Reykjavík Grapevine - 06.12.2013, Qupperneq 10

10The Reykjavík Grapevine Issue 18 — 2013
Index-linked loans, or Verðtryggð lán, as
they’re called, make up at least 85% of
the Icelandic mortgage market, accord-
ing to The Homes Association of Ice-
land. This association, which represents
about 10% of Iceland’s homeowners, is
currently suing bank lenders for provid-
ing misinformation about the benefits
of these loans. It also contends that just
as foreign currency loans were deemed
illegal in 2010, index-linked loans are in
violation of European Economic Area
agreements, which ban “unfair terms in
consumer contracts.”
Given that Prime Minister Sigmun-
dur Davíð has been an outspoken critic of
loan indexation—and organised much of
his election campaign around promises
of mortgage reform and debt relief—you
might expect this lawsuit to have the gov-
ernment’s full and vocal support. The re-
ality, however, is very different.
Index-Linked Mortgages:
A (not so) short explanation
While index-linked loans are all too com-
mon in Iceland, they are dramatically
different from the loans most commonly
available to homeowners in other coun-
tries. They therefore deserve some expla-
nation, although it is difficult to do this
without a detailed discussion of Iceland’s
longstanding problems with currency
devaluation, hyperinflation, monetary
expansion, and borrowing practices.
However, the shortest and simplest expla-
nation (still neither all that short nor that
simple) is as follows:
Index-linked loans are negatively
amortized, which means that they are
structured in order to have extremely
low initial payments. This sounds—and
looks—like good news for borrowers,
but it actually means that monthly repay-
ments are not enough to cover the interest
that is accruing, let alone the loan princi-
pal. So, even as you are making monthly
payments on your loan, the amount you
owe is actually increasing—drastically.
To make matters worse, in Iceland, on
top of a base fixed interest rate, the prin-
cipal of an index-linked loan is directly
connected to the Consumer Price Infla-
tion Index, and the repayment schedule
is most often set to 40 years, versus say 25
years in the US. In a country with a his-
tory of hyperinflation, this is disastrous.
To illustrate this more concretely, take
an example offered by Vilhjálmur Bjarna-
son, the chair of the Homes Association.
When researching home loans available
to him in 2005, Vilhjálmur looked at an
index-linked mortgage. The loan he want-
ed was for 26 million ISK with a 4.15%
fixed interest rate. Estimating for 3.5%
inflation in the coming years, he found
that under the terms of the index-linked
loan, he would eventually be paying 120
million ISK back to the bank. In reality,
however, Iceland has had 8–9% inflation
over the last eight years. So had he taken
a loan of 26 million ISK in 2005, Vilhjál-
mur’s loan principal would have mush-
roomed to a total of 560 million ISK.
“For people from other countries, it’s
very difficult to understand these loans,”
he says. “They say, why did you let the
government and the bank rob you every
day for 30 years?”
Tilting at foreclosures
For three years, Vilhjálmur has dedicated
himself to fighting for loan and mortgage
reform in Iceland. He gets no salary for
his work, although he works full time and
has four children at home. He works out
of what used to be his office when he was
a real estate agent, a profession he worked
in for 20 years.
“The main reason I got into this,” Vil-
hjálmur explains, “is because I had been
advising so many people to take foreign
currency loans.”
Vilhjálmur himself opted for one of
the now-illegal foreign currency loans for
his home in 2005, and lost his home in
a foreclosure sale after the crash. Under
current Icelandic law, even if the courts
determine that the conditions of a loan
agreement were illegal, individuals who
have already gone bankrupt and lost their
homes cannot recover any of their assets.
So despite the fact that the loan, which
drove his family into bankruptcy has now
been determined to be illegal, there is no
way for Vilhjálmur and his wife to recover
their property.
After the crash, it was deemed advis-
able to transfer these loans into Icelan-
dic index-linked loans, but despite the
fact that their legality is also being chal-
lenged, the banks continue to foreclose
on families who are defaulting on their
loan payments.
“One of the things I have been work-
ing on,” he says, “is that you should be
able to get your house and your collateral
back. If you go bankrupt, there should be
a special loan officer who then takes over
your property, but does not immediately
sell it. This is an issue that the govern-
ment never talks about. They just talk
about what will happen to people after
foreclosure. But then you are accepting
the foreclosures, not stopping them.”
