For international readers the following information package is provided in english, with the intent of giving an overview of the association’s activities with regards to issues of mortgage and consumer debt illegitimacy.

Since the association was established in 2009, one of it’s key objectives has been to push for a judicial review of the legal standing and rights of homes and homeowner’s experiencing financial difficulties in the aftermath of the financial crisis of 2008 and onwards. Since a large majority of Icelandic homes are self-owned and often financed by mortgage, a considerable share of attention has been focused on issues relating to mortgages and consumer finances in general.

Partial succes in this regard was made in 2010 when the Supreme Court of Iceland ruled that it was illegal to link the value of loans to exchange rates of foreign currencies. This and other subsequent court rulings have led to a significant debt reduction and compensation for consumers with this type of loan contract, which until then constituted a share of over 10% in the mortgage market. Similar terms were also widespread in automobile financing schemes. Because of the sharp devaluation of the Icelandic currency in 2008 and 2009 foreign exchange linked loans experienced a sharp rise in krona terms, causing a severe strain on many households. However, since the ruling, many consumers have had their debt reduced or recieved compensation.

Conversely a large majority of Icelandic home owners or over 80% have mortgage debt in Icelandic currency, tied to the rate of domestic inflation. This type of inflation linked mortgage contract is the most widespread in Iceland but quite uncommon as far as the rest of the world is concerned. Because of high and constantly rising inflation in the years leading up to the crisis of 2008, these loans also did experience a sharp expansions and rising payment burden, imposing severe financial strains on a significan portion of Icelandic homes.

The legality issue has also been raised with regards to inflation linked loans. During the time since at least 2011, The Homes Association has been involved with extensive research on this issue from the perspective of legitimacy, with specific emphasis on consumer protection rules. The regulatory framework for financial consumer protection in Iceland is largely based on implementation of rules that the Icelandic authorities have since 1993 been under obligation to adopt into Icelandic law according to The Agreement on the European Economic Area.

On the basis of this research, a case has been prepared with the objective of testing the legitimacy of inflation indexed mortgages and similar cases have been prepared for other types of consumer loans. This judicial review has now been underway for some time, resulting in several cases that have been started in the district courts of Iceland. These cases are expected to enter proceedings early in 2015, and a subsequent appeal process to the Supreme Court may be expected to extend the legal procedures until later that year. Under these circumstances it is to early to make strong assumptions. However an advisory opinion of the EFTA-court in november 2014 indicates that there is at least reasonable doubt, which must now be resolved by the domestic courts.

The Homes Association, Iceland 2015

[About financial indexation]

[Financial indexation resources]

...and implications for the Icelandic mortgage market.

Financial indexation is the practice of linking the value of a financial obligation or contract to a variable index rate that may fluctuate over time. Common types of such rates used in contracts include stock market indices such as the Dow Jones Industrial Average which measure the market value of a set of underlying stocks. Another type of index is the London Interbank Offered Rate which measures average short-term interest rates being offered by members of the British Bankers' Association to each other on a given day, or at least whatever rates they might report as such. Yet another type of index might measure the price of a commodity such as oil, gold or the exchange rate of a foreign currency or even a basket of currencies and commodities which fluctuates according to the underlying market conditions. Financial contracts that derive their price from any such variable index rates are generally known as derivatives and are sometimes combined with loan agreements to form even more complex instruments which are the subject of structured finance theory.

Iceland has a relatively long history of widespread financial indexation and as it turns out, most household mortgages are not really what most other countries would recognize as such. The most common type of mortgage loan in Iceland is actually more like the complex derivative type of financial instrument, a loan for a term of 40 years at a fixed rate of interest combined with an inflation derivative and secured by residential real estate collateral. This kind of financial contract is what's known as an index-linked loan, which Icelandic law requires to be linked to the official consumer price index, hence the term CPI-indexation. While rampant inflation would ordinarily cause inflation linked mortgage payments to rise sharply, these loans have additionally been engineered with graduating payments and negative amortization schedules, leading to compounding interest accrual and in the long run exponential growth of monthly payments. The ever increasing costs inevitably lead to a variety of economic calamities and human tragedy.

