Bad Idea from NAMA

This post was written by Colm McCarthy

From this week’s Farmers Journal, with acknowledgement to Gregory Connor:

 

The state ‘bad bank’ NAMA has bought troubled loans at steep discounts from the Irish-owned banks at a cost of over €30 billion. Many of these loans cannot be serviced by the builders, developers and property speculators who borrowed the money in the first instance so the collateral, in the form of completed and uncompleted buildings and development land, is being seized by NAMA. The intention is that NAMA will realize these assets over time. It has sold very little to date but the clock is ticking and NAMA is due to be wound up within ten years of its inception, so there are just eight-and-a-half years to go.

 

Some of NAMA’s assets are in the form of completed residential property. Outside Dublin the market appears to be pretty slow, with only a trickle of transactions and very little availability of mortgage credit from the banks. There seems to be a bit of a buyers’ strike too – buyers with cash see no urgency about doing deals until prices dip a little more, and asking prices remain unrealistic in many cases.

 

So NAMA is getting impatient and has come up with an attractive-sounding wheeze: if you can get a mortgage to buy a home from NAMA, they will throw in, for free, an insurance policy which covers the risk that prices could drop further.

The scheme would work like this. Nama reckons a house it has for sale is worth €100,000. The purchaser is asked to put up €10,000 in cash and get a mortgage from a bank for €72,000, paying NAMA €82,000 in total.  Nama notionally pays itself the remaining €18,000 and records the house as sold at €100,000.  After an agreed period, say five years, if the fair market value of the house is more than €82,000 the purchaser must pay NAMA the difference up to a maximum of €18,000.  If the fair-market value of the house is €82,000 or less, the homeowner pays no more.

Assuming the initial €100,000 valuation is reasonable, this is a good deal for the purchaser and a bad deal for NAMA, which can never get more than the reasonable value of €100,000 but could get as little as €82,000. In effect, NAMA has given the purchaser a valuable price insurance policy for free. Gregory Connor, an economics professor at Maynooth, has calculated that the discount being offered to the purchaser, allowing for the value of the free insurance policy, is pretty big: on plausible assumptions, the buyer is getting a discount of €12,000 or so.

Before you rush off to phone NAMA, bear in mind that you own NAMA, or more correctly, you will pick up the tab if NAMA loses money, since its debts are on the state balance sheet. The scheme has a number of other drawbacks. Not everyone is an economics professor at Maynooth and able to work out the sums. The scope for confusing purchasers (and the taxpayers) should be clear. Moreover NAMA is not the only, or even the main, seller of residential property in the years ahead. The non-NAMA banks (ones such as Ulster and National Irish) also have re-possessed assets to sell and there are even a few non-bust builders out there trying to stay afloat through selling completed dwellings. Plus there are tens of thousands of individuals interested in selling every year in the normal course of events. None of these people can offer the big upfront discount and assumption of risk built into the NAMA scheme, since they do not enjoy the comfort of reclining on the state’s balance sheet. The NAMA scheme, in brief, could seriously distort the market, and looks anti-competitive. The Financial Regulator and the Competition Authority could have some things to say on this aspect before too long.

The banks have finally been re-capitalised and are now better placed to recover their ability to hold on to deposits. There are prospective purchasers in the residential market who must be a reasonable risk for 75% or 80% mortgages, provided prices are realistic. No doubt NAMA is fearful about the ‘realistic’ bit, but what value is there in anything other than market-clearing prices for residential property at this stage? One real drawback with this scheme is the temptation to use it to hold prices up artificially. The best outcome for the residential market is a more normal flow of mortgage credit to solid borrowers and the discovery of a lower price level which clears the over-supplied market steadily over the next few years. If NAMA paid too much for some of its assets, that is unfortunate but there is no point compounding the error through financial engineering gimmicks which distort further an already dysfunctional residential market.  

