| Summary: | We utilise a unique nationwide household-level database to analyse how households’ financial position evolved in the run-up to and aftermath of the financial crisis in Iceland. The main focus of our analysis is to assess how the share of indebted households in financial distress evolved and how it was affected by debt restructuring measures and court decisions. We also analyse the share of indebted homeowners in negative housing equity and those in the highly vulnerable situation of being in distress and negative housing equity simultaneously. The analysis suggests that the share of indebted households in distress grew from 12½ per cent in early 2007 to 23½ per cent on the eve of the banking collapse in the autumn of 2008, when the lion’s share of the balance sheet shocks had already taken place. The extent of acute distress nearly quadrupled over the same period. Forbearance efforts provided temporary breathing space, but the share in distress is estimated to have peaked at 27½ per cent in autumn 2009, before declining to 20 per cent at yearend 2010 due to policy and legal interventions. Financial distress is found to be inversely related to income and age, as well as being higher among families with children and those with foreigndenominated debt than among childless couples and those with ISK-denominated loans only. Parents of every fifth child in Iceland were in distress at year-end 2010. The incidence of negative housing equity increased dramatically, from roughly 6 to 37 per cent of indebted homeowners, over the four-year period. Negative housing equity is more widespread among high-income than low-income households. The share of homeowners simultaneously in distress and negative equity rose from roughly 1 to 14 per cent but declined to 10 per cent by the end of the period. Middleincome families with children, most of which had foreign-denominated loans, and low-income singles seem especially vulnerable. Some of the seeds of households’ financial difficulties were sown by imprudent lending in 2007 and ...
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