This article’s objectives are to explain the toxic nature of Swiss franc (CHF) mortgages and their significance for the Polish economy, as well as highlight the involvement of several European banks in this space over the last two decades.
- What are the Swiss franc mortgage loans?
Banks in Poland began issuing foreign currency mortgage loans in the 1990s and the peak of the sales of these products coincided with the beginning of the Great Recession in 2007 and 2008. Due to its perceived stability, which was repeatedly referred to and heavily relied upon in the complicit banks’ marketing efforts, the Swiss franc became the reference currency of choice in Poland. That resulted in two types of foreign exchange (FX) mortgages on offer: loans denominated in Swiss francs (which accounted for a minority of such products); and loans that were instead merely indexed to CHF (which made up a vast majority of this market). This article deals with the bulk of the Swiss franc mortgage products and, as such, it considers the indexed structures only while leaving the denominated mortgages out of its scope. Swiss franc indexed mortgages were merely referencing CHF to establish the borrowers’ total liability, converted from the Polish złotys (PLN) on the day the mortgage was advanced, as well as using the Swiss franc LIBOR as its interest rate. Despite the name, the customer would have borrowed a PLN amount to finance their property purchase but would have been paying back Swiss franc amounts fluctuating as per the prevailing CHF LIBOR (interest rate). Therefore, neither the borrower nor the developer (who would have typically been the recipient of such financing) ever witnessed any Swiss francs advanced to them by the lenders. Instead, Polish złotys would have been disbursed and transferred by the banks into their accounts. The borrowers would have nevertheless been obliged to make monthly Swiss franc repayments to their lenders or pay off the full Swiss franc liability upon selling the mortgaged property. As specified by the World Bank already in 2010, the lender was purely responsible for shouldering the usual credit and liquidity risks, when the borrowers bore all of the FX, interest rate and lack of transparency risks, whose extent they were unaware of. Indeed, the banks notoriously underplayed the FX risk by portraying it as relating to the monthly repayments rather than impacting their clients’ total liability. This latter economic feature of Swiss franc mortgages was typically not made expressly clear to customers upon their taking out these products , hence effectively making their 1.83 million customers victims of a large-scale misselling operation, likely the biggest in Poland’s modern history, which is very much at the crux of these financial products’ toxicity. As outlined in more detail later in this article, the mortgage agreements pertaining to these financial products contain specific inappropriate clauses, whereas the mortgages themselves are actually structured as FX options or, to put it more factually correctly, uncapped bets which bear the characteristics of a complex financial instrument far more suitable for highly sophisticated risk-seeking clientele as opposed to the typical risk-averse mortgage customers these structured financial products were sold to. These mortgages were initially perceived as quite competitive, as, due to the low CHF LIBOR, the associated interest rate was typically lower when compared against the corresponding standard Polish złoty denominated mortgages. Importantly, on account of such lower repayments and with intermediaries making up about 30% of all mortgage origination, these products were also being offered to customers who could not afford to borrow a corresponding PLN amount by way of a traditional Polish złoty mortgage, which is how they became a Polish equivalent of the American subprime mortgages. Their toxicity had already become apparent during the Great Recession, when the Polish złoty sharply depreciated against most major currencies, but in particular vis-à-vis the Swiss franc, a typical safe-haven asset.
Since early 2015 the Swiss franc has been worth ca. twice as much vis-à-vis the Polish złoty compared with years 2006-2008 when most of these mortgages were advanced. That has led to what is now half a decade of incredibly inflated monthly repayments coupled with artificial negative equity resulting from the change in FX, rendering the mortgaged properties unsaleable and their owners effectively trapped, forced into continuing with their obligations towards their respective lenders. After all, the Polish złoty’s depreciation w.r.t. CHF has doubled numerous borrowers’ liability, often rendering their debts unrepayable, effectively financially entrapping them with a continuing and ever-increasing obligation to the lenders. The one factor that has successfully hindered mass delinquencies is the Polish law which does not allow for writing off of personal debts even in the event of going bankrupt, as well as weak regulatory institutions that to this day fail to protect Polish consumers against corporates, even in the case of inappropriate products such as these.
