The banks that lent us the money destroyed the Icelandic economy and now they want to bankrupt us and take the property”, says the father in an email to Channel 2. The couple has six children, the two oldest have left home and the youngest is less than a year old. They are both college-educated and borrowed 26 million ISK in a currency loan for their town house which was valued at 48 million ISK at the time. When the wife got pregnant they decided to build a bigger house and started work on it in 2007.

In order to finance the new house they took two currency loans for 45 million ISK altogether. The decision to borrow in a foreign currency was not taken on a whim according to the couple, but after careful consideration. They looked at the ISK thirteen years backwards then estimated fluctuations between 25-30% and considered that within their means.

What they didn’t budget for was the freezing of the housing market, which means they cannot sell their old town house, and currency fluctuations of 100% since they borrowed the money. Today they owe 154 million ISK in home loans and have two houses they cannot sell. The bank is foreclosing on the town house which will be sold on an auction in November.

“We were offed payment-adjustments which means that someone will be our “guardian”, and tells us what to have for dinner and when we can take our kids to the movies and then after five years we have an option of owing 110% on our property”, says the father.

“But remember we owned half of our house until the banks and the government destroyed the economy. Are we supposed to accept this? No and no again, then it is better to leave the country and be bankrupt immediately. In my opinion our home equity is being stolen from us, instead of us receiving help “.

Related posts:

1. Man Destroys His House – I Have Nothing To Lose
2. Nothing To Lose In An Unnormal Economy
3. Will there be a fair solution?

So the guy who destroyed his old house has been attracting some headlines in the last couple of days.

His actions have been met with great sympathy from many directions, some calling him a hero for going through with some serious “up yours” to the system that has screwed its citizens royally over.

Others have critisized him for destroying someone else’s property (mostly right-wingers who consider properties to be above people), and many have pointed out the fact that he lost his house in November last year, which means he must have been going under well before the economic crash.

He was on Kastljos yesterday, calm and calculated like a man who knew all to well that he had gone to extreme lenghts but intentionally so.

Then visir.is reported on a couple who say he screwed them over on a house they ordered through him. They lost 10 million ISK doing business with him. He claims the same he did on TV when asked about why he’d found himself in that quagmire of debt, that once his debtors stopped paying, he was unable to pay his own.

Regardless of this particular man’s situation, it is one many businesses and individuals can sympathise with in Iceland. The rapid accumulation of interest payments and currency loans has sucked them dry of cash and squeezed them to a breaking point. In a normal economy you would say it was the way it was supposed to be, bad companies going under because they’d overextended.

But you need not have been a “bad company” to take the heat in Iceland. Interests are high because of very questionable  macroeconomic decisions by previous governments. But it is SME owners and the public who get to pay for the whole deal.

I don’t recommend anyone to go out and destroy their properties, or those they’ve lost. I would on the other hand like to see an investigation into the lending practises of Frjalsi Investment Bank from 2004-2008. It was supposedly easier to get a foreign currency loan with the bank than to find ice in Antarctica.

Again, while the government is busy bailing out every bank in sight, someone should ask why borrowers are made to shoulder all the damages?

Meanwhile, you get the sense that more and more people have nothing to lose. So brace yourself for some more fun stuff.

Related posts:

1. Man Destroys His House – I Have Nothing To Lose
2. Are We Supposed To Accept This? No And No Again!
3. Iceland In Debt

This was revealed at the Central Bank’s conference on the debt of Icelandic households.

On average each home owes triple its disposable income, but one home out of four owes five-fold of disposable income.

A curious note was made by the Central bank in that only 2,5% of homes are supposed to be both facing a heavy payment schedule and negative home equity.

I don’t understand the Central Bank or Johanna Sigurdardottir when they state that so few homes have negative home equity. Currently there is no active real-estate market in Iceland. More than 17.000 homes are listed but very few are selling. Those that are sold are usually when people are trading properties.

So as home equity suggests how much you’d get if you’d sell your house today, I dare say that the Central Bank and the Prime Minister are being awfully unrealistic with their statements. Unless you own your property outright, then you probably are facing negative home equity because no-one is buying and you are stuck.

Related posts:

1. The Non-Existent Housing Market
2. Discussion On Household Debt Held Hostage By Progressive Party
3. What Is Missing From The “Definite” Household Debt Solutions?

Home equity is the cash you’d end up with from selling your home and paying up your home loans.

So the bank is probably assuming a market price based on either its own predictions or value of the deals being made.

Since October there has hardly been any real movement in the property market and for months we’ve heard that most of the little business there is takes place where properties are being traded between buyers.

So as there is no property market to speak of  in Iceland wouldn’t it be more correct to claim that almost everyone who owes something in their home has a negative home-equity?

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1. Iceland In Debt
2. A Fair Solution Or Not?
3. A Storm Is Brewing Over The Ruins – Icelandic Housing Crisis Explained

“Yes, I was one of those who took a currency loan”, says the forty year old father of two. “Twenty million that are now sixty. I am not asking that my loans be remitted. But when I went to the bank to look for solutions, they said no because I am one payment behind. Well that is exactly why I came to the bank in the first place”.

