Íbúðalánasjóður - Company Announcement

Monthly report January 2014

Prepayments in the Housing Financing Fund's portfolio are within normal limits

The Housing Financing Fund's (HFF) prepayment problem has been regularly
discussed in the public arena with the general tone in the debate being that
the problem is continuously growing.The conclusion that this is a problem is
based on comparisons between new loans to customers and customer prepayments.If
the prepayments, however, are compared to the Fund's overall position this
shows that the actual prepayments do not pose large problems to the Fund. To
compare the current prepayments in the HFF's portfolio are proportionally much
lower than is recognised for alike foreign portfolios. 

Prepayments are a part of lending operations

Prepayments are a normal part of lending operations and can occur for a number
of reasons. These include changes in the circumstances of borrowers, improved
terms in the lending market or increases in the number of property
transactions. 

The “big picture” is key

One must view the overall picture when assessing whether prepayments are a
problem.Simply comparing prepayments with new loans is not sufficient. But are
the Fund's prepayments greater than may be considered normal for the portfolio
over an extended period?In the case of the HFF, prepayments are within the
normal range. They have rather been decreasing over the last years.The current
HFF prepayments are thus not really a problem. 

Second, one must also take account of the total payment flow of the Fund's
assets and liabilities, together with its liquidity position as current at any
given time, in order to draw the correct conclusions about the issue.At
present, the Fund's liabilities are being paid at a faster rate than the loan
portfolio. As a result, the prepayments are useful to bridge the difference in
cash flow between assets and liabilities. Moreover the Fund's finance and risk
management has for the most part been able to maintain the interest rate spread
between interest carrying assets and liabilities despite prepayments. 

See the appendix to the attached monthly report for more detailed information.

Attachments:

monthly report 2014 with appendix.pdf