Since originally introduced, such contracts have become so widespread as to currently represent 85% of the Icelandic mortgage market or around 75% of GDP, one third being accumulated cost of inflation or around 25% of GDP. Through the years this risk transfer mechanism has imposed enormous liabilities on the homes which for many has turned out to be an impossible burden to bear, resulting in thousands of families defaulting on their payments and facing foreclosure. Additionally in the years 2005-2008 some 10-15% of the market moved into loans linked to foreign exchange rates, which has since then doubled in price forcing many families into bankruptcy.

These lending practices have repeatedly sparked protests, even riots in the streets, and 15% of registered voters signed a petition for abolishment but have gone ignored by authorities despite polls indicating 80% support of the public at large. In 2010 a supreme court ruling the FX-indexation turned out to be illegal since an amendment was made to the law in 2001. As it turns out less than a year earlier in 2000 an amendment was also made to the law regarding consumer credit, including residential mortgages. Latest research seems to indicate this amendment may in fact also have outlawed the aforementioned usurious CPI-indexation of consumer credit. The Homes Association has prepared a case which has now been filed in court to have this conundrum resolved once and for all.

The Central bank of Iceland on indexation:

Annual report 1992

Page 32: "Third, the indexation of financial assets as well as higher and positive interest rates have had the impact that household debt has accumulated instead of being eroded through inflation."

Working paper no. 59 - Households' position in the financial crisis in Iceland

Page 10: "Another salient (and more problematic) feature distinguishing Icelandic households from those in many other advanced countries is the composition of their liabilities. The majority of mortgages are indexed to consumer price inflation with fixed real interest rates, so that households are insulated from fluctuations in nominal interest rates to a large extent but are instead exposed to increases in nominal debt levels when inflation rises."

Page 44: "Icelandic households are relatively more likely to end up in negative housing equity than households in many other countries due to the characteristics of Icelandic mortgage contracts. The first factor is the extensive indexation to consumer price inflation and exchange rate developments, which exposes the debt position to exchange rate and inflation risks."

Page 46: "The incidence of negative housing equity increased considerably in the run-up to and aftermath of the crisis, as house prices declined and mortgage debt levels rose due to the currency depreciation and accompanying inflation on top of the rapid debt accumulation. The share of households with negative housing equity increased gradually from about 6 to 13 per cent from January 2007 to April 2008 and then rose at a more rapid pace thereafter. Almost 22 per cent of indebted homeowners were underwater at the time of the banking sector collapse, and by February 2009, when the currency had more or less stabilised, it had reached 28 per cent. The inflation spike and further house price declines made the share in negative housing equity continue to escalate even further (see Figures 4.6a and 4.6b). It peaked at almost 39 per cent before the court ruling and new legislation on foreign-denominated loans reduced it slightly, to 37 per cent. This corresponds to an increase from roughly 4,000 households in negative housing equity at the start of the period to roughly 26,000 households by December 2010. Hence, roughly 27 per cent of all homeowners (indebted and debt-free) were in negative housing equity at the end of the four-year period."

The Incredible Loan Machine

An example from a model constructed in 2013 by The Homes Association, showing the projected development and cost of a typical inflation index-linked mortgage over time, compared with other types of loans and specifically with nominal rate loans which are ordinary for most other countries. The example is calculated given prevailing inflation of 4,83% in april 2013, but as shown the historical average is as high as 5,84%.

The problem only gets worse by refinancing inflation indexed loans, because that locks the accumulated undpaid indexation component into a new starting capital amount. This amount then starts rising even more because of price inflation which subsequently compounds on this new and higher loan capital. The refinancing rate of mortgage loans in Iceland has been estimated at 8 years on average. As shown here, the inevitable result is that under such conditions, the average mortgage loan will always keep rising and can in fact never be repaid:

The following is a list of demands along with extensive proposals for debt relief programs, supported by over 37.000 signatures on a petition maintained by The Homes Association during a six month period in 2011. Petition copies were then delivered to both the prime minister as well as the president of Iceland. Also supporting the demands were opinion polls showing up to 80% nationwide acceptance. The suggestion of residential debt relief programs was then pressured upon political leaders and committees, and has turned out to become the main issue of the 2013 parliament election debates, as declared by most of the major candidates themselves.

