The personal insolvency system in Norway

[Brendan Burgess]

Egil Rokhaug who is a lawyer working for the Norwegian government gave an account of the Norwegian system.

Norway has 80% home ownership.

They had a big housing bubble which burst in 1987 and hit the bottom in 1993 with falls of 50% to 60%.

There was a rapid increase in evictions.

In 1993 The Debt Settlement Act was introduced

Where a person was permanently incapable of paying his mortgage and where the deal is not offensive to other debtors or society...

The borrower must try to reach a voluntary settlement with the lender - they have 4 months to try this.

If the Creditors don't agree to a voluntary settlement ( not sure what percent) , the borrower can apply for a compulsory one.

There are 300 enforcement officers deployed throughout Norway who make the decision.

Section 4.4 sets out the criteria

The objective is to avoid forced sales.
It will give creditors a better outcome

There is a 5 year payment programme.

The mortgage is split into two parts

• Current value +10% (which is regarded as secured)
• Unsecured

Interest only is paid on the current value + 10% for the 5 years.
Any surplus is paid to the unsecured creditors including the unsecured bit of the mortgage.



After 5 years, any balance over the initial current value + 10% is written off permanently.


Example

1987 |bought house for €300k with a mortgage of |€300k
1993 |house value had fallen to |100k

1993 -1998 |pays interest on |€110k

1998| mortgage reduced to |€110k

As it happens, by 1998, the market had recovered to its peak, so the guy who availed of this had a house worth €300k with a mortgage outstanding of €110k.



Statistics



In around half of debt settlements, there is a home involved.



In 70% of these cases, the home was kept. (Presumably in 30% of the cases the drop in income was so catastrophic that the borrower could not even pay the interest on the equivalent value of the home)


In only 20% of the cases, is there any payment to unsecured creditors. Where there is a payment, it is only around 20% of the amount due.

There have been 2,500 to 3,000 of these settlements involving houses since 1993 when the law was introduced.



35% were achieved on a voluntary basis.



85% of debtors completed the settlement successfully.

Despite worries beforehand, this system has not changed the banks attitude to lending. They have not restricted their lending as a result of this legislation. They have not pushed up the interest rate.

Although Norway is thriving at the moment, 2011 was a record year for debt settlements, mainly due to consumer debt and credit cards.

 

[Brendan Burgess]

My assessment:

I have always said that the measure of sustainability is the ability to pay interest on the mortgage, so I like this measure.

On the Expert Group on Mortgage Arrears, we looked at "ability to pay the interest on the current value of the home" as a measure of sustainability, but rejected it after much discussion.

The advantage of this measure is that this is the position where the bank will be in no worse a position. (Assuming standard variable rate). If a bank repossesses a house for €100k and lends the money onto someone else, they will only get the interest on €100k anyway.

We rejected the scheme, because it came up with too many anachronisms. Johnny and Mary both buy houses for €300k. Johnny buys well and the house falls to €250k while Mary's house falls to €100k. Mary will keep her house, while Johnny loses his. If they both keep their house, Johnny will pay interest on €275k while Mary will pay interest on €110k.

I think it's bizarre that the shorfall is written off completely. The lender loses €190k and the owner gets a gain of €190k.

I would reduce the payment to the interest on 110% of the value, but roll up interest on the balance. If the house is subsequently sold, the bank would get the proceeds. In a sense, we opted for this with the Deferred Interest Scheme. If someone can pay 66% of the mortgage interest due, the balance of the interest is deferred.

 

[DB74]

1987 |bought house for €300k with a mortgage of |€300k
1993 |house value had fallen to |100k

1993 -1998 |pays interest on |€110k

1998| mortgage reduced to |€110k

As it happens, by 1998, the market had recovered to its peak, so the guy who availed of this had a house worth €300k with a mortgage outstanding of €110k.

What happened the guy who didn't avail of the scheme because he was cutting every corner to pay his mortgage in full

He ended up with a house worth €300K and a mortgage far in excess of €110K I reckon.

How is this fair?

 

[44brendan]

I think the main criteria re this legislation is to give some incentive to those who are unable (rather than unwilling) to meet their mortgage payments. very difficult to come up with a format where some people don't feel that their position is not being comprimised!

