was reduced to 50%

The Swiss Franc Act along with its amendments was deemed a temporary assistance for persons being in a difficult financial situation.

Judgement of the Court of Justice of the European Union (2019)

In October 2019, the Court of Justice of the European Union (CJEU) issued a judgement stating that if a national court will deem terms of a credit agreement, subject to the exchange rate, unfair, then these terms should be declared null and void and they cannot be replaced by (appropriate) provisions of the Polish civil law. According to this judgement, Swiss Franc credit agreements  may also be invalidated if this agreement is based on abusive clauses subject to the conversion of PLN to CHF exchange rate by banks  and reverse . Important is, that borrowers can may have the following options:[1]

1. Invalidation of a Swiss franc mortgage agreement in the event of the agreement violating legal provisions and this will unburden the borrowers of the repayment of the credit in CHF. However, the borrower has to repay the credit taken  from the bank (after receiving back interest and commission from the bank) and the court should decide in which manner the remaining amount of the credit has to be settled, through instalments or as a single  repayment Banks can still  claim back remuneration for granting the credit (e.g. statutory interest) from the borrower
2. Removing of all unlawful clauses subject to exchange rate differences and the mortgage given in Swiss Francs indexed to CHF will be deemed credit in PLN benchmarked to the LIBOR rate. In this scenario  the bank will also be obligated to return excess payments to the borrowers and this may lead to a situation in which Swiss Franc borrowers will be treated better than persons having  mortgages in Polish currency ,as their mortgages will be regarded as the cheapest on the market[2].

There is also a risk that the court may come to the conclusion that a Swiss franc mortgage agreement does not include any abusive clause and if so, the mortgage agreement will not be terminated and the Swiss franc borrowers will additionally be charged with costs of the court proceedings including attorney fees and the fees of  an independent certified auditor calculating the amount of charged interest etc.

Judgement of the CJEU in the light of changes to court cases won by Swiss franc borrowers (2019 -2020)

In view of the judgement of the CJEU, the number of court cases increased in size and law firms  significantly benefited from this development. Thousands of Swiss Franc borrowers have fought (or are still fighting) in courts claiming the invalidity of the correlation of the credit to the rate of exchange of a foreign currency. They are of the opinion that the Swiss franc mortgages are unlawful. Apart from individual court cases, there are also pending class action suits filed to courts[3],  for instance a class action suit of about 2000 borrowers whose mortgages were  valued at many hundreds of millions of PLN. It should be stressed that the main claims have been directed at the termination of the entire agreement or the invalidity of the exchange rate lists attached to the agreements. The court cases have lasted many years and the outcome of these cases was at the beginning not in favor of borrowers and instead the banks succeeded. Since the judgement of the CJEU (end of 2019) the number of successfully won cases  by Swiss franc borrowers has risen rapidly. This result has also been supported by opinions issued by the Office of Competition and Consumer Protection and the Chief Financial Officer in this respect.

According to data collected by the “Stop Banking Lawlessness Association” (SBB), Swiss franc borrowers eventually won 69% of the court cases which were pending in 2019.

Diagram 1: Structure of court judgements in 2019 and 2020 subject to Swiss franc mortgages

Source: pomocfrankowiczom.pl

The turning point was the judgment of the CJEU at the end of 2019. After that the borrowers began to win court cases against the banks even more often.

 

Diagram 2: Structure of the judgements of the courts of the first instance subject to Swiss franc mortgages in the first quarter of 2016 and in the first quarter of 2020

Source: Stowarzyszenie Stop Bankowemu Bezprawiu SBB (bankowebezprawie.pl) https://www.bankowebezprawie.pl

Before courts of the first instance in 2020, the Swiss franc borrowers won 51 cases and only one case was lost. Before the courts of appeal, Swiss franc borrowers lost three times and in 18 cases they gained upper hand.

