Emerging Europe

Debtor village: Ghetto or default solution?

Jessica Morris, special to CNBC
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Hungary has found an answer to its mortgage problem: a purpose-built "debtor village" for Hungarian families who have defaulted on their soaring loans and lost their homes.

Before the financial crisis in 2008, many Hungarians took out cheap mortgages denominated in foreign currencies such as the Swiss franc, euros and yen. However, as the crisis gripped Europe, the value of Hungary's currency, the forint, tumbled, making the cost of the foreign-denominated mortgage prohibitively high for many families. As many as one in five households could not keep up with their monthly mortgage payments, according to the BBC.

(Read more: Hungary attacks Roubini over currency 'advice')

In response to this, the Hungarian government stepped in to create a "debtor village" to house these families. The village, which provides affordable accommodation, is able to house around 80 families.

Life in Hungary's debtors village
Life in Hungary's debtors village

Critics have described the estate as little more than a ghetto for the indebted which has very basic amenities. But for many of the village's residents, it is an affordable alternative to homelessness.

One resident speaking on life in the debtor village told CNBC: "It costs roughly 80 euros ($108) a month. I think the aim is to keep heating costs low. That's why there is no gas. We chop wood and the stove is very good."

Hungarian Prime Minister Viktor Orban has taken other measures to deal with the foreign currency mortgage problem, with the government putting a moratorium on evictions and establishing an agency to buy homes from struggling borrowers.

In a move that has worried potential investors, however, the government has put pressure on banks to resolve bad loans. This comes despite the country already experiencing a contraction in lending, and being in desperate need of credit.

(Read more: Could Hungary be thrown out of the EU?)

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