“I am forty years old and I have nothing. All my life has been about catching up with inflation and interest rates. I took the currency loan because the low interests were more favorable in the long term compared to almost 20% interests on the ISK. I expected fluctuations but not a systematic crash.”

Finance Minister Gylfi Magnusson and PM Johanna Sigurdardottir maintain that enough has been done to help homeowners. But people in Iceland were shocked this week to find out that those who get assistance by extending their loans etc. must suffer the ignomity of having their names published in Logbirtingarbladid, where bakruptcy-cases are traditionally published amongst other actions. “Smells like the Soviet”, says Petur Blondal, Independence Party MP.

Meanwhile the first Icelandic Viking Raider has been declared bankrupt. Magnus Thorsteinsson has no worries though. He had the foresight to move his home to Russia last autumn where Icelandic bankruptcy cases cannot be sought. Magnus should feel right at home in Russia where he operated the Bravo drink-productions with Bjorgolfur Gudmundsson and Bjorgolfur Thor before selling it to Heineken and coming home to receive Landsbankinn from the Independence Party on the cheap. Magnus has been an active investor in different sectors but it was Straumur Bank that requested the bankruptcy order because of loans that he was personally responsible for.

Magnus says that Straumur has shown “unusally strong-armed tactics” in collecting the debt. Funny how the businessmen that ran Iceland into the ground are suddenly so much like the rest of us. 

Related posts:

1. Bjorgolfur Bankrupt And Then Some
2. The wonderful world of an economic disaster
3. Loans of the Icelanders

A storm is brewing in Iceland. Homeowners have waited since October for words from the governments of Geir Haarde and then Johanna Sigurdardottir on how the state is going to tackle their problems. 

They are still waiting and they are getting angrier every day. 

The thing is that pretty much all home loans in Iceland have become subprime loans in less than a year. If you have invested in a home in the past decades then you have had two options: 

a) A price-indexed loan in Icelandic Kronas. 

- Back in the eighties the government had battled a massive inflation and decided to implement price-indexation on loans. 

- This was done to protect the owners of capital, in effect lenders from losing their money if they lent it to someone else. 

- The price indexation has the effect that if the consumer price index rises then the capital of your loan does so as well, and so do your payments. So a 5% annual inflation means that your 10 million krona loan grows to 10.5 million. 

- Nothing on the other hand was done to protect borrowers from inflation. They still received their wages in an ISK that wasn’t price indexed, so they in fact suffered a double loss on the inflation rising. The rising cost of the loan and the shrinking purchasing power of their wages. 

- This created an unbalance in the economy, whereas the banks and lenders were said to have both a belt and suspenders to keep their pants from falling down. The costs of inflation were effectively transferred to wage-earners and borrowers.  

- Now you could technically still get loans that weren’t price indexed but you should have tried asking your bank for one. Fat chance, they were in a position to direct you solely to price indexed loans.  

- The intent of the price indexation was to protect people’s savings. What it ended up doing was create an environment where lenders and borrowers did not share a common interest in doing everything to suppress inflation. With money flowing into the economy and overheating, the banks should have stopped lending money a lot earlier than they did. They didn’t because they kept receiving payments while things were good and it didn’t matter how much they charged. 

- Since the Central Bank of Iceland set itself a goal of inflation at 2,5% since March 2001 it has spectacularly failed. Since 2004 inflation has been on the rise from 5% up to almost 20%. 

- Anyone can see that home-prices must maintain a fantastic rise to keep up so that people don’t end up losing their home-owners equity.  

- The banks realized that they were selling a product that was fast becoming undesirable. 

So around 5-6 years ago they introduced a new and brilliant product: 

b) Currency loans. 

- Homeowners sick of real interest rates on their properties never dropping below 10% and sometimes touching 20% looked at the low interests rates offered by other currencies as their way out of the swamp.

- The Yen and the Swiss Frank were especially popular. A 50/50 combination soon proved a hit in the auto-loan market. 

- This meant that instead of paying the exorbitant rates that came with the ISK they could greatly lower their monthly payments. Why pay 30.000 when you can pay 15.000 AND your capital doesn’t rise with inflation but decreases instead? 

- There was a double gain on offer. If the ISK got stronger then the capital would decrease as well because of the exchange rate. Absolutely brilliant. 

- But there is always a catch and always some small print somewhere. If the ISK would weaken then the capital would rise accordingly. People were told that currency loans were brilliant if you could handle monthly fluctuations of 15-20%. 

- With almost no unemployment and Iceland becoming richer by the day it was a small detail. Somewhere between 8-15% of homeowners decided to risk the gamble. 

- And then the Icelandic krona’s index went from 109,7 to 251,5 in 18 months. 

The combined effect of these two natural disasters is apocalyptic. Lets say two neighbors each bought his home for 35 million with a 10 million downpayment a couple of years ago. So each took a loan for 25 million. 

Mr. A now probably owes the bank in excess of 30 million even though he paid the bank 5 million of his income from the last two years onto the loan.  

Mr. B is even worse off. He now owes between 50-60 million to the bank. If he was making payments of 150.000 per month then they are now fluctuating above 300.000. 

