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Fri Apr 13, 2012, 01:52 PM

 

Iceland forgives mortgage debt?

Posted in many places on the web. IMF even recommended it. Big news if true.

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Reply Iceland forgives mortgage debt? (Original post)
RegieRocker Apr 2012 OP
muriel_volestrangler Apr 2012 #1

Response to RegieRocker (Original post)

Sat Apr 14, 2012, 10:47 AM

1. It's complicated, but the main part is reducing underwater mortgages to 110% of the house value

It's not 'news' in the sense of a new decision in the past few days; but the IMF release its World Economic Outlook a few days ago, and wrote about it there - one or two media outlets noticed, since it was mentioned in the press release. Here's a part of the report:

Fast-track write-downs: The final pillar, erected
in December 2010, was a government-fostered
agreement by lenders on relatively simple rules
for writing down deeply underwater mortgages to
110 percent of pledgeable assets. This agreement
removed households’ incentive to hold back in
the hope of a better deal later on by specifying
the dates on which the mortgage and the property
would be valued and by specifying the date
on which the offer would expire. The fast-track
write-downs have reduced more debt and reached
more households than all the other programs.
As of January 31, 2012, close to 15 percent of
households with mortgages have benefited from
the fast-track write-downs, compared with fewer
than 6 percent who have used or are using the
sector agreement and the DO. That said, the
case-by-case approaches may be reaching a larger
number of households with high debt service
ratios since only about a quarter of the households
benefiting from the fast-track write-downs
were in this category (Ólafsson and Vignisdóttir,
2012).

Outcomes and Lessons
While the jury is still out on Iceland’s approach
to household debt, a number of conclusions can
already be drawn. First, measures with simple
eligibility criteria, such as write-downs of deeply
underwater mortgages, can provide quick relief
with rough-hewn targeting. Second, case-by-case
out-of-court frameworks can help bail out households
with complex problems faster than the courts.
However, these frameworks are also slow: only
35 percent of the applications received had been
processed by the end of January 2012. In part this
is because key concepts (such as “capacity to repay”)
were not defined precisely. But it is also because
the legislation and the sector agreement leave more
to be decided on the basis of individual circumstances
than is consistent with the fast-track objective.
Finally, in the same vein, the more complex
structure of the DO approach contributes to long
processing periods.

There appears to be a trade-off between speedy
resolution and fine-tuning debt relief in order to
protect property rights and reduce moral hazard.
One way to minimize this trade-off is through the
use of parallel frameworks—general measures for
severe cases in which write-downs appear inevitable
and case-by-case measures for more complex cases.
Indeed the authorities’ decision to complement
case-by-case frameworks with fast-track measures for
deeply underwater mortgages is a step in the right
direction.

http://www.imf.org/external/pubs/ft/weo/2012/01/pdf/c3.pdf


What complicated Iceland's mortgages a lot was that many were denominated in a foreign currency (typically Euros), against which the Icelandic krona plummeted in the financial crash, making them unaffordable; and many of the rest had interest rates linked to the inflation rate - which rose sharply, because a lot of Icelandic goods are imported, again making the mortgages unaffordable.

Here's a Bloomberg article from a couple of months ago: http://www.bloomberg.com/news/2012-02-20/icelandic-anger-brings-record-debt-relief-in-best-crisis-recovery-story.html

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