- A recent game-changer
The legal situation changed in October 2019 due to a landmark ruling by the EU Court of Justice (ECJ) which by law has to be applied in Poland on account of it being an EU member state. The ECJ ruled that, as of that moment, the victims could ask the Polish courts to convert their Swiss franc mortgages into Polish złoty. ECJ also provisioned for these borrowers to decide whether they prefer for their mortgages to be declared null and void, with the implication that the bank and the consumer would repay each other what they received throughout the mortgage, or to have these fraudulent mortgages turned into standard PLN ones by removing the indexing clause. As a consequence, at that point, we observed the beginning of a fallout resulting from the toxic nature of these financial products. At last, more and more customers realise they are within their rights to suspend repayments on Swiss franc mortgages, as well as to take their lenders to civil courts to demand cancellation of their mortgages or, in some cases, also demand refunds for any potential historical overpayments. The big question is of course whether we are now observing a sufficient surge of both mass delinquencies, as well as resultant banks’ liquidity issues, for Poland to experience its version of a subprime mortgage crisis. One tool which stops some victims of this scandal from suspending their mortgage repayments is the Polish credit scoring system (BIK). It is owned by the major banks, with disregard for the obvious conflict of interest, who reserve for themselves a right to blacklist debtors who cease or suspend their repayments, even if they have valid legal grounds (such as challenging their Swiss franc mortgages in civil courts).
- Just how big is this problem?
Some 1.83 million Polish households have tied themselves into Swiss franc mortgages, mainly during the period 2000-2010. Assuming an average Polish family of 2+2 with both adults being parties to their mortgage, that gives us 14.4% of the total population of this 38 million strong country, or 15.6% of Poland’s working-age population accounting for some 23.5 million. These are already some quite significant percentages which nevertheless fail to show the more nuanced societal impact of the problem. The victims of this scandal were typically in their late twenties to early forties when taking out these mortgages, usually first-time homebuyers or newly refinancing their existing PLN mortgages with what appeared to be a much more attractive product. Unlike their US sub-prime counterparts, Polish borrowers would usually have had decent credit scores. They would have gone for these particular products to stretch their ability to access credit, to be in a position to purchase more expensive properties which they would have otherwise not been able to secure. Judging by their age, these people would have been in their prime, most economically productive years, over the last decade or longer. Now, because of the spiralling mortgage repayments, they will not have had a chance to either invest their earnings or spend them within Polish economy, as they will have had to keep up with monthly payments to their banks, which would in turn transfer the money to their Western European headquarters. A 2015 report by Dr Bohdan Wyżnikiewicz, a reputed Polish economist, has estimated Poland’s middle class to be roughly equal to 3 million, which amounts to less than 8% of Poland’s population. I believe that, due to an incredible run of three decades without a recession, Poland’s middle class could nowadays be close to twice that figure, had the Swiss franc mortgage victims and their families not remained financially entrapped for such a prolonged period.
Societal impact aside. CHF mortgages in Poland made up 23% of the market in late 2019 and about half of all the mortgages (PLN 192 billion of foreign currency loans, majorly CHF-linked) at the peak of their popularity in 2011 . In late 2014, Swiss franc mortgages were worth 131 billion złotys (30.42 billion euros), which amounted to just under 15% of the total (households and companies combined) loan value of 895 billion złotys. Interestingly, in June 2020, the outstanding Swiss franc mortgages amounted to 100 billion złotys, equivalent to ca. a third of all Polish mortgages. As pointed out by Erste Group, “the increase in volume (of Swiss franc mortgages) was related to the weakening of the Polish currency to a great extent”. The biggest increase of CHF share of all mortgages resulted from the substantial appreciation of CHF after January 2015. That is when the Swiss National Bank abandoned Swiss franc’s peg versus the euro. Soon after that event, with CHF reaching near parity with EUR, Citibank estimated the immediate additional debt service costs to implicated households would have risen by 17%, although it should be noted that CHF has subsequently appreciated against the PLN further than would have been evident then. What makes matters worse for the victims is that appreciation has now lasted for more than half a decade, thereby creating an incredible burden for a large part of the Polish society.