 

[RIAD_BSC]

Brendan, you say "As it happens, by 1998, the market had recovered to its peak". How can this be possible? Prices were more than 50% down from their peak by 1993, when they bottomed. That means in the five years between 1993 and 1998, prices must have more than doubled again. That would be another bubble of massive proportions. Surely something is wrong in your analysis? There is no way the guy in the example could have had a house worth 300k in 1998 and a mortgage of 110k.

 

[Brendan Burgess]

Hi RIAD

They are the figures which he gave. I know nothing abou the market. But it's the principle rather than the actual numbers which is important.

But just to be absolutely sure, I asked a question after his paper, and he confirmed my understanding that this guy would end up with a mortgage of €110k on a house worth €300k. Of course, most people did not have a 66% fall. To have that, they would have had to have a 100% mortgage at the peak of the market. And they would have had to do a debt settlement at the bottom of the market.

It sounds mad:

1987|300
1993|100
1998|300

The increase in 5 years was 200% cumulative from the bottom. I am sure that there is a Norwegian index somewhere. The bubble at €300k may not have been as bad as ours. The collapse probably overshot on the way down. So there could well have been a big spike when prices recovered. Even so, I agree that 200% is a lot.

 

[Brendan Burgess]

What happened the guy who didn't avail of the scheme because he was cutting every corner to pay his mortgage in full

He ended up with a house worth €300K and a mortgage far in excess of €110K I reckon.

How is this fair?

DB

I asked this exact question.

After confirming my understanding of the case, I said:

"And my friend Derek here, who bought at the same time as I did for €300k has struggled for 10 years but kept up his repayments, will have still have a mortgage of €300k while mine has been reduced to €110k" to which Egil responded:

"That is correct"

I said "Thank you" and sat down, feeling that no further comment was necessary.

The next speaker said "What Brendan Burgess doesn't understand is that the first person has had a collapse in their income" and she got huge applause for that as if to say "How dare Brendan Burgess criticize such a fantastically progressive scheme" . Ross Maguire of New Beginnings spoke later and made a similarly disparaging remark.

 

[ballaboy]

What i learned yesterday it not the insolvencey bill that causing the write down,that is already there if they reposses or as is getting common they walk away.It like car insurance if you never had a claim your insurance is so high because of other bad drivers.We all members of society and must act accordingly,wait until the actual slides of the event become available it will open your eyes,simply brillant

 

[darag]

I don't understand your strenuous objection RIAD_BSC. Surely the purpose of a relief scheme should be to allow people, where sustainable, to retain ownership of their home while making the mortgage payments affordable?

Why, in addition, is it necessary to also throw in a potential windfall, even if "only" 40K? Is it not enough that taxpayers (ultimately) pay to make the person's financial situation sustainable?

 

[Brendan Burgess]

RIAD has pointed out that the figures given out by the speaker and questioned by me, must be incorrect.

My response to that and the ensuing discussion is here

Brendan

 

[dodo]

I think the Norway way seems a fair way to go as long as it is the person who can't pay rathar than wont pay gets the benefit,
If person A had mortgage/house worth 300K and has earning of 65K a year and secure job ,and

Person B had mortgage/house worth 300K and now has earning reduced by 40K to 25K then of course he should get dept forgiveness, A would not want to

swap with B taking into account that recession lasts 10 years and person B earns less than 400K in that time, A still goes on holidays,eats out etc while B does none of that, not rocket science is it, the moral brigade have no place in these times what so ever,

DB

I asked this exact question.

After confirming my understanding of the case, I said:

"And my friend Derek here, who bought at the same time as I did for €300k has struggled for 10 years but kept up his repayments, will have still have a mortgage of €300k while mine has been reduced to €110k" to which Egil responded:

"That is correct"

I said "Thank you" and sat down, feeling that no further comment was necessary.

The next speaker said "What Brendan Burgess doesn't understand is that the first person has had a collapse in their income" and she got huge applause for that as if to say "How dare Brendan Burgess criticize such a fantastically progressive scheme" . Ross Maguire of New Beginnings spoke later and made a similarly disparaging remark.