A petition from The Icelandic Homes Coalition

In the name of the public interest we, the undersigned, demand a comprehensive and fair revaluation of mutated home loans in Iceland, and for indexation on loans to individuals to be abolished.

If the government has not responded to this demand by January 1st 2012 my signature equals a demand for a referendum on this claim.

Consumer Price indexed loans:  Accumulated indexation costs from January 1st 2008 should be revalued according to the upper margin of the inflation target of the Central Bank of Iceland, or a maximum of 4% per year. 

Exchange-rate indexed loans:  The best outcome for the consumer should prevail. The same method of reevalutation as with price indexed loans should apply, or as otherwise decided by a court of law depending on which outcome favours the consumer. Any remaining uncertainty regarding retroactive reevalutation of debt burden should be explicitly removed, to make perfectly clear that such action against consumer rights, should be absolutely BANNED.

HOW? – A few options to correct mutated loans and to abolish indexation

The Homes Association has, for the sake of public interest, launched a petition to support its demand for the revaluation of mutated loans and abolition of inflation indexing of mortgages.

Parallel to any selected method of revaluation, independent of which method would be chosen,  all creditors should be required to offer refinancing of mortgages with a fixed interest rate over at least the next 3 years. Stamp duties(Loan registration fees) should be abolished and the levy of special prepayment fees should be banned. At the same time a ceiling on interest-rates should be implemented for both fixed and variable interest rates. Icelandic households should thereby be able to change their old consumer price indexed mortgages without penalty in order to ease the transition into a new mortgage system.

The Icelandic Homeowners Coalition reiterates that where there is will there is a way. Now, the most important thing is for the government and parliament to take a stand of solidarity with Icelandic households and provide the political leadership necessary to move forward and out of this cul-de-sac of the nations current mortgage situation.

A simple explanation of the systemic problems of the Icelandic economy

The Icelandic currency, the Crown, is one of the victims of the business model used prior to the collapse of the financial system. Through market manipulation prevalent in the banking system and by individuals in key positions in Icelandic business , both  on the stock market and bond market, with loyal assistance of the money -printing-effect of indexation and the monetary policy of The Central Bank of Iceland, the money supply multiplied in the years 2001-2008.

In retrospect we can clearly see this increase was without base and it can further be argued that the individuals in question were in effect engaged in counterfeiting money and getting away with it. Worthless papers were given monetary value through so-called “repurchase agreements” between the banks and The Central Bank of Iceland. In that way the banks and their favored customers, who were usually among the owners of the banks, were able to exchange fake crowns for real crowns.

Currently these ,,real” crowns are deposited with The Central Bank of Iceland and capital owners in the form of off-shore crowns and bonds. Capital owners are now waiting for a chance to exchange these off-shore crowns into foreign currency. The Central Bank of Iceland has developed a plan to loosen the current currency controls, but the primary obstacle is the large amount of crowns in circulation, as the owners of the offshore crowns are expected to want to convert these crowns into hard currency.

The Central Bank of Iceland has promoted two possible methods of loosening the tension caused by the large amounts of crowns in circulation. Both options are based on the premise that different exchange rates would be used for crowns owned by capital owners that want to exchange them. First option is that foreign currency would be sold at an auction, and second option that all outflow of foreign currency would be taxed, in order to ensure that the real exchange rate of currency is as close to the off-shore listing, rather than the official registered exchange rate of The Central Bank of Iceland. So far, only the first option has been exercised.

It is clear that the methodology proposed by the Central Bank will take a very long time, as evidenced by the fact that currency controls are now expected to be in place until at least 2015. Ultimately, this methodology puts capital owners in the driver’s seat regarding the duration of abolition of capital controls. The main drawback is that it  does not reduce the quantity of money in circulation.