Initiative of the Chairman of KNS in the matter of settlements with Swiss franc borrowers (end of 2020)

At the end of 2020 the Chairman of KNF, Mr. Jacek Jarzębski, suggested that the bank should present to Swiss franc borrowers attractive terms of settlements and KNF expects  the banks to initiate  out of court settlements with their clients to avoid litigation. An interbank team including KNF and the majority of banks having Swiss franc mortgage portfolios has been established. According to banks, out of court settlements with borrowers were steps in the right direction as far as they will be able to finally regulate the settlements subject to Swiss franc mortgages and will be supported by public institutions. Also the Polish National Bank (NBP) has stated that It may consider to participate in the process of conversion of Swiss franc mortgages into Polish currency under the terms and market rates of the exchange provided that the banks will also meet certain requirements. The Chairman of KNF estimated that he is step by step getting closer to solving the problem of Swiss franc mortgages and that the findings of surveys carried out by Swiss franc borrowers were promising and if more than 70% of borrowers will be interested in reaching settlements, this would be a positive result.[4].

Judgement of the Supreme Court (13 April 2021)

On 29^th January 2021, the First Chairman of the Polish Supreme Court filed a motion to pass a resolution by the Supreme Court subject to Swiss franc mortgages. The Supreme Court will decide whether abusive clauses may be replaced by other civil law regulations or customs, whether the credit indexed /denominated as credit in Polish currency, along with the interest rate based on LIBOR, may still be maintained, whether in the case of Swiss franc mortgages being invalid, the “balance theory” or “two conditional theory” shall apply, from which date banks‘ claim for the return of paid credit amounts shall be barred by statutory limitations and last but not least whether banks and consumers may receive remuneration for the use of funds received from the other side. On 13^th April 2021, the Supreme Court should decide about all aforementioned issues behind closed doors, however, the date of the passing of the resolution has been postponed until May 2021. It should be expected that banks will analyses the  resolution after its publication in particular with regard to its impact on  case law in Poland and the value of the parameters for the stipulation of the reserve value subject to legal risks.[5].

Structure of Swiss Credit  Mortgages in Poland by the end of 2020

It should be emphasized that PKO BP bank has the biggest portfolio of Swiss franc mortgages at a value increasing  20 billion PLN by the end of the third  quarter of 2020 and this amount constitutes about 5.3% of the bank’ assets. By the end of September 2020, approx. 3.8% of all Swiss franc mortgages were subject to disputes with customers. The greatest financial problems with Swiss franc mortgages may be faced by  Get in Bank, mBank and Millennium. At  Millennium bank, the share of Swiss franc mortgages in their credit portfolio is systematically on decline, being still at a high level of 20%. In turn, foreign currency lending at Get in Bank amounts to 26% of their entire  portfolio and in contrast to other banks, Get in has built up rather lower reserves for this portfolio. Get in Bank is additionally  struggling with the problem of low capital. At the other end of the portfolio of Swiss franc mortgages is ING Bank Śląski. After the latest information, the bank created additional reserves for this portfolio and the reserve ration in relation to the value of this portfolio will be increased by approx. 31.% in the forth quarter. Millenium bank and mBank reported a net loss and the profitability of Santander Bank has plummeted by 84% on a yearly basis. Some banks tried to carry out  analysis of loss calculation provided that Swiss franc mortgages will be converted in line with the KNF initiative. For example, mBank calculated that the  costs of such an action would result in the amount of 4.7 billion PLN for an active Swiss franc mortgage portfolio or in the amount of 5.4 billion PLN for the entire portfolio (active and repaid).[7] Similar assessments were provided by Bank PKO PB according to which the costs of this conversion would cause between 4.9  and 5.5 billion PLN for active Swiss franc mortgages or between 6.1 and 6.7 billion PLN for the entire portfolio (active and repaid)[8]. The analyst of DM Citi Handlowy bank, Mr. A. Powierza estimated  costs for the banking sector in the region of approx. 34 billion PLN. In his view, from the perspective of the security of the financial system and investors, we will be provided with key information on this subject after the Polish Supreme Court will finally determine whether settlements for Swiss franc borrowers are justified. Important issues within this process concerns the approach of regulators towards the banks which will not be able to meet capital requirements due to costs related to Swiss franc mortgages. mBank estimated costs of this process – in the case of their Swiss franc mortgage portfolio – at 4.7 billion PLN and at 35 billion PLN in the event of the entire portfolio PLN[9]. We present below a graph with regard to banks listed on the Warsaw Stock Exchange (GWP).