Meanwhile the housing market has plummeted and there are hardly any transactions taking place. The Central Bank assumes that home prices have or will decrease by almost 50% this year meaning that all loans in Iceland are effectively subprime loans. You cannot sell without assuming debt without an asset behind it. You cannot move if you want to, or what is worse, if you need to. And with thousands of apartments coming into the posession of the banks needing some cash inflow the rent market has shrunk as well, so people cannot even rent their apartments to make ends meet. 

Now the argument has been made that borrowers know the risk when seeking loans. People entered into the agreements with the banks of their own free will. That is true but in fact their choices were limited and no less important they were participating in their society. 

- Loans without price indexation were impossible to find for common people. 

- Competition was minimal. No foreign banks dared offering loans to Icelanders so the local banks were relatively hassle free.

- If everyone in Iceland had said to themselves that something was up and stopped borrowing money for homes then society would have grinded to a halt. Of course they didn’t, jobs were plentiful, the housing market on the rise and consistent propaganda from the government and the banks that people should borrow, invest and spend like there was no tomorrow. People participated in their society because they believed in it. One of the slogans from the Independence Party’s 2006 campaign was “When all is considered,  strong economic management is the biggest welfare issue”. That’s how you appease both ends of the spectrum in one sentence. Pure PR heaven. 

Since last autumn, the governments have indicated that something would be done to relieve the plight of Icelandic debtors. But there is a dilemma. 

- The state is in deep financial trouble. How deep down it really is is unknown because the cat hasn’t been let out of the bag yet. But the IMF and Oliver Wyman have used words like “largest in history”, “worst in 80 years”.

- Everyone knows that Iceland is entering extremely rough times. Welfare will be cut, taxes will rise and the state is facing an unenviable wall of debt that need to be paid off. The interest payments alone will cripple a large part of the economy. 

- Foreign debtors obviously will want as much as they can for Iceland’s outstanding debt. It will be a heavy burden for the state, i.e. everyone in Iceland for a long time. 

- So therefore it makes no sense from the standpoint of pure economic theory to cancel debts. You assume debt and pay it off. If you don’t you lose your home. That is how the world works.  

But this is still unacceptable to Icelandic homeowners. 

- Yes, they borrowed that money and some people assumed a lot of risk by borrowing more than they could chew and in currencies different from the one their wages are in. 

- But most people didn’t expect this magnitude of risk and agreed to pay their loans under drastically different circumstances. They expected (or hoped) for a lower inflation. They expected low unemployment. They expected steadier purchasing power. And they trusted their banks. 

- That was probably the biggest mistake. It appears that the owners and top management of the banks were systematically lowering the ISK to inflate their annual and quarterly reports. 

- The reason Iceland is in such deep trouble is the wrecklessness of these people who either started savings accounts abroad without care for the safety of their depositors or lent stupendous amounts of money to closely related individuals or businesses. The word on Kaupthing for example is that more than 50% of their loans were made to just 10 different individuals or businesses. 

- This is an equivalent of someone renting you an apartment, breaking in and wrecking it and then asking you to pay the damages. This is a question of fairness to the wage-earning homeowners of Iceland and being able to trust that the society you belong to punishes those who do wrong instead of letting them off the hook. 

During the election campaign, the Progressive Party introduced their plan of a 20% drop of all loans and that probably delivered them a relative gain in the end. The Independence Party jumped aboard on the idea when they were getting more desperate but most were sceptical. Everyone knows that this will be at a cost so reducing loans for businesses or large investors wasn’t appealing. 

The Social Democrats and Left Greens on the other hand rejected these kind of reductions. They have passed bills that allows people in bad situations to extend their loans but that is like putting a band aid on a person experiencing a heart attack. Also it is not transparent enough. Who gets help and why? 

It is frightful to say outloud what many are thinking. If it hadn’t been the Progressives who had put the idea forth in the first place, but someone from their own ranks then it would have been given greater consideration with the government. Party politics might still do some damage to an already crushed nation. 

Unfortunately other ideas have not been allowed to float to the top in the cesspool of Icelandic politics. I personally am intrigued by the Zingales’ Plan whereas the bank renegotiates with borrowers to drop their loans by an agreed percentage, say 40-50%. The bank in turns receives the same amount from the eventual sales profit of the home once the borrower decides to sell it. Whereas the 20% flat cut is hard to swallow for creditors, they might see an opportunity to regain some of what they are receding in the Zingales plan. 

While recommending that it be given a closer look that doesn’t mean that it could be the only or satisfying solution. What has happened in Iceland despite the nation’s current state of denial is an economic and systematic collapse. People are injured, confused, frightened and angry. What is needed from the government is a response similar to what is expected after a natural disaster. Relief must be provided, oppurtunity must be given, hope must be presented and then there has to be a clearing of the ruins. Once that is done, we must be careful not to continue living in the same houses that collpased and build different ones, stronger and more trustworthy. 

At the time of writing, the rescue people are taking a lunch break before approaching the ruins. Let’s hope someone has a plan with a different type of architecture in mind.

Related posts:

1. In the ruins
2. Two days later – our homes are at risk
3. The Non-Existent Housing Market