Vilhjálmur is frequently in contact
with members of parliament, present-
ing the Homes Association’s case, and
requesting rectification of current mort-
gage and borrowing laws. One of the indi-
viduals he regularly approaches about this
matter is Minister of the Interior Hanna
Birna Kristjánsdóttir. He happened to
have a meeting already scheduled with
her the week that the 154 families had
their homes put up for sale. Following this
meeting, Vilhjálmur says, Hanna Birna
made a statement to the press, saying
that loan providers’ constitutional rights
could not be overturned, and moreover,
that in consideration for the individu-
als who have already lost their homes, it
would be immoral to change the foreclo-
sure process now.
“It’s as if you have an open mine
shaft,” Vilhjálmur says, “but you decide
to leave it open out of respect for the peo-
ple who have already fallen down there.”
He wonders about Hanna Birna’s
position. “Why is she so aggressive in
defending the banks? Why is she not de-
fending our homes? She is our minister
and the constitution is for the people, not
for companies. If I could understand her
reasoning, I could fight against it. Right
now, I’m like Don Quixote.”
For the greater good
According to Vilhjálmur, it has actually
been extremely difficult to get any public
comment whatsoever from a government
official on these matters. Most often, his
presentations and petitions are met with
nearly unilateral stonewalling. “It is like
fighting an invisible foe,” he says. “No one
is really opposing me—they just aren’t do-
ing anything about it.”
But then this also begs the question of
where the public stands on the matter—
and just where are the individuals who
have lost their homes?
According to the Homes Association,
15% of registered voters signed a petition
for the abolishment of index-linked loans,
and they say that polls have indicated that
as much as 80% of the Icelandic public
supports such reform. And there have
been sporadic news reports and testi-
monials from Icelanders who are facing
foreclosures. But there is also indication
of a growing despondency among those at
risk of mortgage default.
Vilhjálmur and the Homes Asso-
ciation offer their advice and support to
homeowners facing foreclosure, and will
accompany them to the hearings where
their situations are reviewed. In the case
of the 154 families who had their homes
put up for auction in October, however,
only one individual came to the Homes
Association and requested assistance. He
says that none of the other families even
attended the hearings in which their as-
sets were seized.
“We are trying to tell people: ‘you have
to defend yourselves, you have to do some-
thing,’” he says. “It has been five years
[since the crash], and people are just...seri-
ously, they are sleeping. But we shouldn’t
have to do this—the government should
have done it.”
Should the court rule in favour of
the Homes Association, and deem
index-linked loans—like the foreign
currency loans before them—illegal,
the hope is that there would be a sub-
stantial basis for reforming mortgage
and foreclosure practices in Iceland. If,
on the other hand, the Homes Associa-
tion does not win their case in Iceland,
Vilhjálmur says that they have no in-
tention of dropping the matter. Rather,
they will take the issue to the European
Free Trade Association court, as Iceland
is an EFTA member. “What is illegal, is
illegal,” he says. “We will never stop.”
Turn the page to read a related piece about
the government's recently announced debt
relief measure for households.
During a single week in early October, 154 Icelandic families quietly defaulted
on their mortgages and had their homes put up for forced state auctions, or fore-
closure sales. They aren’t the first families to be threatened with the loss of their
homes this year, and based on current trends, they won’t be the last. Rather, these
families are part of a steadily increasing number of Icelanders whose bankruptcy
is precipitated by compounding loan interest and skyrocketing principals, victims
of what MIT graduate and researcher Dr. Jacky Mallet referred to in this paper as
“the most unique instrument of financial self-destruction over the last 30 years.”
Shadow Boxing With
The Banks
Iceland’s Homes Association Fights
For Mortgage Reform
— By Larissa Kyzer
Economics | Housing
“So even as you are mak-
ing monthly payments
on your loan, the amount
you owe is actually in-
creasing—drastically.”
The Icelandic Homes Association has a wide range of English-language resources on its website
www.heimilin.is. For more information on Iceland’s Index-Linked Mortgages, see Dr. Jacky Mallet’s April
2012 Grapevine article, “Robbery By Math.”