Amendment of the Act No. XXX of 1997 on the Mortgage Banks and the Mortgage Bond

1. Amendment of the Act No. XXX of 1997 on the Mortgage Banks and the Mortgage Bond

2. Amendment of the Mortgage Bank Act I. - Act No. XXX of 1997 on Mortgage Banks and Mortgage Bonds (“Mortgage Bank Act”) contains the specific rules applicable to mortgage banks and mortgage bonds in Hungary. - The Association of Hungarian Mortgage Banks („Magyar Jelzálogbank Egyesület”) initiated the amendment of several provisions of the Mortgage Bank Act last year. The consultation process was closed in October, 2006 and the Government introduced the amendments to the Parliament on October 20, 2006. - The amendments reflect the demands of the investors, the new rating approaches of Moody’s and provide for a more secure and more flexible business environment. Naturally, the amendments are very similar to those recently introduced in Germany, as the German legislation is the common benchmark of the mortgage bond market. - The main goals of our proposals will be shown on the following slides.

3. Amendment of the Mortgage Bank Act II.- Taking derivates into the mortgage pool, net present value calculation 1. Mortgage banks are obliged to hedge currency exchange risk by entering into derivative transactions in cases, when mortgage bonds and their coverage are not denominated in the same currency. Mortgage Banks are also entitled to include derivatives in the ordinary coverage as from July 1, 2004. However, in practice this will be only possible after the Government decree on the special requirements of taking derivatives into the pool will be published. This will follow after the amendments of the Mortgage Bank Act enter into force.

4. Amendment of the Mortgage Bank Act II.- Taking derivates into the mortgage pool, net present value calculation 2. Further to the amendments, swap agreements survive the insolvency of the issuer. As a remuneration for waiving the right to terminate the derivative transaction in case of issuer default, those derivative partners waiving such right will rank equally to bondholders should the mortgage bank become insolvent. Naturally, the coverage will only comprise derivative transactions, where the derivative partner waived the right to terminate the contract with respect to issuer default. - To make an adequate representation of derivatives in the calculation of cover possible, the present-value calculation has been introduced alongside the nominal cover calculation, effective as from 1 January, 2006.

5. Amendment of the Mortgage Bank Act III.- Prudent banking practice Loan-to-value ratio, limit of assuming obligations secured by a mortgage. Pursuant to the amendments of Sections 4 (2) and 5 (3) of the Mortgage Bank Act, it will be unambiguously declared with respect to single mortgages the mortgage bank may grant loans up to 100 per cent. of the ‘mortgage lending value’; the 70 per cent. limit applies to the portfolio.

6. Amendment of the Mortgage Bank Act IV.- Prudent banking practice - Purchase of mortgage loans – maturity limits Section 5 (1) and 8 (2) point b) will provide for general maturity limits both in case of own lending and purchase of loans or independent mortgage liens. Following that, at the point of time of own lending, purchase of loans or independent mortgage liens the outstanding claims of at least five years of maturity may not amount less than 80 per cent. of the total portfolio.

7. Amendment of the Mortgage Bank Act V.- Prudent banking practice - Extension of the investment and refinance opportunities of mortgage banks Section 8 and 9 will allow mortgage banks to acquire and obtain ownership rights in credit institutions, insurance companies, investment companies, investment funds and their complementary undertakings.

8. Amendment of the Mortgage Bank Act VI.- Prudent banking practice Extension of the eligible part of the principal claim and the repurchase price in case of residential mortgage loans In conjunction with the Basel II Accord and the CRD, residential mortgage loans may be used as cover up to the first 70 per cent. of the value of the property (‘mortgage lending value’) established by the mortgage bank. Further to the amendment of Section 8 (2) mortgage banks will be allowed to purchase mortgage loans and loans provided under Government guarantee („follow-up loans”) not only from commercial banks, but also from financial enterprises.

9. Amendment of the Mortgage Bank Act VII.- Prudent banking practice Foreign transactions Following the amendment of the Mortgage Bank Act, the cover may also comprise loans granted in abroad up to 15 per cent. of the total portfolio. The mortgages must encumber properties, or such rights under a foreign legal system that are comparable with rights equivalent to real property under Hungarian law. The encumbered properties and the properties in respect of which the encumbered rights exist must be situated in a Member State of the European Union or another Contracting State to the Agreement on the European Economic Area.The mortgage bankmay not include such assets in cover until it has obtained sound expert knowledge in respectof these new products, and in the case of activities on new markets in the field of mortgagelending not before the end of two years after taking them up.

10. Amendment of the Mortgage Bank Act VIII.- Prudent banking practice Extension of the range of eligible assets in the supplementary coverage 1. The excess cover may comprise after the amendment of the Mortgage Bank Act money held on a separate blocked account at the National Bank of Hungary; Hungarian government bonds; securities issued by the Member States of the European Union, another Contracting State to the Agreement on the European Economic Area or the Organization for Economic Cooperation and Development.

11. Amendment of the Mortgage Bank Act VIII.- Prudent banking practice • Extension of the range of eligible assets in the supplementary coverage 2. Also securities issued by the European Investment Bank, the International Bank for Reconstruction and Development, the Council of Europe Development Bank or the European Bank for Reconstruction and Development qualify as eligible supplementary assets, if the debtor is the issuer itself. Furthermore, securities for which the Hungarian State or any of the above states and organizations has assumed the guarantee in respect of the payment of interest and of principal repayment may constitute excess cover assets.

12. Amendment of the Mortgage Bank Act IX.- Prudent banking practice - Insolvency regulation 1. A very detailed regulation will provide for the timely satisfaction of principal and interest claims of bondholders and derivative partners in case of a possible insolvency situation. The cover pool administrator will only safeguard the interests of bondholders and derivative partners and will also have an access to assets not recorded in the cover register. The transfer of the portfolio or parts of it may grant for liquidity, however, in this case the prior written consent of the Hungarian FSA has to be obtained in order to avoid „cherry picking”.

13. Amendment of the Mortgage Bank Act IX.- Prudent banking practice - Insolvency regulation 2. As a general rule, Section 20/A (4) of the Mortgage Bank Act will declare that the cover pool administrator is obliged to maintain the liquidity of the pool on a constant basis, and allows him to transfer the pool or parts of it to another mortgage bank and to enter into derivative transactions. In two years after the commencement of the liquidation procedure, both the cover pool administrator and the bondholders may request the court to complete the coverage from the general insolvency estate. The cover pool administrator shall be entitled to receive remuneration for his work anda refund of appropriate expenses.

14. Amendment of the Mortgage Bank Act X.- Technical issues We have suggested quite a few amendments which will provide for a more flexible business environment: Creation of mortgages will not necessarily be requested to be included into notarial deeds, e.g. there will be no such document requested, when a limited security lien („keretbiztosítéki jelzálogjog”) will be registered. The Mortgage Bank Act will no more require a bilateral notarial deed, following that the representatives of the mortgage bank will not necessarily sign the document creating the mortgage – a unilateral commitment of the clients will be appropriate to grant the loan. This will reduce costs. Furthermore, mortgage banks will be also allowed to prepare expert opinions on the mortgage lending value, without any limitation to possible customers

15. Amendment of the Mortgage Bank Act X.- Technical issues A complete English translation of the amended Mortgage Bank Act will be available on the website of the Hungarian Mortgage Bank Association under www.mortgagebanks.hu early next year. Should you have any questions, please do not hesitate to contact us under info@mortgagebanks.hu or via telephone: +36-1-411-1346