Did Iceland forgive the majority of its citizens’ mortgage debt?

An unbelievable story, the source of which appeared to be a single Spanish-language news broadcast, made the blogosphere rounds yesterday: Iceland is forgiving nearly all of its citizens’ mortgage debt!

According to the report, the government of Iceland “put politicians and bankers on the bench of the accused” in response to the public outcry after the near-collapse of Iceland’s banking system and an embarrassing bailout by the IMF in 2008.  The context of the report implies that the cancellation of debt (and, presumably, the forced disposal or write-off of mortgage-based bank assets by the government) was done as a sort of punishment for the irresponsible fiscal policies of the banks.  The report lauds the actions of the Iceland government as “a very different way from the one chosen by the rest of Europe to overcome the crisis.”

Hmmm … “different” for sure.  And mostly untrue.  Here’s a more accurate picture of Iceland’s debt restructuring program: “IMF Says Targeted Debt Reduction Policies Can Work

In the case of Iceland the situation was more difficult, due in part to the much bigger proportion of the population that was affected, and to the wide presence of foreign currency mortgages.

The government and the newly constructed Icelandic banks developed a template to be used in case by case restructuring discussions between borrowers and lenders. The templates facilitated substantial debt write-downs designed to align secured debt with the supporting collateral (i.e bring the loan into line with the value of the house) and align debt service with the ability to repay.

The IMF found that such case by case negotiations safeguard property rights and reduce moral hazard, but they take time. As of January of this year, only 35% of the case by case restructuring applications had been processed. To speed things up, Iceland has introduced a debt forgiveness plan which writes down deeply underwater mortgages to 110% of the households’ pledgeable assets.

It noted that only when a comprehensive framework was put in place and a clear expiration date for relief measures announced that debt write-downs finally took off. As of January 2012, 15 to 20% of all Icelandic mortgages have been or are in the process of being written down.

…which sounds a lot more reasonable and realistic than the Spanish language report, which appears to be highly inaccurate.  Even in a small nation like Iceland (320,000 citizens) the process of re-evaluating home values and restructuring mortgages to more closely match those values (along with the current financial situations of borrowers) is a slow and time consuming process.  And of course it would be an utter disaster if banks were forced to simply erase a significant portion of their assets, regardless of how well-intentioned the reasons were.  But it’s good that Iceland is making a serious attempt at helping honest borrowers keep their homes and pay back their mortgage loans.

It’s also reassuring to see that they’ve put the heads of both politicians and bankers on the chopping block, which is more than I can say for our own government.

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  • http://profile.yahoo.com/LIZ6PLCXHMWQZYOCCRW3PZSFE4 Robert England

    Thanks for clarifying this matter. As you note, many websites were trumping a mass forgiveness of mortgage debt.

  • http://www.wizbangblog.com Maggie Whitton

    It’s nice to know that some where common sense still works!

  • Guest

    In our “corporations are people” culture why not send some “corporations” to jail?

  • GarandFan

    “It’s also reassuring to see that they’ve put the heads of both politicians and bankers on the chopping block, which is more than I can say for our own government.”

    Hmmm….why do the names Barney Frank, Maxine Waters and Franklin Raines immediately jump to mind?

    • http://twitter.com/JoeCoe Joe Coe

      because you’re a partisan ass. The google is there to help you find out both sides played huge roles (along with their paymasters on wall street), so wise up. 

      • GarandFan

        Hey Dipshit, I merely mentioned three names that NEVER seem to come up.  It’s always GWB’s fault.  So go back and kiss your Obamassiah’s ass.

        • http://harry-canary.myopenid.com/ Harry Canary

          Actually it started with the worthless second rate movie actor pretend president ronnie reagan.  And the spoiled frat boy, bushjunior, did a whole bunch of damage to this country.  You just can’t admit that your wrong wingnut CONservative ideas were again proven to be trash and have wrecked the economy……again.

          • GarandFan

            That’s okay Harry, I didn’t expect an INTELLIGENT response.  Why not go back to Huffpo were you’ll be among like ignorant friends.

          • RightThinkingOne

            On the contrary: Our economy improved and grew into the powerhouse for which it is destined.

          • AsH Watchoutforthattree

            Be careful using terms like “Destined”. The reason this nation became a powerhouse is easily explained. Folks from Europe, who had to *really* work to survive and live, did so with very little. They came to a land that was very rich in fertile soil, natural resources, and space to live and work. It was a natural progression that these people would do amazing things very quickly, and what they [Immigrants!] created was handed to the following generations, each successive one having to work less and less to enjoy that bounty. Now, we are reaching the point where we’ve used up the hard fought benefits of those previous generations, and a lot of us don’t know what it means to really work anymore.

          • RightThinkingOne

            Excellent post.

            Just one point that may or may not be in agreement with you, however: Many immigrants who come to America now know what it means to really work, even though there is not the available space and land that existed in our past. In fact, immigrants to places like overcrowded Hong Kong do well, too.

    • http://pulse.yahoo.com/_OS6VICNRTQESBGKPRCSJO6ZBXY Linda

      Don’t forget Hillary and Frank Dodd

  • Commander_Chico

    The Icelanders told their gambling banks that they had to take their own losses, instead of bailing them out like the USA and the EU did.  Those commie Scandanavians!

  • http://profile.yahoo.com/H2CA6P6DHSCNYSZE24O57VTFTU Neighbor Dave

    Hope this becomes contagious in the states soon…

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  • http://www.facebook.com/people/Greg-Porter/673046196 Greg Porter

    how do people stick up for stupid  s@#$? arguing the illusion of a both sides.
    stupid s@#$ is rubbing off on you guys! better pay some attention and put the joke map down and embrace that man you’re calling a fool, and then, look up to the top of the hole you’ve been sharing. 
    republican democrat conservative liberal = stickers & labels for the same poison.
    shame on the people who turn on each other as a form of relief from their true oppressor.

    • http://wizbangblog.com/author/rodney-graves/ Rodney G. Graves

      Duly noted, appropriately filed.

  • http://www.facebook.com/profile.php?id=640762733 Ralf Amok
  • http://www.facebook.com/mr.lukekelly Luke Kelly

    So, to rephrase
    – 35% of Icelandic mortages had been reassessed, and over half of them (15-20%
    of all mortgages) have been written down. So they’re currently on course for
    cancelling the majority of mortgage debt. Which means the answer to the
    question “Did Iceland forgive the majority of its citizens’ mortgage
    debt?” is…. yes! Or did I miss something?

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  • http://www.facebook.com/jrfibonacci J R Fibonacci Hunn

    Many people forecast the real estate decline, including me.


    I expect the continuing wave of credit deflation to resolve toward a single bureaucratic agency “servicing” all of the loans, with governments (courts) having practical and functional control of real estate markets, similar to the system of the USSR. Since the financial institutions are insolvent and owned by the central banks, all assets of the institutions will go to the central banks. Since the financial institutions are soon to own 100% of the equity on a huge amount of real estate (through a continuing deflation), there will arise the practical issue of how to “socialize” the private ownership of “free and clear” real estate. Should be interesting.

    More from me:

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