34 Responses to “Bad Idea from NAMA”

  1. grumpy Says:

    Quite right Colm.

    All you need to do now is dig yourself an Anderson Shelter and use one of your columns to let the taxi drivers know about the existence of 1.28 of the Croke Park Agreement and three months later bingo! - people will be queueing up to buy Irish gilts.

  2. Joseph Ryan Says:

    Excellent argument and conclusion.

    If NAMA paid too much for some of its assets, that is unfortunate but there is no point compounding the error through financial engineering gimmicks which distort further an already dysfunctional residential market.

    1. Free State insurance on a further 18% fall in residential market price.
    2. As there are finished properties, not one single new job is created.
    3. Banks that will not loan to farming, industry and anybody, will be encouraged to throw scarce capital into the finished property market!

    I suspect that all of this is in response to a demand for develeraging coming straight from the ECB, through the DOF, through the banks and to NAMA. Or perhaps the ECB calls NAMA direct and tells them to find cash somewhere and fast.

  3. Oliver Vandt Says:

    @Joseph Ryan
    “I suspect that all of this is in response to a demand for develeraging coming straight from the ECB, through the DOF, through the banks and to NAMA. Or perhaps the ECB calls NAMA direct and tells them to find cash somewhere and fast.”
    Very likely true.

    @All
    Looked at the excellent namawinelake blog for the first time in a few weeks. Well worth it.

  4. Bunbury Says:

    Very good article. As someone who dips into this blog from time to time but has generally found Namawinelake far more interesting, in my view this is the first article that has ‘trumped’ the latter blog in terms of explaining this scheme in a far more succinct, interesting, and pungent manner.

    Needless to say, this mortgage proposal is troublesome and suggests NAMA ‘mission creep’ already. Who would bet on NAMA being wound up in the 10-year timeframe? NAMA is likely to become just another quango and will surely be suggested for culling in the XXIV McCarthy Report.

  5. Ronan Burke Says:

    So Fianna Fáil’s legacy organisation ultimately ends up distorting the entire property market and forcing property prices up at a high cost to every taxpayer in the country in favour of property developers?

    Say it ain’t so.

  6. Bklyn_rntr Says:

    Well said Colm
    I always suspect that cash flows drive decisions in downturns while profits maximization drives the upturn. If true in this case, then it suggests that nama’s capital is close to exhausted and it needs to raise more cash. This may be the driver for what is, indeed, a very bad idea.

  7. Gregory Connor Says:

    Thanks for the generous hat-tip, Colm. I agree with your verdict regarding this proposed scheme.

    You hint that the best strategy for Nama might be standard bank-mortgage-based sales at substantially lower prices. Or is there some other way that Nama could use its credit access (essentially obtained through the ECB) to generate more mortgage credit?

    On the other hand it isn’t clear to me that from a broader policy perspective, more mortgage credit is that valuable in current dire circumstances. Perhaps it would be better to let the housing market remain moribund while focussing on somehow chanelling credit toward more business lending.

  8. grumpy Says:

    @bunbury

    “Very good article. As someone who dips into this blog from time to time but has generally found Namawinelake far more interesting, in my view this is the first article that has ‘trumped’ the latter blog in terms of explaining this scheme in a far more succinct, interesting, and pungent manner.”

    “it has had a good kicking on this blog before:

    http://www.irisheconomy.ie/index.php/2011/05/19/frank-daly-on-nama-providing-finance/

    http://www.irisheconomy.ie/index.php/2011/07/04/namas-mortgage-enhancement-scheme/

  9. hoganmahew Says:

    Don’t forget that the NAMA developers with their profit-share on the reduced balance of the loans will also stand to benefit from this. They’ll be paid profit-share on the initial notional sales price…

  10. Colm McCarthy Says:

    Hoganmahew:

    That’s a nice point, had not copped it.

