Iceland Seeks Burden Sharing as State Mortgage Bank Founders

Iceland’s government will seek participation from bondholders in a bailout of the struggling Housing Finance Fund, the country’s largest mortgage provider.

“It’s not only a task for the authorities to resolve the problems of the Housing Finance Fund, but rather a problem that needs to be dealt with by all parties,” Welfare Minister Eyglo Hardardottir said yesterday in a telephone interview. “It’s important that everybody realizes that we have a problem on our hands that won’t go away -- that needs to be resolved. The only way to do that is through good cooperation.”

HFF, which provides mortgages linked to inflation, is losing business to commercial competitors such as Arion Banki hf and Islandsbanki hf that can offer regular loans. As inflation hovers above 3 percent, borrowers have turned away from HFF and sought alternative home loans to prevent their debt burden from growing with consumer prices.

The bank’s capital ratio was 3.2 percent of its risk-weighted assets at the end of last year, compared with a 5 percent regulatory minimum, the fund said in March. HFF had $4 billion outstanding in bonds at the end of April.

Yields Jump

Yields on HFF bonds maturing in 2024 and 2034 rose as much as 10 basis points after investors sold about 1 billion kronur in the securities following the minister’s comments, according to Valdimar Armann, an economist with Reykjavik-based asset manager GAMMA. The 2024 bond yield traded at 2.3 percent, while the 2034 bond was at 2.5 percent as of 10:02 a.m. local time.

HFF and the ministry said in a joint statement today that any changes in the terms of the bonds would only take place after creditors have given their consent.

Iceland, which let its biggest banks default on $85 billion in 2008, said in February that it would bail out the fund before it becomes unable to honor its debts. That promise followed a November pledge to inject 13 billion kronur ($105 million) to keep the state-backed lender afloat.

The Financial Supervisory Authority said on May 28 that it was concerned about the growing risk of HFF’s declining capital-adequacy ratio. It was “important to resolve” the difficulties as the fund has “significant repayment risk, especially under the current interest-rate regime.”

State Guarantee

“It’s clear that the fund has a state guarantee so the role of the government is absolutely clear in that respect,” Hardardottir said. “It’s important that these, just like other projects of the government, are collaboration projects.”

The new government of Hardardottir’s Progressive Party and the Independence Party, which ousted a Social Democrat-led coalition last month, wants a “radical” changes to the island’s housing market. The government wants to write down household debt by as much as 20 percent and reduce the reliance on inflation-linked mortgages.

“It’s absolutely clear that the majority of inflation-linked loans have been provided by the Housing Finance Fund,” Hardardottir said. “Therefore we can expect that the Housing Finance Fund plays a significant role in how the environment will be into the future.”

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