Iceland to Relax Grip on Mortgage Market Following ESA Criticism

Iceland plans to scale back the role of the state-backed Housing Financing Fund in the nation’s mortgage market following criticism from the European Free Trade Association’s Surveillance Authority.

“We’re getting a very clear message from ESA that they want the state’s participation in the housing market to be more limited than it has been in the past,” Housing Minister Eyglo Hardardottir said in an interview. The government will “tread slowly” to avoid upsetting the housing market, she said.

The government has yet to settle on a plan to keep HFF afloat as the lender fights insolvency. The company, which only offers mortgages indexed to the consumer price index, has lost money since commercial banks started competing on regular mortgages. Inflation-linked mortgages proved toxic for borrowers after Iceland’s 2008 crisis, which triggered a krona sell-off and sent inflation as high as 19 percent a year later.

Landsbankinn hf, Iceland’s largest lender, estimated in June it may cost the Treasury 100 billion kronur ($825 million) to save HFF from bankruptcy. Iceland’s financial regulator last month said the lender’s business model won’t be able to withstand continued losses over time.

“It remains to be seen how much money needs to be injected into HFF,” Hardardottir said in the Nov. 14 interview.

‘Weakest Link’

The government said last month HFF is “its weakest link” and estimated it will need to spend 9 billion kronur through 2015 to keep the lender afloat. That’s on top of 46 billion kronur already injected into HFF since 2009.

HFF’s outstanding bonds are worth 490 billion kronur, which is guaranteed by Iceland’s Treasury. Of the bank’s household loans, 11.8 percent were in default, with an underlying value of 77.1 billion kronur, HFF said in an October monthly report.

The lender’s capital ratio fell to 2.5 percent of its risk-weighted assets at the end of June, based on a loan portfolio of 777 billion kronur. That’s half the requirement set by Iceland’s Financial Supervisory Authority.

“In dealing with the problems of HFF we have to address these matters, which aren’t easy and there are no quick-fix solutions available,” said Hardardottir. “Unfortunately we can’t just snap our fingers and everything is back to normal.”

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