  11. hoganmahew Says:

    And while we’re on “don’t forgets”, don’t forget that the scheme is designed to work this way. It can only maximise returns by selling back to the original borrower at a discount (or by just writing off debt to the point the loans become performing). It was never going to work any other way.

  12. Jagdip Singh Says:

    @Bunbury,

    A long list of questions was submitted to NAMA on this scheme and the response was that the details were still being worked out. There are all sorts of competition issues to be resolved (eg with competing banks and sellers will be placed at a disadvantage). The scheme might have unintended consequences on the property market because the only way a non-NAMA seller will be able to shift their property will be to reduce prices to €80,000 in the above example. There are issues about interest on the €18,000 and who undertakes the independent valuations, what happens if there’s default etc etc etc.

    All NAMA has really done so far has been to float an idea because it has an almight stock of 16,000 properties under its control, there’s little credit, confidence in the residential market is shot (and until the upward only rent review issue is resolved the commercial sector is also undermined). Yet NAMA needs dispose of one quarter of assets in the next 28 months.

    Maybe NAMA should hold a competition for ideas because it’s facing a humdinger of conundrum in disposing of anything here. And this mortgage product seems peppered with holes, but again we have very little solid information.

  13. salmac Says:

    I would like to propose a scheme whereby any Non EU national that buys property without a EU based mortgage in Ireland gets a green card.
    There are a lot of wealthy Chinese people who cannot purchase real property in China and would be very interested in a way to acesss living in the EU.
    It would also allow all those rich Nigerians a way to legitimise there presence in the EU.
    It would not solve all our problems but would kickstart some external demand in the Irish property sector and bring in a bit more tourism for a start as well as extra demand in our 3rd level sector.

  14. Ronan Burke Says:

    @salmac
    Sure why don’t we auction off the Book of Kells while we’re at it. Just sell the passports for whatever price you like if you need income from that source.

  15. Rich Says:

    How about appealing to Irish penchant for gambling, we seem to believe we are lucky or at least others did. Why not stick a million Euros under the floor boards of a few of the 16,000 houses and to buy a ticket you have to pay the pretend prices they seek?

  16. ObsessiveMathsFreak Says:

    It seems to me that NAMA don’t have a friend in the world when it comes to rolling out this Mortgage Enhancement Scheme. Yet they are ploughing on ahead with it regardless. Is there no oversight of this agency?

    Apparently if an agency, department, or office of the Irish State is prepared to adopt a policy, no matter how harebrained or ill-conceived, they can push it though with no-one to oppose them. There doesn’t seem to be a system in place to bring semi-state companies to heel. We also saw this with the DAA board and nationalised banks bonuses.

    The lasting damage from this type of carry-on is enormous. We have delinquent managers using the power of their offices to concoct crazy schemes and policies, for the benefit of who we don’t know, and no-one seems able or willing to stop them. If NAMA was planning to offer 50% discounts on houses, would anyone actually be able to stop them?

    Who’s at the tiller of this country?

  17. PRGuy Says:

    @ObsessiveMathsFreak

    “Is there no oversight of this agency?”

    “Who’s at the tiller of this country?”

    Two very intelligent questions.

  18. Joseph Ryan Says:

    @Jagdip

    Yet NAMA needs to dispose of one quarter of assets in the next 28 months.

    Where is this timetable coming from?

    The reason for NAMA was to take excess property off the market until such time as the market had stabilised. We are nowhere near that point.
    Does it make economic sense to sell this property? Would it make any difference if no NAMA properties were sold for the next five years and all sold in the remaining two/three years.
    Why not rent the properties? After all the rental the rental market is stable at present.

  19. Rich Says:

    no market can be representative when such large elemnts of the market are warehoused as is happening with NAMA. Who would buy now when a flood of stock is being held in reserve? who decides the extent of the placement of this stock on the market, just rent it? or fully load the market? the ‘no firesales’ mantra is not objective, it suits one section of the market - owners, the elite who will lose out if houses were to sell for €40,000 in D4, however, the gainers from such purchases would have more disposable income to spend on tat etc. We spent 30% of our incomes on food in the 1980’s today its 10%, why shouldn’t housing go the same way, same market drivers - supply is more than market can absorb.