The major Swiss franc mortgage lenders are: Getin Noble (privately-owned Polish bank, as of February 2021 in the process of nationalisation), Millenium (owned by Portuguese Millenium bcp), mBank (owned by German Commerzbank), PKO BP (a Polish bank whose biggest shareholder is the Polish state), BOŚ (a Polish bank with a majority of shares held by a state fund), Santander (owned by Spanish Santander), BNP Paribas (owned by French BNP Paribas), Pekao (owned by Italian UniCredit at the time of its CHF mortgage offering, recently sold to PZU and as such now controlled by the Polish state), ING BSK (owned by Dutch ING). The ECJ ruling referred to above has prompted these banks, as well as others who may not be as prominent in this space, to set aside over 1.96 billion złotys (or USD 525 million) in late 2020 to enable them to compensate their victims for the Swiss franc mortgages, should some of the borrowers win in civil courts. Intriguingly, as of September 2020, these provisions amount to a meagre 2% of the total value of the Swiss franc mortgage portfolio. It should be stressed that, as the Polish financial regulator does not appear to possess sufficient powers and the successive Governments do not wish to resolve the problem of these fraudulent financial products by way of legislation, the complicit banks intend to fight every case in the civil courts in the hope that they will not lose all of them, as well as in the confidence that such cases will be dragged out over many years, hence deferring any possible compensation. Nevertheless, as of September 2020, some 90% of such court cases were being lost by the lenders, as the mortgage agreements contain well known abusive clauses which have been designated as such by the Polish Office of Competition and Consumer Protection (UOKiK) and which consequently render these agreements invalid, as they contravene the European Union’s Unfair Terms in Consumer Contracts Directive 93/13/EEC. The number of such court cases has been rising sharply from 21,000 in the 2017-2019 period to 34,000 new lawsuits in the first three quarters of 2020 despite the coronavirus slowing down the proceedings. In late 2019 the Polish banking lobby group Związek Banków Polskich (ZBP) estimated the worst-case scenario loss for the financial sector at PLN 60 billion. That is approximately four times the value of the Polish banking sector annual profits, and as such has the potential of putting some banks out of business, which would have a profound economic impact on Poland’s economy. It is for that reason that KNF, the Polish financial regulator, recommended in 2020 that e.g. mBank only issue a dividend no higher than 5% of its 2019 profits, whereas this year KNF recommended no dividend at all to be paid out, which is in stark contrast with mBank’s 2020-2023 strategy of issuing dividends amounting to 50% of its profits.
- Why has there been no systemic solution to this problem?
There used to be substantial popular support for a top-down systemic, legislative resolution of the Swiss franc mortgage problem in the first half of the 2010s. That was driven by Poland’s weak market regulation and customer protection, particularly in the financial markets, which has successfully prevented the vast majority of Swiss franc mortgage victims from freeing themselves from these financial products or indeed winning any meaningful compensation from the complicit banks at the time. The victims’ emotions boiled over once the Swiss National Bank (SNB) abandoned the CHFEUR peg in early 2015. Faced with street demonstrations, the politicians of all colours, who had until then pretended the Swiss franc mortgage problem did not exist, started to take notice. The current Polish President Andrzej Duda was particularly successful at courting such voters by promising them he would prepare and enact a new law which would force the banks to remove the abusive indexing clauses from their mortgage agreements. With his party Law and Justice (PiS), also on track to win the Parliamentary elections, and to form Government later in 2015 and cement the legislative power in Poland, continuing the hard-line rhetoric on the resolution of the CHF mortgage problem by forcing the banks to foot the bill, the market started pricing in the resulting losses to Polish banks.
