Biggest Icelandic Mortgage Bank to Be Wound Down Amid Losses

Iceland’s government proposed disbanding the Housing Financing Fund, the nation’s largest mortgage provider, as the lender struggles to make a profit amid loan losses and competition from commercial banks.

The nation will wind down the operations over the next 30 years and continue to service the lender’s 480 billion kronur ($4.29 billion) in bonds, according to a government plan outlined yesterday in Reykjavik.

Legislation to push through the changes will be introduced in parliament this fall, allowing for the suspension of HFF’s daily operations. The government is seeking to set up a system that resembles Denmark’s mortgage bond market and introduce a new housing agency that won’t enjoy a state guarantee.

“Now that these proposals have been put forth we can take the next steps, continue working on them, put forth the bills and adopt the new housing system,” Welfare and Housing Minister Eyglo Hardardottir said in an interview in Reykjavik yesterday. “The Treasury’s state guarantee on HFF’s outstanding debt obligation is very clear. Both the finance minister and I have confirmed the state guarantee repeatedly and that stands.”

HFF has been on the brink of insolvency as it loses market share and households struggle to repay loans in the aftermath of the island’s 2008 economic collapse. The lender can only offer inflation-linked loans, which are losing to regular mortgages. HFF lost 4.4 billion kronur last year, and its equity ratio was 3.4 percent, below the 5 percent regulatory minimum.

Yields Fall

Yields on HFF’s benchmark bonds maturing in 2024, 2034 and 2044 slid by 10 basis points to 18 points, according to asset manager GAMMA.

“It seems like the announcement yesterday has removed a lot of the uncertainties regarding HFF’s bonds,” Valdimar Armann, an economist at Reykjavik-based GAMMA, said in a telephone interview.

Hardardottir expects the plan to disband HFF will garner the necessary support in parliament. The minister’s new system anticipates that future mortgages will not be linked to inflation. HFF’s borrowers will continue to be serviced by a new housing institute or another body enlisted for the task.

Seen Challenging

“These proposals are pretty good and I fully agree with disbanding HFF,” Asgeir Jonsson, an economist at GAMMA, said in a telephone interview. “So far there aren’t many suggestions as to how they will be implemented. In regards to many of the structural changes to the financial markets, implementation will be challenging, to say the least.”

Trading in HFF bonds was suspended yesterday by the Finance regular pending the announcement.

The government had also proposed a plan to reduce household debt by as much as 150 billion kronur, in part by raising taxes on banks and offering tax incentives to homeowners. Homeowners have also seen some relief after central bank currency interventions helped bring inflation below 3 percent, from a peak of 19 percent in 2009.

While Iceland has struggled to lift capital controls in place since its three largest banks collapsed in 2008, debt relief for consumers has helped propel a recovery.

After completing the 33-month International Monetary Fund program in August 2011, Iceland is outgrowing much of Europe as it recovers from its recession. The economy is seen expanding 2.6 percent this year and 3.7 percent in 2015, the central bank forecast in March. Sedlabanki has kept its benchmark rate unchanged at 6 percent since November 2012 as the stronger krona pushed inflation below the bank’s 2.5 percent target.

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