    There are simply vested interests including the state looking to protect their own interests with out really considering what will bring recovery. They talk recovery but a very conditional one were the likes of those calling the shots in NAMA, who ever they are, coin a new reality were in 10 years we will achieve Rapture. It is all those who resist fireslaes who are preventing recovery

  20. Robert Browne Says:

    @ OMF

    The people who created the disaster, still unfolding, are the selfsame people who sat down, thought it up and tailored it to their own likeness. Those individuals are in the parliament and they run NAMA before they proceeded they got the consent of the trade unions in return for Croke Park.

    Does that answer your question?

    @ Joseph Ryan

    In all seriousness, do you honestly believe that a gravy train like NAMA will be allowed to be wound up within a ten year time frame? Moriarty was to report back ‘expeditiously’. it took 13 years. NAMA will be extended and extended. The only thing that will put an end to NAMA is civil unrest or a new political movement and I don’t see any of those on the horizon. NAMA was set up to save the banks from having to be nationalised and get them lending. Now, we are told ‘new game in town’ NAMA is effectively to be the lender. Those responsible for setting it up failed to notice the bank insolvencies and when they did discover them acted as if NAMA was still going to perform its defunct objectives. In any event it has failed. The only reason we don’t own BoI yet despite having paid several times its market value, is because our leaders are not willing to suffer complete humiliation and have their noses rubbed in it. Make no mistake we are still covering their losses.

    “Would it make any difference if no NAMA properties were to be sold for the next five years etc?” No, it would not make any difference in fact it would make sense but rest assured NAMA will not be paying off any of its 31.7 bn back and you will find that in five years time some excuse or manoeuvre will see to it that they have paid very little back. They have only paid back about 600 million to date. The game is to make it look like it is doing “stuff” to justify the jobs and the inordinate fees and to keep the public confused enough with sound bites like “we will not know whether NAMA will succeed or even make a profit”. We already know it has FAILED. NAMA will make money, but not for the Irish people rather it will make money and tons of it, for a very small coterie of people on both sides of the equation. Meanwhile., try selling a house when the buyer is not on one of those NAMA negative equity loans.

    I once described NAMA as worse than The Government of Ireland Act 1920 the way it partitions our society. I see no reason to change my mind in fact all that I see confirms it.

  21. Joseph Ryan Says:

    @Robert Browne

    NAMA will make money, but not for the Irish people rather it will make money and tons of it, for a very small coterie of people on both sides of the equation.

    At this point, I am beginning to move towards that conclusion too. There is just no other logic to their actions.

  22. Jagdip Singh Says:

    @Joseph,

    NAMA set out its debt repayment targets in its business plan and has reaffirmed the 25% by 2013 several times subsequently. See page 10 of the business plan.

    http://www.nama.ie/Publications/2010/NamaBusinessPlan30June2010.pdf

    If you assume the 2013 target is December 2013 then that’s 28 months away.

  23. hoganmahew Says:

    @OMF
    ““Is there no oversight of this agency?””
    No, no there isn’t. It’s a private company remember…

  24. Joseph Ryan Says:

    @Jagdip
    Thanks for link to Nama Business plan.
    I looked through it to see which department was responsible for trying to get money back from the developers. I am still looking. I wonder is it the credit and risk section. If so why is the section ‘Credit and Risk’. Its all a little late for the ‘Risk’ part.
    Where is the ‘Debt Collections’ department? I thought that was the primary objective of NAMA.
    The ‘Portfolio Management’ section seems to be only section that makes sense and has proportionate staffing.(36).

    The whole operational structure appears quite dysfunctional when one considers the objectives. And it would appear, most of these people have little to do. The work it seems is all being contracted out, presumably at huge expense.

