Key covered role in Icelandic housing proposals

An Icelandic government-appointed committee has called for the establishment of specialised mortgage companies to finance mortgage lending via covered bonds, among other changes aimed at reforming the country’s housing system, according to Standard & Poor’s.

As previously reported, the committee was established last autumn by the minister of social affairs and housing, Eygló Harðardóttir (pictured), to look into possible changes to the country’s housing finance model.

Soffía Eydís Björgvinsdóttir, chair of the taskforce, presented the proposals to the minister at a press conference on 5 June. She previously told The CBR that adoption of a Danish-style system was under consideration.

According to Standard & Poor’s, the proposals put forward by the committee are for the state-owned Housing Financing Fund (HFF, or Íbúðalánasjóður), to cease lending and for its portfolio to be allowed to expire. A new state-owned housing loan company would be established in its place, but unlike HFF would not benefit from a state guarantee.

In addition, specialised mortgage companies should be established, which would only be permitted to grant mortgage loans and finance them through covered bond issuance.

S&P’s comments were made in connection with a downgrade on Tuesday of HFF, from BB to BB- to reflect the rating agency’s views that the institution’s public policy role has diminished following the committee’s proposals.

“We now assess HFF’s role for the government as important rather than very important, under our criteria for rating government-related entities (GREs),” it said. “Therefore, we believe there is a high likelihood — compared with extremely high previously — that the government of Iceland would provide timely and sufficient extraordinary support to HFF in the event of financial distress.”

The new state-owned housing loan company would operate on the same terms as the proposed specialised mortgage companies, according to S&P.

“The new proposals on the organisation of the housing system are likely to be considered in parliament in the coming months,” said the rating agency. “So far, the timeline for their implementation remains uncertain.

“We understand, however, that HFF is likely to continue extending some loans — especially to the residents of rural areas of Iceland — before the new specialised mortgage companies become operational.”

Under the existing housing finance system in Iceland, mortgage lending has predominantly been channelled through HFF, but it had to be bailed out in 2012 and has required further government support.

S&P said it understands the committee’s proposals to be aimed at addressing the need to limit persistent losses posted by HFF in recent years, and to promote the development of an active rental market.

“They also answer the requirements of the European Free Trade Association Surveillance Authority, which has on multiple occasions expressed concerns that some operations of HFF entail state aid and do not comply with the rules of the European Economic Area agreement, demanding changes to the scope of HFF’s operations,” added S&P.

Mortgage financing in Iceland is also provided by the country’s commercial banks, and, to a lesser extent, pension funds. Arion Bank and Íslandsbanki have sold covered bonds under covered bond legislation introduced in 2008 to refinance this, and there had also been structured covered bond issuance before the financial crisis.

Arion began issuing covered bonds in early 2012 shortly after Íslandsbanki sold the first covered bonds under the 2008 Icelandic legislation. Landsbankinn received a licence to issue covered bonds late last year.