Market Scene : The Price for Democracy May Be a Higher Mortgage : * Under the old Communist regime, a Hungarian homeowner had to worry about paying off a 3% loan. But now that figure has climbed to 15%.

BUDAPEST, Hungary —  After years in a cramped, one-room apartment, Anna Bernat felt a sense of triumph three years ago when she tapped every line of credit available to build and finance a home of her own.

Under the warped economics of the Communist system, it mattered little that the $170-a-month typist took on a debt equal to 14 years’ income and monthly payments that ate up two-thirds of her wages.

As a valued proletarian and single mother, she qualified for a no-interest loan for part of the mortgage and another state-subsidized credit with an easy 3% rate.

She secured a building site through government connections and with three other families oversaw the construction of a stylish four-plex in the Buda hills. When she moved in a year ago, she took out new loans for furniture and appliances to outfit the comfortable lace-curtained dwelling she shares with her 13-year-old son.

Like most of her compatriots, Bernat voted out the Communists in last year’s free elections, declaring her wholehearted support for a switch to capitalism. Also like most of her compatriots, she never dreamed that the hardships of transition would hit so close to home.

Bernat now faces conversion of her 2-million forint ($28,000) mortgage to 15% interest--a bargain compared to the market rate of 32% but hard on a single wage earner confronted with rising prices for everything from bus fare to food.

Angry and disillusioned, Bernat insists that the new government is still obliged to uphold the social contracts made by Communists in the past.

Her anger is shared by many of the 1.3 million Hungarian families who held low-interest mortgages at the start of this year, before the government entered the political minefield of weaning an entire population from the subsidy trough. Home mortgage subsidies account for nearly 90% of the $1-billion domestic budget deficit Hungary carries this year. The former government’s practice of borrowing at higher market rates and lending to homeowners at 3% fostered a vicious cycle that helped amass a $21-billion foreign debt.

“Even in the early 1980s, it was obvious that this program could not go on much longer without bankrupting the government, but no politician dared to take the responsibility of ending it,” said Pal Cseh, the Finance Ministry’s chief adviser on housing matters.

While subsidized mortgages granted between 1971 and 1989 are a major factor in Hungary’s indebtedness, officials acknowledge that they had the desired effect of removing the state from the role of landlord. More than 85% of Hungarians live in privately owned homes, compared to less than 10% in most other areas of Eastern Europe.

But the mortgage pyramid had to stop for Hungary to qualify for Western assistance with its economic transition. The International Monetary Fund and other lenders made new credits contingent on a whittling of the domestic debt.

In a compromise typical of a government that has vacillated between shock therapy and softening the blow, mortgage holders were offered two choices: convert their loans to 15% annual interest or pay the market rate--now 32% because of inflation--and the state would forgive half the principal.

Seizing the bargain of a lifetime, families who had money in the bank opted for the second choice in unexpected droves. By the March 1 deadline, 470,000 homeowners had paid off the other half of their mortgages. Another 300,000 accepted the government’s half payment, indicating they were confident of earning enough to pay off the remainder later or to at least keep up with the higher payments.

The number of homeowners with access to such huge sums of cash surprised finance officials. While statistics indicate that 40% of Hungary’s 10 million people live below the poverty line, the figures are based on income reported to the government for tax purposes.

“This showed how little the state knows about the real wealth of the population,” Cseh said of the mortgage payoffs, which nearly halved the state’s subsidy burden. “A lot of people are suffering but nowhere near as many as the statistics imply.”

But as prices soar amid 35% inflation and failing enterprises begin to lay off workers, some Hungarians--like Bernat--are struggling to make ends meet.

About 530,000 mortgage holders did not take advantage of the government’s offer to pay half their principal, apparently because they lack the income to pay market-rate interest on what would remain. Because the mortgage program affects so many families and involves the most important asset in their lives, it has forced a sober reassessment of the capitalist system most thought they wanted a year ago when they went to the polls.

“I don’t know anymore if there is a benefit for our society at the end of the road,” said Bernat, who fears she will be forced to rent out or sell her new home. “All I can say is that, for me personally, the new system is very disadvantageous.”

Even those who could afford to pay off their mortgages resent the government’s unilateral action. “I would never want to return to socialism, but it had its advantages for many people,” said Lajos Flautner, 53, a prominent Budapest surgeon who earns at least six times as much as Bernat. “There was an unspoken agreement that, because the state took care of certain things, income was very low. Now that social contract is being broken.”

Having amassed considerable savings over the years when Hungary offered little for consumers to buy, the surgeon paid off his own mortgage this year, as well as that of his daughter, Ildiko, 26. Both bitterly lambaste the center-right government for tinkering with one side of the social equation before addressing the other.

Ildiko Flautner notes that her income of 10,500 forints ($145) per month as a pediatrician is far below that of a common laborer. She complains that the government of Prime Minister Jozsef Antall has done nothing to bring salaries in line with capitalist standards, while most prices now match those in the West.

Most mortgage holders are like Erzsebet Jarmai-Fekete and her husband, Jeno, two administrative workers in the Budapest government who deeply resent the interest-rate turnabout but will somehow find the means to deal with it.

“We aren’t going to lose our home, that’s for sure. We worked too hard to get it and it’s all we have to show for 30 years’ work, other than our 7-year-old Lada,” Jarmai-Fekete said, referring to their Soviet-made compact car.

But like many Hungarians fed an addictive diet of credit over the years, the Feketes carry other debts that will make it hard to absorb a doubling of their housing costs. Their combined income is about $450 per month, and more than $200 already goes for the mortgage.

Some provisions have been made for financial assistance in the most dire cases, and no moves toward repossession are expected because of the social outcry that would bring.

Despite the safety valves, few Hungarians see their hardship as contributing to a long-term benefit. Few even see a connection between the national dependence on credit and the high inflation that is their chief complaint.

Economists with the Hungarian Democratic Forum, the lead party in the governing coalition, say the transition out of state-subsidized housing is painful. But they promise it will be short. Many predict an upturn in Hungarians’ buying power as soon as early next year.

In the end, the government argues, Hungarians will have escaped the destructive cycle of borrowing that made them Europe’s highest per-capita debtors. And after the short-term sacrifices expected now, most families will end up owning the roof over their heads.

Pick Your Payment Hungarians voted out the Communists in last year’s free elections and threw their support behind a switch to capitalism. Now, they are finding the hardships of the transition are hitting close to home. The government, trying to trim a $1-billion domestic budget deficit and stop the vicious cycle of free lending that helped amass a $21-billion foreign debt, is putting an end to generous subsidies for homeowners. Now, mortgage holders must choose between two options: pay an interest rate that is five times higher than before, or pay a rate that is more than 10% higher, with half the loan forgiven.

How would Hungary’s interest-rate policy affect a California homeowner? Assuming a $198,000 balance due after a 10% down payment on a $220,000 house, here’s what payments (principal plus interest) would be under the various scenarios faced by Hungarians:

At the old 3% rate: $851.40 At California’s 10% rate: $1,742.40 At the new 15% rate: $2,514.60 At market rate (32%): $5,286.60 At the market rate after half the loan (99,000)is forgiven: $2,643.30 Source: Los Angeles Times