Frettabladid indicates today that all mortgages are to be taken over by the state run Icelandic Housing Financing Fund.
The reason for this would be to ensure that if actions are taken to reorganize the debt of Icelandic mortgage holders, then there would be no danger of different treatment by different banks.
Frettabladid also indicates that this must be clear before the fall session of Althingi, which begins in October.
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Vilhjalm A.
2 years ago
This is obviously a very significant development, and makes a complicated issue even more complicated and difficult to understand.
The Icelandic government most likely will not write down or otherwise reduce the principal of the mortgages. Probably they will reduce mortgage payments due based on the mortgage holders income, total assets, and disposable assets and income, for instance, limiting payment to e.g. 38% of income for those who can’t make their payment. This is the American “bandaid” approach. Or the Irish approach of 25% reduction in payments (which is essentially forgiving the interest portion of the payments due).
There are some big questions remaining.
Will every mortgage holder get some payment relief? Or only those who are effectively bankrupt? Or will there be a sliding scale based upon need? Will they extend mortgages in return for lower payments? What about indexation? How is the Icelandic government going to pay for these mortgages? Will they issue bonds to the banks, S&Ls, pension funds who currently hold the mortgages? Will the government pay face value of the mortgages, or the write-down value? Will the banks first write-down the mortgages and then sell them to the government? How does this plan affect the solvency of the banks? How does taking one of the most valuable assets of the banks affect the government plan to give Glitnir and Kaupthing entirely to the mostly foreign creditors? Who ultimately takes the loss on all these hopelessly bloated mortgages? How does this plan affect IMF loans, which are conditioned reduced government spending and on no general debt relief? Is this yet another case of government paralysis in which they put off making important decisions as far as possible into the future? Does the government have a secret long-term plan for dealing with the mortgage problem, or are they just incompetents making stuff up as they go along?
One thing is certain, the government is afraid of anarchy if large numbers of mortgage-holders stop paying. Once some portion of mortgagees stop paying, then lots of others will stop paying too. All it would take is 10000 or so to stop paying – how could the system deal with that many defaults? Ten thousand potential foreclosure and eviction actions, no sympathy for the banks, probably a lack of cooperation from the police, not to mention the ripple effect of creditors not getting paid — now that would create real chaos. You could have a nation of debt-refugees and squatters giving the finger to the financial system, maybe to the tax system too.
D_Boone
2 years ago
I see this as possibly a good development.
In the rural Irish west any people buying a house that had been foreclosed would likely be “boycotted”. Memories and social presures are still fresh from their recent past. Therefore banks and government realise that is not an serious option on any major scale. Nicelandics appear much less anarchic and seem to have lost the cultural trappings from their shared genetic heritage?
A reasonable option is distressed but not hopeless housing loans are written down by HFF but with a provision that if the houses are subsequently sold they also share in any gains in sale price i.e. the goverment/HFF become equity owners to some extent. There wold still be a few loan holders that are still probably better off going bankrupt. The failed bank bond holders as well as the shareholders should suffer the losses when transferring th loans. This probably means pension funds as well as “investors”. The government should not socialise the losses. And get rid of indexing.
Blubber
2 years ago
Yes, good points there.
Giving debt relief only to the worst hit, makes little sense to me. The relief should benefit not only those bought too much house for their wallets, but primarily those who made smart decisions in a crazily bloated housing market.
Primarily two things need to happen, first the loans need to stop being tied to the consumer index. Second, the debt needs to be tied to the property, not the borrower – what is the point of having collateral if it isn’t actually collateral?
The way it is now the prices do not reflect the true value of the housing market.
The Billion ISK Question
2 years ago
[...] Very good comments from EDA’s readers in response to this story. [...]
Silvia Planchett
2 years ago
If indexing isn´t addressed then nothing else matters.
Bromley86
2 years ago
>Second, the debt needs to be tied to the property, not the borrower – what is the point of having collateral if it isn’t actually collateral?
The answer is to aid in the collection of the debt from that person. More importantly, I’d have thought that the underhand practice of changing social security numbers for bankrupt companies needs to be addressed. That’s outright theft from the banks, and hence the Icelandic people.
Any payment strike would stall the Nordic and IMF loans. That’d mean the banks would get it from both sides (no recapitalisation at the same time as their income/assets plummet).
No one has shown that getting rid of indexation would make life any easier for the average Icelander, as mortgage rates would just increase to 12-15% overnight. Not that I’m saying it should be kept, just that no one has proved that getting rid of it would be of much help.
I’ve always thought that what the government needs to do is to take on the exchange risk element by converting all foreign currency loans to ISK loans (as far as the consumer is concerned). But that’d no doubt have implications for the sovereign debt and rating.
>The relief should benefit not only those bought too much house for their wallets, but primarily those who made smart decisions in a crazily bloated housing market.
Unfortunately, it’s a zero sum game. Those sensible Icelanders will have to pay for the reckless ones, because no one else will. So there can’t be debt relief for all.
Blubber
2 years ago
> The answer is to aid in the collection of the debt from that person.
In the US, for example, once the bank forecloses on you, you walk away from the debt. Yes, your credit rating is shot to hell, which could affect your chances of getting a lease to rent, a new mortgage or even a job sometimes, but you are not paying off something you do not possess any more.
> More importantly, I’d have thought that the underhand practice of changing social security numbers for bankrupt companies needs to be addressed. That’s outright theft from the banks, and hence the Icelandic people.
Couldn’t agree more. Although the argument that this somehow keeps Icelandic business alive and kicking will be beat into our heads with dried cod from here to eternity. The ethical implication of this is that it keeps Icelandic business teeming with people who have no scruples or integrity.
As for the index, a lot of people have fixed rates which would be unaffected. Obviously if mortgage rates were 15% on new mortgages, the housing market would stall completely. But for how long? And, unlike the index, mortgage rates can come down.
nn
2 years ago
Bromley86> No one has shown that getting rid of indexation would make life any easier for the average Icelander, as mortgage rates would just increase to 12-15% overnight.
This is not something you can easily show, but I do believe that the inflation is a lot higher than it would have been without price indexation, or with a fairer scheme.
1) First we had a fixed % system where inflation helped borrowers, hurts lenders -> high inflation (60s and 70s).
2) Then we had a fully indexed system where inflation is irrelevant -> Unstable feedback loop that can lead to Zimbabwe-like inflation (indexed in jan. 1983, annual inflation from august 1983-84 was over 100%).
3) Now we have a system where inflation hurts borrowers, is irrelevant to lenders -> lenders can pump up prices, increase availability of loans (even risky ones) because their money is safely indexed and defaulting is not an option.
Because of our volatile currency we need a fourth option, a system where inflation is a common enemy of lender and borrower so they would both gain by keeping it down.
The fixed % loans are not that type of system. Just because option 1 is not always better than 3 that does not mean we should stick with option 3 forever.