Iceland Should Restructure Housing Finance Fund, IMF Says

Iceland’s government should restructure the state-backed mortgage provider Housing Finance Fund to protect the country against potential losses, the International Monetary Fund said.

The HFF’s “mandate and institutional set-up need to be reviewed, preferably by independent experts, to find a permanent and financially viable solution,” the IMF said in a report presented in Reykjavik today. The country’s Financial Supervisory Authority “should be closely involved, starting with a review of capital adequacy.”

Iceland’s government is struggling to find a solution for the HFF, which has about $4.2 billion in bonds outstanding. The lender is striving to escape insolvency as its inflation-linked home loans lose ground to regular mortgages sold by commercial banks. Iceland’s treasury may be on the hook for more than 100 billion kronur ($830 million) from financial difficulties at the country’s biggest mortgage provider, Landsbankinn hf said on June 12.

“We would recommend conducting a comprehensive review of how to find an economic and financially viable solution to HFF,” Daria Zakharova, IMF mission chief to Iceland, said in an interview today. “That would involve looking at the role of the HFF. Going forward, should it be involved in commercial mortgages or should its role maybe be narrowed to helping with social housing issues?”

Bondholder Flexibility

Finance Minister Bjarni Benediktsson last week called on HFF’s bondholders to show “flexibility” if the fund tries to negotiate new terms on its outstanding debts. Welfare Minister Eyglo Hardardottir, whose ministry oversees the HFF, said in an interview last month that she wants “radical” changes to the country’s housing market.

HFF had a capital adequacy ratio of 3.2 percent at the end of last year, compared with a 5 percent minimum requirement set by the regulator, the fund said in March. The Reykjavik-based lender said defaults on home loans decreased by 0.3 percent last month and 1.1 percent fewer corporate loans went into arrears, according to a monthly report. The underlying value of loans in default was 116.1 billion kronur, the lender said.

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