Even though the promised piece of legislation was watered down substantially, to keep both sides of this conflict happy, it eventually appeared to be ready in 2016. At that stage, the unelected but instead co-opted Deputy Prime Minister and Minister of Finance, Mateusz Morawiecki, began to criticise this legislation. Mr Morawiecki had been up to that point the Chairman of Bank Zachodni WBK (now Santander Poland – one of the major Swiss franc mortgage portfolio holders in Poland), whose shares he held well into his Premiership of Poland until December 2017. Mateusz Morawiecki continued gaining power, subsequently becoming the Prime Minister in 2017 and 2018 even taking responsibility for the Polish financial regulator KNF, whereas the systemic resolution of the Swiss mortgage problem promised by President Duda was at that point shelved indefinitely. The subject of the Polish President or Government resolving this issue was eventually laid to rest by Jarosław Kaczyński, the governing party leader and the de facto most powerful politician in Poland, who in early 2017 advised the Swiss franc mortgage victims to seek justice in civil courts instead.
- Seeking justice in a civil court is a long game
The issue with the solution proposed by Mr Kaczyński is not merely to do with the ensuing costs, as every victim who wishes to take on their bank in court does not only need to pay a specialist lawyer for most likely two stages of the court case as well as cover other associated fees but has to further factor in a court case which can go on for years. Furthermore, despite the very favourable ECJ ruling, the plaintiff cannot be sure that the court case will completely resolve their problem in the end, as there are several possible resulting scenarios. It must be noted that Polish courts are all independent and there is no law of precedent, which is why the judges can opine differently in generally the same cases. For example, in 2020: 67% of these mortgage agreements were ruled null and void, 16% had their abusive indexation clauses removed thereby turning the mortgage products into financially questionable PLN loans coupled with a CHF LIBOR, whereas despite the EU law having superiority over Polish law 5% of the cases were inexplicably lost by the victims, which would have burdened them with additional court proceedings costs when they were already likely in a very desperate financial situation. As such, the costs, long timelines and some risk of losing in court despite ECJ’s clear position will nevertheless hinder many victims from ever fighting for their rights and claiming any overdue compensation. I have personally experienced just how long a process it can be, having initially attempted mediation with Commerzbank’s Polish subsidiary mBank via the Polish Financial Ombudsman (Rzecznik Finansowy) in early 2017 as well as through the banking sector lobbyist ZBP later that year, through being sued by mBank in Polish civil court in autumn 2018 for withholding mortgage repayments, to countersuing them in autumn 2020 for claiming twice the borrowed amount to close out my Swiss franc-indexed loan upon the sale of my property, and as of June 2021 I am yet to be informed of the date of our first court hearing.
- The banks’ attitude
It should be noted that banks in Poland tend to treat their clients from a position of strength, as the level of consumer protection in the country is very low by EU standards. That is why the same institutions which appear to be taking corporate social responsibility very seriously in Western Europe take a different approach in Poland. Importantly, the implicated banks could show goodwill by removing the abusive clauses from the mortgage agreements, as this is a relatively straightforward process. As far back as November 2015, I published proof that the Swiss franc indexed (referencing) mortgage lenders could undo the indexation of their outstanding financial products at no cost. At the same time, due to subsequent changes in legislation barring further issuance of Swiss franc loans, these banks are continuing to benefit from de facto protection against new entrants to this market.
The mechanics behind a CHF indexed mortgage are relatively straightforward. In essence, a Polish bank maintains PLN deposits from which it would have lent out Polish złotys to enable mortgage financing for its clients, whereas the liability would have been indexed (referenced) to an equivalent CHF amount at the time when the mortgage was agreed. The superficial benefit to the clients would have been the opportunity to pay the lower CHF LIBOR instead of WIBOR (PLN LIBOR), causing the initial mortgage repayments to be lower. Most of the Polish banks in question are owned by Western European institutions, and so they would have hedged their positions resulting from these mortgages by entering into FX swaps with their European parent companies, thereby borrowing the necessary Swiss francs in such a way that they would be locked into a lower exchange rate for a while (as CHF tends to only appreciate in the long term) and allowed to roll over this debt as time goes on. In addition to real money transfers from Poland as and when the mortgage repayments are received by the Polish banks and passed on to their owners, the Western parent would be exploiting a higher prevailing rate of interest paid on the PLN as opposed to their native EUR. Additionally, the Polish subsidiary would over time be benefitting from both the FX differences between their swap financing (low) and the prevailing (high), as over time the Swiss franc only appreciates with respect to the Polish złoty), as well as spread charged to their borrowers. Thereby, the banks would have offset the risk on their side whilst profiting from these products in several ways. Nevertheless, the clients were left exposed to shoulder all the resulting and uncapped FX risk. What makes this situation worse is that the borrowers would not have known the scale of the FX risk they were taking on, and were offered no insurance products to offset such risk. From a reporting perspective, these swap transactions would have been done on an off-balance sheet basis and, should the implicated banks have wished to show some goodwill and remedy the situation, the swaps could simply not be renewed following the abusive clauses’ removal from the Swiss franc mortgage agreements, as the rolling over of such debt would no longer be necessary at the point of undoing the indexation to CHF.
