Memorandum of Understanding on measures to address household debt problems
This autumn, the Government initiated a special inquiry into the payment and debt problems of households, focusing on the use of the measures offered and an assessment of other options under discussion. This inquiry was conducted in co-operation with all affected interested parties. The conclusion of this work has been introduced in a report of the expert working group. Discussions have also been conducted with financial undertakings and pension funds. This Memorandum of Understanding is the result of these discussions.
All parties agree that a range of measures must be implemented to respond to the household debt problems. The problems are urgent, and the situation of households in distress must be met swiftly. One of the most important parts of this MOU relates to measures directed at households in debt distress and considerable arrears. Measures will also be directed at households with over-collateralized properties. A new kind of interest tax subsidy will benefit mortgage holders in general. The parties agree that with these actions the problem of household debt is dealt with as appropriately as possible. It is of importance that the measures be implemented as quickly as possible, as no further measures are to be expected.
The measures listed in points 1 and 2 below are based on the authorisation for lenders under Act no. 107/2009 regarding measures to assist individuals, households and businesses.
1. Measures to benefit over-mortgaged households
A. Alignment of mortgages to property value and debt service capacity
In order to accelerate the inevitable adjustment of existing mortgage to asset values and debt service capacity of debtors, the following resolution measures will be offered:
If existing mortgages, after fx-indexed loans have been re-estimated, are significantly higher than the value of the mortgaged property, the debtor will be offered the option to have the mortgage reduced to 110 per cent of the value of the property, provided the debtor can qualify under other conditions of this option. The value of the property will be based on assessed tax value or on market value, whichever is higher. Mortgages under this option are defined as debts truly undertaken for acquiring residential property for own use and meets the conditions for interest tax rebates. Furthermore, the debt service of applicant's mortgages, according to the original terms of the loan, must exceed 20 per cent of gross income (income tax based plus capital income) before tax in 2010, as further defined by regulation procedures.
The reduction of mortgages by this provision can amount to a maximum of 4 million krónur for an individual and 7 million krónur for married/cohabiting couples or single parents and will be processed on the basis of an application and information provided by the debtor on assets, debt and income. The application will be processed on the basis of the latest tax return, unless there is reason for further inquiry. The application must state that the applicant owns no other attachable assets. To the extent that assets exceed those limits, they net out against the write-down done by this measure. If information on which the reduction in debt is based proves wrongful, the debt reduction may be rescinded.
A further reduction in uncollectible debt in excess of the above limits, i.e. 4 million and 7 million krónur will be considered after careful consideration of the debtor's asset position and an assessment of debt service capability in accordance with procedures of the voluntary debt mitigation. As a general rule, debt will not be reduced by more than 15 million krónur for an individual and 30 million krónur for married/cohabiting couples and single parents.
The procedures listed above reflect the assessment that debt far in excess of assets and debt service capability is, as a rule, uncollectible. It is therefore in the interest of creditors, debtors and society at large to come to grips with this fact without the intermediation of the courts. This debt reduction will be on offer for debtors until July 1st 2011. Previous write-downs will be taken into account when applying the above ceilings.
B. Special voluntary debt mitigation
In circumstances where the accelerated measures according to section A of this chapter, prove insufficient in resolving situations due to inadequate capacity to service mortgage, the special voluntary debt mitigation will apply, according to the agreement of banks and pension funds of October 30th 2009, pursuant to Act no. 107/2009. The agreement will be amended to the effect that debt mitigation, aiming at bringing the mortgage in line with the debt service ability of the debtor, will be based on a debt corresponding to 70 per cent to 100 per cent of the value of a property, according to tax value or market value, whichever is higher. The difference between the debt that the debtor can service and the above upper limit will be placed in a three-year deferred loan, bearing neither interest nor indexation. If the debtor cannot service the deferred loan after three years, other measures must be considered, such as renegotiating the debt or that the debtor moves to a smaller home.
C. Suretyship
Sureties in excess of an asset position and/or the debt service capacity of the surety party will be rescinded. When assessing debt service capacity, the suretised debt is assumed to be fully paid over a three year period. In cases where the asset position is in excess of the ability to pay, a suretised debt will not be collected from the surety party during the debt mitigation period.
D. Guarantor mortgages
A guarantor mortgage will not be attached during the period of debt mitigation. The collection of a mortgage that is secured with the property of a third party, the pledged property, shall be limited to the debt service capacity of the owner of the mortgaged property, and the enforcement of the pledge will not be fulfilled until the property has been sold, in the absence of debt service capacity. The pledged asset will continue as surety for the claim, including indexation and interest.
E. Other issues
The provisions of this section will be incorporated into the “Agreement on Procedures of Problem Debt Restructuring for Individuals” of October 31st 2009, no later than December 15th of this year.
The parties to the “Agreement on Procedures of Problem Debt Restructuring for Individuals” shall assess, having regard to conditions in the property market, before April 1st 2012 whether there is a need for joint resolution measures after the expiry of the special voluntary debt mitigation.
2. A venue for creditors
In order to accelerate the debt adjustment of households as much as possible and simplify the resolution of complicated debt issues, a venue for creditors shall be established. Financial undertakings, including pension funds and the Housing Finance Fund shall participate in this venue. The parties agree to take under immediate consideration how co-signature sureties shall be treated in connection with special debt mitigation.
3. A special effort to reach households in payment arrears
Creditors shall respond quickly in the event of arrears. They shall contact the debtor as soon as possible and enquire as to the reasons for the late payment. They shall review the circumstances of the debtors and offer appropriate remedies. Creditors shall contact all households in arrears and this process shall be completed no later than May 1st of next year.
4. Tax rebate on interest
The temporary increase in tax rebate on interest that has been in force in 2009 and 2010 will be extended. The tax rebate will be amended to better meet the needs of households with heavy debt burden and low incomes, cf. also paragraph 5 on interest subsidy below.
5. New interest subsidy
The Government will, in cooperation with the parties of this MOU, seek ways to have financial undertakings and pension funds finance a new temporary interest subsidy. The interest subsidy will be administered through the existing tax rebate scheme. The subsidy will be general and irrespective of income but will be rescinded when the net asset of the debtor exceeds a certain limit. This measure is expected to cost up to 6 billion krónur a year and be in effect in the years 2011 and 2012.
6. Forced sales
All measures shall have the aim of preventing the forced sales of a real estate where the debtor legally resides, as far as possible. Creditors and district commissioners shall establish clear work procedures for the execution of auctions with the purpose of showing respect and deference to the debtor.
7. Housing issues
Despite extensive remedy measures, it can be expected that creditors will have to attach and repossess properties. Creditors are represented in a committee established by the Ministry of Social Affairs regarding the resolution of housing issues. Creditors will work with the state, local governments and other interest groups to establish a variety of housing options, in accordance with the conclusions of the committee.
The pension funds will aim at paving the way for social housing measures, by purchasing a special issue of housing bonds that the Housing Finance Fund shall issue at the lowest interest rate available. The size of the issue will be determined by the strategy laid down by the Ministry of Social Affairs committee and its assessment of financing needs. The proceeds of the issue will be used to refinance existing loans for social rental housing, to finance new such loans and finance tenant-ownership schemes.
8. Appropriations for rent subsidies
The Government intends not to cut appropriations for rent subsidies next year.
Individual sections of this Memorandum of Understanding require further completion in co-operation of the participating parties. Following such completion, a formal agreement between the Government and the participating lenders will be signed.
Reykjavík, December 3rd 2010