Iceland May Inject $75 Million Into ‘Weakest Link’ Housing Fund

Iceland’s government may have to inject 9 billion kronur ($75 million) to keep the Housing Finance Fund afloat through 2015, according to the Finance Ministry.

The government has provided a state guarantee to HFF’s 940 billion kronur in debt and the state-backed mortgage provider is considered to be the “weakest link” among the enterprises with a full state backing, the ministry said in its budget today.

Iceland’s government has struggled to find a solution for HFF, which is near insolvency as its inflation-linked home loans lose ground to regular mortgages offered by commercial banks.

Without changes to the fund’s operations “there may be a risk of the Treasury suffering further losses due to the fund,” the ministry said. In addition to the $75 million in capital, the government may have to inject more equity into HFF and write off loans granted to it “if the financial position of the fund worsens even more,” according to the ministry.

The difference between loans granted and debt sold by HFF isn’t enough to cover operational expenses, the ministry said. HFF has “a high number” of defaults and many borrowers have refinanced their loans with commercial banks, it said.

HFF has about 496 billion kronur in bonds outstanding, it said on Sept. 18. A total of 4,291 households, or 8.6 percent, of homes with mortgages from HFF were in default, with an underlying value of 81.5 billion kronur. The lender’s capital adequacy ratio fell to 2.5 percent at the end of June from 3.2 percent at the end of last year, missing the 5 percent regulatory minimum.

To contact the reporter on this story: Omar R. Valdimarsson in Reykjavik at valdimarsson@bloomberg.net

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net

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