Having far too many crowns in circulation means that  the monetary value of the currency has permanently been devalued and the underlying  inflation pressure creates a significant risk for another attack on the finances of Icelandic homes when these crowns, ultimately not linked to any underlying production value, go into circulation as planned by the Central Bank of Iceland. In addition, it is to be expected that the main buyers of these crowns will be the Icelandic pension funds.

Currency reform

This pertains that monetary commitments in (Icelandic) crowns are converted into a new or different currency on a variable exchange rate with the intention of rebuilding the homes and the economic system. This would lead to an increased welfare in a radically transformed financial environment and would create an opportunity to correct the unfair confiscation of assets that has occurred.

Currency reform has proven itself to be successful when it comes to rebuilding societies that have suffered serious shock. Although the (Icelandic) situation may not be completely comparable to other countries where this method has been used, like Germany, it is the evaluation of the Icelandic Homes Coalition that this method is both simple and clever. It is probably no coincidence that Germany has used it three times, most recently when the Germany was unified in 1989.

The Icelandic Homes Coalition does not take a stand as to which currency should be chosen, that is a political question that the government has to answer. But a number of options have been floated, such as a new Icelandic crown, the Euro, the US Dollar, the Canadian Dollar, the Norwegian Crown or even a new joint Nordic Crown.

More on currency reform

To ensure that monetary policy is decided by the Icelandic nation itself, it is necessary to change currencies and convert to another currency under a variable exchange rate, depending on whether wages and minimum savings are in question or off shore crowns built on a false value.

The conversion should take no more than a few days and would speed up the reconstruction of society by many years. Simultaneously, while converting into a new currency the foreign exchange restrictions should be abolished and indexation on consumer credit  and mortgages prohibited, and subsequently a demand should be made for a responsible economic management. In this manner Iceland could once again regain control over its own economic and monetary affairs.

An operation of this type would be constructive whether the country joins the European Union or not, since it would support and speed up the process of the country to fulfil the Maastricht protocol for adopting the Euro; or if the nation decides not to join the EU, utilizing a currency that, unlike the present Crown, would be valid in international business. The Icelandic Homes Coalition does not take a stand as to which currency should be chosen, whether a new Icelandic Crown or something else.

In its simplest form the idea is that assets and liabilities are converted into a new currency on a variable rate of exchange. As an example, smaller amounts, like wages and bank accounts up to a certain amount could be converted on the rate (of exchange) of 1 against 1. In this manner 100 thousand in the old system would be equivalent to a 100 thousand in the new system.

Larger commitments, like home loans/mortgages, would be converted on a different rate (of exchange), for example 1 against 0,6-0,7 (the coefficient would be relative to accumulated inflation from 2008 which is now about 37% from January 1st 2008). Price entries of official registrations- , for example real estate registers on real estate evaluation and assessed value for fire insurance, should be converted on the exchange rate of 1 against 0,6-0,7. 20 million in the old system would thereby become 14 millions in the new system. By using this method a correction could be made for the high increase of inflation that took place because of the collapse (of the Icelandic financial market) and, simultaneously, abolish indexation with a fast and immediate operation. That is why the Icelandic Homes Coalition believes that currency reform would be viable.

The method of expropriation

With the so-called emergency law no. 125/2008 the Housing Financial Fund was given permission to buy mortgages from the banks and the minister expected to work out the execution of this step more specifically through specific regulations. Through minor changes to the current regulation the Housing Financial Fund could be made to expropriate all home loans of Icelanders, “since that trade would be made to guarantee the safety of loans on the real estate market and (to guarantee) the interest of borrowers” as stated in the 1st paragraph of the regulation no. 1081/ 2008 set by the Minister of Social Affairs at that time, Ms. Jóhanna Sigurðardóttir.

