0001-6373/$20.00 © 2015 Akadémiai Kiadó, Budapest Acta Oeconomica,Vol. 65 (S1), pp. 123–147 (2015) DOI: 10.1556/032.65.2015.S1.8 INCOME-CONTINGENT REPAYMENT SCHEME FOR NON-PERFORMING MORTGAGE LOANS IN HUNGARY* Edina BERLINGER – György WALTER At the end of 2014, more than 23% of the foreign currency denominated mortgage portfolio in Hungary was overdue; about 20% was classified as non-performing and the tendency is worsening. In this paper, we propose a solution to effectively reduce the credit and systemic risk inherent to this portfolio – the proposed model can be applied to other mortgage portfolios in trouble as well. The main element of our proposal is income-contingent repayment complemented with effective incen- tives to motivate debtors to repay their debt. We demonstrate that the proposed scheme is attractive for both the debtors and the lenders; therefore, contrary to some recent policy measures, in this case there is no need for direct state intervention to force modifications to the existing legal contracts. In order to evaluate the possible effects, we simulated a realistic population of borrowers with different age, debt, loan-to-value, and income. Then we calculated the expected income paths, the repayments of the borrowers as well as the profit of the lenders on the basis of the non-performing FX mortgage portfolio. The results underpin that the proposed scheme creates significant value added and, most importantly, that it can effectively reduce the vulnerability of the entire economy to future shocks. Keywords: FX mortgage loans, emerging markets, management of credit and systemic risk, PTI, income-contingent repayment, micro-simulation, Hungary JEL classification indices: E42, G17, G21, G28 * This paper was based on a research supported by the Hungarian Academy of Sciences, Mo- mentum Programme (LP-004/2010). Edina Berlinger, corresponding author. Associate Professor and Head of Department of Finance at the Corvinus University of Budapest, Chair of the Finance (sub)Committee of the Hungarian Academy of Sciences. E-mail: Edina.Berlinger@uni-corvinus.hu György Walter, Associate Professor at the Department of Finance at the Corvinus University of Budapest. He is a member of Finance (sub)Committee of the Hungarian Academy of Sciences. E-mail: Gyorgy.Walter@uni-corvinus.hu