Seðlabanki Íslands The effects of the financial crisis on Icelandic households First preliminary results of a Central Bank Working Group March 11, 2009

About this report This is an analytical report that provides the first preliminary results of a Central Bank Working Group on the effects of the financial crisis on Icelandic households The analysis builds on a database for households that the Central Bank has gathered in cooperation with financial companies based on a permission given by the Data Protection Authority All data is coded and the group has worked with anonymous data per household This report does not include policy statements or policy recommendations Further results will be published on an ongoing basis

The database Assets Housing, cars, deposits Housing wealth is measured on the basis of the valuation by the Icelandic Property Registry for December 2008, the group will publish estimates according to other measures at a later stage Liabilities Original amount and outstanding amount at the end of 2008 for each loan for mortgages, car loans, non-indexed loans and loans with securities as collateral Debt service Average monthly payment from issuance of each loan as well as the newest payment (February) Currency composition, loan conditions, type, maturity, date of origin All information to make debt service projections Income Data on income is the weakest link of the database, hindering a thorough analysis of debt service ratios The group is looking at ways to include data on income Non-payments and use of procedures to delay payments

Unique database Financial information for close to all individual customers of the state banks, HFF, saving banks and other small financial companies, but not the pension funds Ca. 86% of the national registry Information on household housing wealth and debt for ca. 80 thousand households 89% of households in the database have only ISK mortgages, 3% have only foreign currency denominated mortgages and 8% have mixed mortgages Information on all car loans and overdrafts

Housing equity and debt service Default most often follows from a combination of a high debt payment-to- income ratio, a vulnerable equity position and an adverse life event, e.g. loss of income, unemployment, increase in debt service or divorce Large majority of households with negative equity do not default: Over 90% in the U.S.

Distribution of housing wealth (A)

Distribution of housing debt (B) Most households have less than 30 m.kr. in mortgage debt (mortgage lending from pension funds not included)

Distribution of housing equity (A-B) Close to 20% of households have negative equity and 22% have very limited positive equity

Debt service of mortgage loans Debt service on mortgages is below 100 t.kr. for 75% of households

Distribution of housing debt for households in a vulnerable equity position 60% of households in a vulnerable equity position has debt below 19 m.kr. A vulnerable equity position reflects either negative equity or up to 5 m.kr. positive equity

Housing wealth for different currency groups Households with foreign currency denominated mortgage debt tend to have more (gross) housing wealth than the ISK group

Housing debt for different currency groups Mortgage debt tends to be higher for households with foreign currency denominated debt than the ISK group

Housing equity position for different currency groups

Housing equity position by age groups

Composition of households with negative housing equity 3/4 in negative equity have only ISK mortgages but households with foreign currency denominated debt are overrepresented (11% of homeowners, 23% of households in negative equity)

Composition of households with negative housing equity

Debt service of mortgage loans by currency groups

Debt service of mortgage loans for households in a vulnerable equity position A vulnerable equity position reflects either negative equity or up to 5 m.kr. positive equity

Increases in debt service on mortgage loans Difference between the last payment and the average monthly payment from issuance for each loan Increase in the monthly debt service on ISK mortgage loans is for (close to) all cases below 50 thousand kr. Ca. 30% of households with all their mortgage loans denominated in foreign currency have experience a larger increase in their monthly debt service than 50 t.kr. The same applies for 18% of households with mixed mortgages (ISK and foreign currency denominated )

Debt service of car loans

The increase in debt service on car loans

Combined debt service of mortgages and car loans

Final remarks Out of the 80 thousand households in the database that are homeowners, 70 thousand have mortgage debt below 30 m.kr. Out of the 67 thousand homeowners with ISK mortgages, 11,200 households are in negative equity. Thereof 2,600 have more than 5 m.kr. in negative equity Out of the 8,900 households with foreign currency mortgages (in full or partly), 3,400 are in negative equity. Thereof 2,400 have more than 5 m.kr. in negative equity

Final remarks The monthly debt service on mortgages is less than 100 t.kr for 75% of households in the database Increase in the monthly debt service on ISK mortgage loans is in most cases below 50 thousand kr. Ca. 30% of households with all their mortgage loans denominated in foreign currency have experienced a larger increase in their monthly debt service than 50 t.kr. The same applies for 18% of households with mixed mortgages

Final remarks The monthly debt service on car loans is less than 50 t.kr for 70% of households in the database and between 50 and 100 t.kr. for 24% of households 74% of households have experienced a increase in their debt service on car loans between zero and 50 t.kr. 68% of households with both mortgages and car loans have a combined monthly debt service under 150 t.kr.