Government Declaration concerning measures related to the real estate and financial markets

Real estate market activity has slowed considerably during the current year. The real estate market is an important segment of the general economy, and a severe cooling would amplify the current economic contraction, to the detriment of property owners and buyers alike. Such a development could undermine financial stability in the long run. In addition, the Icelandic financial markets are faced with a liquidity shortage that greatly curtails the banks’ ability to carry out normal lending activity, and the limited supply of risk-free króna bonds has generated mounting pressure on the bond and foreign exchange markets. The Government has decided to adopt special measures in response to this situation. These measures are in line with the Government’s policy on improvements and changes in the structure of the Housing Financing Fund (HFF) and are intended to enhance the effectiveness of monetary policy.

· Two new classes of HFF loans will be established. The first involves lending to banks, savings banks, and other financial institutions for the purpose of refinancing mortgage loans that these institutions have already granted against collateral in residential property. The second involves lending to banks, savings banks, and other credit institutions for the financing of new mortgage loans granted by them. The prerequisite for loans in these series is that they be conducive to guaranteeing the security and supply of credit and that they promote normal price formation in the real estate market. The loans will be granted for a special Government guarantee fee and will be subject to the requirement that the maximum loan-to-value ratio not exceed the limit set by the HFF. The credit assessment requirements will be comparable to those of the HFF. Furthermore, rules will be set concerning the maximum loan amount for loans granted by credit institutions funded by the Housing Financing Fund. The Housing Financing Fund’s financing of the above-specified mortgage loans granted by financial institutions will be secured by the institutions’ portfolio of mortgage loans, in a manner similar to that applying to covered bonds: either with liquid assets or with mortgage bonds that are eligible as collateral for Central Bank of Iceland facilities.

· In order to relieve the substantial pressure on the bond and foreign exchange markets, it has been decided, on the basis of an authorisation granted by Althingi, to increase the issuance of short-term Treasury notes. The Ministry of Finance will prepare such issuance in consultation with the Central Bank.

· The fire insurance value reference for HFF lending will be discontinued, and instead the reference amount will be up to 80% of the purchase price of the property. In the greater Reykjavík area, the fire insurance value is often no more than 50% of the market value, which makes it difficult to use HFF loans to finance the purchase of small apartments in this area. This change will greatly facilitate transactions involving smaller properties in the greater Reykjavík area.

· The maximum HFF loan amount will be 20 million krónur instead of the previous 18 million krónur, with the aim of encouraging real estate market activity.

· There will be expanded authorisations to take HFF rental housing loans on the general market in order to convert property that does not sell for a period of time into rental housing. Companies, non-governmental organisations, and housing co-operative societies wishing to take rental housing loans from the HFF must have their Articles of Association confirmed by the Ministry of Social Affairs. Rental housing loans will be granted to parties in those geographical areas where an impartial assessment of the level of demand for rental property has been carried out. Therefore, the authorisation to convert apartments for sale into rental apartments will not be utilised unless there is a demonstrated need for rental property.

· Emphasis is placed on credit institutions’ responding to the needs of borrowers experiencing repayment difficulties; for example, by freezing loans, restructuring debt, or refinancing. The aim is that a legislative bill concerning payment adjustment be passed during the next legislative session.

· The Minister of Social Affairs will prepare the measures pertaining to housing issues together with the Financial Supervisory Authority and the Housing Financing Fund, as appropriate, and in consultation with the Central Bank of Iceland.

Reykjavík, 19 June 2008