You could be forgiven for being sick to your stomach while surveying the scene of Iceland’s economic ruins.
The price-indexation has made sure all home loans are up around 18-22% from two years ago, while the complete absence of cohesive urban planning between local councils, financial institutions and construction companies ended up in roughly 7.000 new apartments or houses being built or in the early stages of building in early 2008. More than 1.100 of the finished apartments were empty.
The financial institutions which made all the money available to build those apartments are now creating property companies around renting or selling. Which means that the market for regular homeowners is bust. You cannot sell and you cannot rent out your apartment because you will not get enough to cover your costs.
In countries like the US, the sensible solution would be to leave the keys and the house with the bank. Not so in Iceland. While the price-indexation acts as both belts and suspenders for the financial institutions that lend homeowners money, the liabilities don’t end there. If you would decide to leave your home with the bank, it will sell it at an auction for a cut-down price and then come to you for the difference. Meaning if you owed 25 million ISK in your home, up from 20 million ISK two years ago even if you paid 3-4 million ISK a year onto the loan, and the bank would sell it for 15 million ISK, it would send you the bill for the ten million ISK in difference.
What kind of society allows its citizens to face this gruelling future?
The answer is the same society that allows the management of Straumur Investment bank to pay out bonuses less than ten days before the government takes over the bank. This is understandable, their homes and debt have risen along with anyone else’s so they have to save themselves somehow. Take the money they can get, leave the ruins with the taxpayers, who happen to be faced with the above prison of debt.
Note that the banks are now state-owned.
This is the same society that allows a business to cancel contractual pay-rises for its lowest paid staff, while paying shareholder dividends that could support those pay-rises for years like HB Grandi does.
This is the same society that allows the management of Exista and other top companies to register their belongings in the name of their spouses ten minutes before or after the collapse.
The same society that has raised taxes on its citizens, but allows the owners of the banks to keep their money safe abroad.
Meanwhile the silence from the Parliament and the Government is becoming more unbearable every day.
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Vilhjalm A.
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Earlier I posted a suggestion made in Ireland about a mortgage-relief plan, under which the underlying mortgage would be reduced by, say, 50%, with the 50% being assumed half by the government, half by the bank holding tthe mortgage.
Here’s a mortgage-relief plan from the US, the “Zingales Plan”:
“Zingales proposes that Congress pass a law to give a recontracting option to all homeowners living in a zip code where housing prices have dropped by more than 20 percent. If exercised, the Plan B option will write down the face value of the mortgage by the same percentage that the area housing price has dropped and, in return, the homeowner will give the mortgage holder 50 percent of any appreciation at time of sale. (Zingales points out that mortgage holders will do much better under this program than with foreclosures, where transaction costs eat up a hefty proportion of the market value.)”
Basically it means the homeowner gets mortgage-relief in return for giving up future profits. And the percentages could be modified in various ways, eg 35% mortgage reduction for 70% of future profits to the government.
So, if a plan like this were implemented in Iceland, it would mean that the government would take on more debt, on paper, but would also get more assets, on paper, so the plan would be a “wash” on the books. Also, you could argue that the state is not favoring one group of debtors over another, since the homeowner debtors are giving up price-appreciation profits – one of the main (potential) benefits of owning a house. The main disadvantage for the state is that it would get less revenue — but is “revenue maximization” the main policy concern of the state? If that were the case, why not just increase income tax (or other taxes) as much as possible?
A rational mortgage-relief plan, combined with the removal of indexing, would keep a large number of homeowners solvent, who would otherwise go bankrupt or leave the country. Probably the amount that the state would lose in mortgage payments would be partially offset by the amount of income tax from employed homeowners, which would otherwise be lost if the homeowner emigrates.
(By the way, the non-recourse mortgages, are used in about 27 U.S. states, mostly in the west plus Texas and Florida. Not the entire country. It’s no coincidence that the largest bubbles and subsequent defaults and foreclosures occurred in those states.)
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