According to laws and regulations regarding property right this  kind of expropriation is permitted if it is thought to protect the public interest, however a fair price must be paid for the property. This method has the same difficulty as the so-called arbitration, proposed by the Consumer Spokesman, that it might not be simple to evaluate what would be considered a fair price, and thus to evaluate the cost of this method and its other economic consequences. On the other hand, both the Central Bank of Iceland and the Financial Supervisory Authority of Iceland have this year revealed data showing that loans lent out by the banking system to Icelandic homes were estimated just over half-price when transferred over to the new banks. Thereby we have a criteria for a fair payment for the expropriation.

When all mortgages of Icelanders would have been taken over by the Housing Financial Fund a leeway for written-down value would be increased because of a lower demand for equity ratio, and at the same time it would become less complicated to let the same thing be valid for everyone. The leeway for depreciation that can be found on the bonds portfolio could be utilized and passed on fully to the borrowers and distributed between them in a fair way.

Assessment of the cost of this operation indicates that it would almost cost the State nothing. If the leeway for general corrections that this would create is not enough for those individuals in most need, it might be a possibility to use it together with mixed solutions, for example those described in the method of taxes.

Correction of accumulated indexation

The Consumer Price Index should be lowered to 282 points, or to the value of January 2008. All deposits in banks, debentures and loan agreements would be converted according to this index and would have a fixed value until 2012. During the period of 2008-2012 a specific levy could be charged, as has been suggested by The Icelandic Homes Coalition, of 2,5-4% relative to the inflation target and the upper confidence limits of The Central Bank of Iceland.

Thereby Icelandic households would be protected against the inflation and at the same time a law would be passed with the purpose of making way for a new loan system. It should be noted that The Icelandic Homes Coalition believes  that indexation of loans without limitation goes against European directives and consumer laws concerning transparent negotiation, where the borrower should be able to figure out and calculate his commitment throughout the credit period. Consumer price indexed loans in their present form should therefore be abolished.

Parallel to the correction of index all creditors should have to offer refinancing of mortgages with a fixed interest rate for at least 3 years. Stamp duties should be abolished and a special prepayment fees banned. At the same time an interest-rate ceiling should be put on both fixed and variable interest rates. Icelandic homes could thereby change their old price indexed home loans into new loans without prepayment- or stamp duties in order to ease the transition into a new system of loans. This could be a very fast, efficient and inexpensive method since imputation/accounting systems of financial corporations already exist and therefore no new scales or tools would need to be introduced.

The Icelandic Homes Coalition believes that the stimulus to reduce inflation must come from the environment of the financial system. By not offering any consumer price indexed loans, and at the same time putting a ceiling/cap on interest rates, that stimulus would be completed.

A one-time corrective tax levy

The purpose of a mixed taxation for correction is to distribute the correction between the pension funds, the largest banks and owners of bank accounts/deposits. In order to serve this purpose a corrective tax would be used once. Thus a wealth tax would be put on bank accounts that exceed a certain amount and a correction tax would be put on banks and pension funds. It should be noted that by doing so wealthier individuals would not be taking on any burdens exceeding the wealth transfer towards them from Icelandic homes in the form of indexation during the economic depression. By using the method of a corrective tax this excess money would merely be paid back in the name of public interest, and in order to rebuild Icelandic homes and thereby the economic system.

Since the collapse of the economic system enormous amounts of assets in the electronic monetary system have been transferred from Icelandic households to capital owners (pension funds and owners of bank deposits) in the form of indexation on loans. Those who owned money either on bank accounts or as shares in money market funds were compensated far beyond obligation and legal authority. In that way the emergency law guaranteed bank deposits with interests and indexation, which far exceeds what was done in the case of Kaupthing Edge in Germany, where only the principal sum was guaranteed, to name only one example.

The Icelandic Homes Coalition believes this to be excessive charging of  indexation since the inflation has gone far above the upper confidence limits of the Central Bank of Iceland (4%), but accumulated inflation, compared to the cost-of-living index apart from housing,  from the year 2008 is about 34% when this is written.

According to data from the National Tax Administrator only 5% of the nation owned more than half of all bank balances at the end of 2009. 2,5% or 4.627 people owned 44% of all bank balances and thereof 9 individuals owned more than a billion Crowns. At the same time 95% of the nation owned 15 millions or less in bank deposit accounts. Those figures cover individuals, not corporations/companies.

