UPDATE 1-Hungary banks should bear most of FX losses on loans-PM Orban
* PM Orban says banks should modify fx loan contracts voluntarily by Nov
* Government will "eliminate" forex loan contracts otherwise
* Latest step in campaign to make banks pay towards policy changes
(Adds more comments from PM Orban, detail)
BUDAPEST, Sept 6 (Reuters) - Banks should modify foreign currency loan contracts in favour of Hungarian borrowers by November, bearing most of the losses from exchange rate swings on the loans, Prime Minister Viktor Orban said on Friday.
Orban and his Fidesz party, gearing up for elections in 2014, want to reduce the burden on Hungarians who took mortgages in Swiss francs - and to a lesser extent euros - and have seen repayments and the amount owed rocket due to the franc's gains since 2008.
The country's mostly foreign-owned banks have feared for some months that a new relief scheme would inflict further losses on them after years of hefty windfall taxes and a drastic earlier repayment scheme which caused big losses for the sector.
Orban said it was banks' moral obligation to modify contracts in favour of borrowers and if they do not do this then the government will step in, reiterating an ultimatum that his party gave to banks on Thursday.
"It is a moral obligation of banks, it would be a fair and honest procedure, if they were to modify foreign currency loan contracts voluntarily ... in a way that they would bear most of the loss stemming from the exchange rate change instead of the people," Orban told public radio.
"If the government has to resolve this situation ... it will apply a solution that eliminates foreign currency loans."
He did not specify how the government would do this but said the solution should be "fair", and those who got indebted in foreign currencies cannot be better off than those who took out mortgages in forints.
"We know how this problem should be resolved as of Nov. 1, there have been and still are talks with banks, but we would not like to be the ones who resolve it," Orban added.
More losses for the banks would be the latest in a raft of policy moves by Orban which have seen him lump banks and other international companies with a bigger share of the costs of reining in Hungary's budget deficit - to squeals of protest from big business, the EU and some foreign governments.
The Bank Association has already submitted its proposals on the mortgage issue to the Economy Ministry.
The National Bank of Hungary, led by Orban's close ally Governor Gyorgy Matolcsy, has also made a proposal of its own, which would lead to a gradual and full conversion of the loans into forints.
The central bank has proposed forgiving part of principal payments on foreign currency mortgage loans and extending an earlier scheme that allows monthly repayments well below the current market exchange rate.
Big foreign banks whose Hungarian units may be hit by a new mortgage relief scheme include Austria's Raiffeisen and Erste, Germany's Bayerische Landesbank and Italy's Intesa Sanpaolo.
(Reporting by Krisztina Than/Gergely Szakacs; editing by Patrick Graham)