mBank has already assessed costs in the event of the conversion of active foreign currency mortgages in accordance to the KNF initiative at 4.7 billion and at 5.4 billion in the entire (active and already repaid) portfolio.

Diagram3:  Analysis of Swiss mortgages listed on GPW (Warsaw Stock Exchange) 

Source: https://www.rp.pl/Banki/311269888-Banki-chca-sprzedac-rzadowi-frankowy-problem.html

Summary

Swiss franc mortgages cause problems for borrowers and also for banks. The latter have to build up reserves and this contributes  a burden to their balance sheet total as well as to other capital ratio. In addition, this  can also negatively affect the Polish economy. According to Moody’s Analytics, this situation may also be detrimental to  economic growth due to lower lending volume. Costs incurred by banks may be passed on to banks’ clients in which Swiss franc mortgages have been granted. Swiss franc mortgages divide Poles and evoke emotions constituting a negative social impact.

 

 

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[1] See https://enerad.pl/finanse/kredyt-hipoteczny/kredyt-we-frankach-szwajcarskich/

[2] Regarding the conversion of  Swiss franc mortgages into PLN along with the LIBOR rate, it seems to be a significant interference into the main subject matter of the agreement pursuant to the CJEU.

[3] A class action suit is cheaper but it lasts longer. The main advantage of the class action suit is that the court fees (even 100 000 PLN) is divided between many individuals (plaintiffs) and the court fee may also be cancelled (at the request of the Consumer Ombudsman). In the event of lawsuits subject to Swiss franc mortgages it is recommended to take individual legal action against banks as such action will be better perceived by banks and associated with lower risks. In addition, each Swiss franc mortgage may include different/exceptional clauses.

[4] The chairman of KNF is putting more pressure on banks to conclude settlement agreements with Swiss franc borrowers (businessinsider.com.pl)

[5] See https://businessinsider.com.pl/finanse/uchwala-sadu-najwyzszego-w-sprawie-frankowiczow-decyzja-juz-za-miesiac/vh5t82n

[6] As of 31 December 2020 mBank created a reserve for individual court cases subject to Swiss franc mortgages in the amount of 1.42 billion PLN (increased by 1.0 billion  comparing to  2019). The balance sheet value of Swiss franc mortgages amounted to 13.6 billion PLN (approx. 3.2 billion CHF) comparing to 13.6 billion PLN (approx.. 3.5 billion CHF) at the end of 2019.

[7]https://www.mbank.pl/pdf/msp-korporacje/relacje-inwestorskie/wyniki-finansowe/2020/wybrane-niezaudytowane-skonsolidowane-dane-finansowe-grupy-mbanku-s-a-za-iv-kwartal.pdf

[8] https://www.pkobp.pl/media_files/5e0d7781-8076-42e2-8a7b-198d8ad6e720.pdf .

PKO BP bank informed that there were 5372 ongoing court cases subject to Swiss franc mortgages at the end of 2020 granted in the previous years in foreign currencies totaling approximately 1.4 billion PLN.

[9] https://alebank.pl/ugody-z-frankowiczami-jak-wyglada-sytuacja-w-poszczegolnych-bankach, 1.02.2021; https://alebank.pl/dm-citi-handlowy-sad-najwyzszy-przesadzi-czy-jest-miejsce-na-ugody-z-frankowiczami, 16.02.2021; https://biznes.interia.pl/finanse/ news-kredyty-walutowe-szykuje-sie-wielkie-przewalutowanie-franka, 11.02.2021.