Iceland’s government proposed disbanding the Housing Financing Fund, the nation’s largest mortgage provider, as the lender struggles to make a profit amid loan losses and competition from commercial banks.

The island nation will wind down the operations over the next 30 years and continue to service the lender’s 480 billion kronur ($4.29 billion) in bonds, the government said today.

Laws permitting the changes will be introduced in parliament this fall, allowing for the suspension of HFF’s current daily operations. The government is also seeking to set up a system that resembles Denmark’s mortgage bond market and introduce a new housing agency that won’t enjoy a state guarantee.

“These are clear and well defined proposals which will support a sustainable housing market with realistic choices and sensible housing support for people, depending on income and circumstances,” Welfare and Housing Minister Eyglo Hardardottir said in an e-mailed statement. “The goal is to guarantee that everyone is afforded secure housing and these proposals are a good foundation for that.”

HFF has been on the brink of insolvency as it loses market share and households struggle to repay loans. The lender can only offer inflation-linked loans, which are losing to regular mortgages. HFF lost 4.4 billion kronur last year, and its equity ratio was 3.4 percent, below the 5 percent regulatory minimum.

Capital Controls

Hardardottir expects the plan to disband HFF will garner support in parliament when it’s presented to lawmakers, she told reporters in Reykjavik today. It’s “absolutely clear” that HFF’s outstanding obligations will continue to be backed by a state guarantee, she said.

The minister’s new system anticipates that future mortgages will not be linked to inflation. HFF’s borrowers will continue to be serviced by a new housing institute or another body enlisted for the task.

The government had also proposed a plan to reduce household debt by as much as 150 billion kronur, in part by raising taxes on banks and offering tax incentives to homeowners. Homeowners have also seen some relief after central bank currency interventions helped bring inflation below 3 percent, from a peak of 19 percent in 2009.

While Iceland has struggled to lift capital controls in place since its three largest banks collapsed in 2008, debt relief for consumers has helped propel a recovery.

After completing the 33-month International Monetary Fund program in August 2011, Iceland is outgrowing much of Europe as it recovers from its recession. The economy is seen expanding 2.6 percent this year and 3.7 percent in 2015, the central bank forecast in March. Sedlabanki has kept its benchmark rate unchanged at 6 percent since November 2012 as the stronger krona pushed inflation below the bank’s 2.5 percent target.