Due to the Polish financial regulator’s weakness and the European banks’ apparent indifference to the public image they are projecting in Poland, there is no particular incentive for these lenders to remedy the situation resulting from these financial products.
- The curious case of inadequate financial market regulation in Poland
As alluded to above, the Polish financial regulator (KNF) as well as the Office of Competition and Consumer Protection (UOKIK) have been unable, or perhaps unwilling, to tackle the issue of the Swiss franc mortgages, effectively leaving the victims to their own devices for well over a decade in spite of the fact that these products are still in existence. For example, the Polish competition watchdog identified mBank’s Swiss franc mortgages as abusive as early as 2016. Additionally, mBank was ordered, also by UOKIK, to reimburse its clients for a token PLN 6.5 million (ca. GBP 1.3 million) in 2016 – a penalty for not passing on the negative CHF LIBOR interest rates. Such a low amount seems laughable by European standards. Also, the regulator has a habit of advising, rather than ordering, the unruly lenders. For example, the financial regulator KNF, appealed in December 2020 to the lenders to reach out to their clients with proposals to remove the CHF indexing clauses from the mortgage agreements. Unsurprisingly this appeal was summarily dismissed by mBank’s CEO as an idea which had already been shelved some years ago. Lastly, the Polish Public Prosecutor refuses to investigate the lenders’ behaviour as a criminal matter, instead suggesting that these merely amount to civil disputes.
To summarize, the Polish financial market regulation as well as the judiciary system, which has ended up lumbered with the Swiss franc loan problem when the country’s legislative washed its hands of it, are not fit for purpose. Faced with the civil courts being clogged up by tens of thousands of Swiss franc loan related cases, the Supreme Court of Poland decided in May 2021 to delay its ultimate ruling on these cases indefinitely while it awaits additional opinions from a multitude of irrelevant bodies such as e.g. the children’s rights ombudsman, which effectively also suspends all the individual court proceedings indefinitely. The EU of course already has a framework for dealing with the confirmed abusiveness of the Swiss franc loans – it is the aforementioned Unfair Terms in Consumer Contracts Directive 93/13/EEC. As outlined above, the ECJ has also ruled in favour of Polish borrowers and against the Swiss franc lenders, and the European Court of Justice is the highest instance that a Polish citizen can take their case to. However, as no systemic resolution to this problem has been devised in Poland, the borrowers have to fight each case individually in the sclerotic civil courts. Inexplicably, the Polish financial regulator KNF was informed already in late 2005, i.e. six years before the Swiss franc loan peak, by all the major banks about the risks associated with Swiss franc loans as well as their willingness to either shrink or even fully suspend their offering of these products, yet failed to take any action to stop these clearly toxic products from becoming fundamental to the Polish property financing. As such, both a stronger financial market regulation, in line with that prevalent in Western Europe, as well as a much better-organized judiciary system are desperately needed to clean up the Swiss franc loan mess, which is very likely to be exacerbated by the economic fallout from the coronavirus pandemic and the ensuing likely increase in mortgage delinquencies.
Author: Przemek de Skuba Skwirczynski
Published in the Summer 2021 edition of the Housing Finance International Journal.
Republished by British Poles portal with the author’s permission.