The pension funds possess assets of about 600 billion in home loans and have absorbed about 140 billion in the form of indexation during this time. Statements from leaders of the pension funds imply that they do not consider unlimited indexation to be a taking of usury from the homes, and that they do not think they will be able to return a part of the indexation in the name of public interest and for the advantage of Icelandic homes.

The Icelandic Homes Coalition wants to remind the administrators of pension funds of the fact that Icelandic homes are overwhelmingly members of the pension funds and thereby their owners. A correction of this excessive taking of indexation does not have to lower the present payments (out of the pension funds), but it is well possible that the foundations and construction of the funds must be revised as well as their future payments (to members).

Thereby it is possible to use the rate of return from 10 years as a frame of reference in the calculation of payments, instead of using the rate of return from 3 years. The restructuring of the pension funds  would also have to take into account that they are  throughput pension funds as well as funded pension funds, not one or the other. The Icelandic Homes Coalition is not planning to solve completely the system of the pension funds, only to point to the fact that the system might have to be revised.

In recent years the banks have been offering consumer price indexed loans. According to information from The Central Bank of Iceland 30.4.2011 the collection of home loans (bonds) of Icelandic banks is now about 276 billion (the amount can be seen on charts on the bottom of the homepage in loans), but was previously about 600 billion. It is not superfluous to mention once again that this collection of mortgage bonds was transferred from the old banks with about 50% discount, which The Icelandic Homes Coalition beliefs should go onwards to the borrowers. It seems that the banks have not lowered the amount of these bonds in their bookings, even though The Central Bank of Iceland has done so. Therefore a corrective tax could be taken from these loans, to be used as a correction. The amount’s compound, as well as the decision of how much tax or transfer (and from whom) there would be, is always a political decision, as is the case with all the methods that would be chosen.

An new mortgage system - increased stability

The Icelandic Homes Coalition is proposing a new mortgage system that would be similar to that of the Nordic countries as those are countries that Iceland wants to compare to and resemble.

With the transfer into a mortgage system without any indexation the financial corporations become more active and responsible in creating an economic stability in Iceland. Under the current circumstances volatility, instability and debt-expansion of the economy can have a positive effect on the performance of financial corporations. It causes inflation, which leads to indexation on consumer price indexed mortgages - even more than the devaluation of the currency. With volatility and debt-expansion of the economy the financial corporations can guarantee themselves profit from their operations. This was shown in 2008, when profit of financial corporations seemed to be derived alternatively from the weakening/devaluation of the crown and the indexation on loan contracts.

The Icelandic Homes Coalition believes it to be very important that all of the main players in the economic system take part in keeping inflation down and ensure stability. It should be pointed out that the proposals of the Coalition would have no effect on the performance of financial corporations, given that inflation is lower than the ceiling put on interest rates. The proposals of the Icelandic Homes Coalition include an internal stimulus to maintain stability and low inflation. The Coalition believes that financial corporations and capital owners will find it advantageous to keep inflation down and thereby support a positive real return of their loans.

Demands of Hagsmunasamtök Heimilanna (The Homes Association) HH.

This list of demands is based on resolutions reached at nationwide meetings June 23rd 2009 by HH members when planning for mortgage strikes.

1. Mortgage loans with principal indexed to foreign currencies shall be brought to their original ISK principal value on the date of issue minus payments already made and interests recalculated.
2. Mortgage loans with inflation indexing of principal shall be adjusted so that they have a cap on inflation indexing at 4% from Jan. 1. 2008.
3. A new amendment be passed that insures that collection on defaulted loans can not lay claim beyond the mortgaged assets.
4. A new amendment stipulate that in the case of personal bankruptcy, the person is completely cleared of all prior financial obligations within five years and claims can't be reopened.
5. Inflation indexing of loans is a complex financial product lacking transparency. We demand that a timed plan be invoked to abolish inflation indexing of consumer loans be they mortgage loans or otherwise.

Iceland, June 23rd 2009.