Iceland Mulls Danish Mortgage Model Undaunted by Market’s Woes

Iceland is contemplating setting up a system that resembles Denmark’s mortgage market even as financial regulators in Copenhagen seek ways to crack down on lending policies amid soaring household debt loads.

Setting up a Danish-styled mortgage market is among the proposals that will be introduced next month by a taskforce appointed by Iceland Welfare Minister Eyglo Hardardottir.

“Our work and consultation with parties of interest and the reports of analysts have shown that many are looking toward a housing system that resembles the Danish” model, said Soffia Eydis Bjorgvinsdottir, chairman of the group. “Adopting a Danish housing system can’t happen overnight. But there are indications today, such as with the banks issuing covered bonds, that there are many fundamental aspects in the current system which can be customized,” she said.

Since the nation’s 2008 banking failure, Iceland has been seeking ways to support the Housing Financing Fund, its state-run mortgage bank. HFF, which has 487.6 billion kronur in outstanding bonds that are guaranteed by the Treasury, has been on the brink of insolvency as it loses market share and households struggle to repay loans. The lender can only offer inflation-linked loans, which are losing to regular mortgages.

Affordable Way

The taskforce was directed to “seek out ways to have the system sustainable and allow the state to participate in the market in a social capacity, in an affordable way,” she said. “It’s clear that the state will have to continue playing a role regarding that henceforth, in one way or another.”

The government announced in November it would be reduce household debt by 150 billion kronur ($1.28 billion), in part by raising taxes on banks and offering tax breaks for homeowners. The move, which was a pre-election promise, risks backfiring because of the burden it will place on HFF’s balance sheet, according to the International Monetary Fund.

Of HFF’s household loans, 10.4 percent are in default, with an underlying value of 67.3 billion kronur, according to a report published in January. Landsbankinn hf, Iceland’s largest lender, estimated in June it may cost the Treasury 100 billion kronur to save HFF from bankruptcy.

Denmark is reining in its $550 billion home loan industry, the world’s biggest per capita, after cheap credit fed a borrowing spree. Danes owe their creditors about 321 percent of disposable incomes, a world record and a level that warrants a policy response, the Organization for Economic Cooperation and Development said in November. That compares with Icelanders’ debt of 239 percent of disposable income.

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