  25. aiman Says:

    No comments to date appear to recognise the possible Ryanair-type sell-the-early-cheap approach by NAMA in this. I may be giving them (NAMA) too much credit in suggesting that this is their approach; but I don’t know that it’s fair to assume the entire stock of residential property on their books is for sale under the taxpayer-unfavourable terms identified.

    It will be the weighted average price of disposals that determines the gain/loss to the taxpayer, not the lowest marginal price achieved for a portion of the book.

  26. What Goes Up... Says:

    There is obviously a Marketing deficit in NAMA.

    They’ve sold this idea all wrong!

    They should be selling it all upside.

    Pay €10K to enter - guaranteed a house - sell it for anything over €100K and keep the proceeds!

    They shouldn’t be messing about saying we’ll cover an €18K loss, blah, blah blah, blah, blah.

    They should simply say:

    Sell it for less than €100K and we’ll give you your deposit back!

    Sell for more than €100K - free money - you’re a winner!
    Sell for less than €100K - get your money back - you’re a winner!

    Now - who do I make my consultancy fee out to?

  27. Dreaded_Estate Says:

    @NWL
    “Maybe NAMA should hold a competition for ideas because it’s facing a humdinger of conundrum in disposing of anything here. And this mortgage product seems peppered with holes, but again we have very little solid information.”

    Here is a novel idea :).

    Why not charge Allsop with auctioning off 1,000 of the NAMA properties and see where the market is?

  28. Noel Says:

    @ Dreaded_Estate

    Great idea - but wouldn’t that entail facing reality?
    NAMA’s whole existential purpose is to hide the reality until the last sucker can be sucked in.

  29. John Corcoran Says:

    @ Jagdip Singh

  30. John Corcoran Says:

    @ Jagdip Singh

  31. John Corcoran Says:

    @ Jagdip Singh ( and until the upward only rent review decision is resolved the commercial market is undermined.) You conveniently failed to mention, hotels, golf courses, empty offices shops and warehouses, commercial property with leases due to expire in the next few years, commercial development land with planning permission , almost complete commercial property developmemts etc etc etc etc. which the Fine Gael 2011 manifesto promise -we will pass legislatio to allow all commercial tenants to have a rent review in 2011 irrespective of any upward only or other review clause) will have no impct on whatsever. Colm Mc Carhy has written a report recommending our government allow market rents prevail immediately. Your namawinelale commemtators whose anti-tenant bile and anti-market rents propaganda is outrageous –the same crew who destroyed our country now want to prevent its recovery, vilify tenants on your site, with impunity from you.

  32. Gregory Connor Says:

    @John Corcoran

    That seems way too strong! Communal blog controllers are only responsible for deleting profanities, libellious comments, and such, they are not responsible for controlling what individual contributors state as their own opinions on billboards.

  33. John corcoran Says:

    At the Oireachtas Joint Committee on enterprise trade and Employment discussion on commercial rents on 30th March 2010 the following are comments made by Frank O’Dwyer; “In preparation for this meeting IAIM conducted , for the first time , an analysis of the full portfolios of seven of the largest institutional investors. These portfolios have a combined value of 5 Billion euro and are estimated to account for 25% of the investment property market”. Later he states ” Under the competition Act, I am not in a position to tell the committee what the concessions are that were identified in our surveys. If I asked member firms about that I would be accused of facilitating a “cartel”. Later I state ” There is a rigged market ,capably orchestrated by the men on the right of this room. This has been very damaging for the country and has helped to destroy it. There is news today that the Quinn Group is in trouble and the banks have more than 20 Billion in bad loans going to Nama. Much of that is a function of the rigged market that is upward-only rents.”

    Later both Tom Dunne and Deputy Ciaran Lynch (Labour) agree with me. Tom Dunne states “One might say the market was rigged against tenants . That was the way the market was at that time and certainly landlords took advantage of it” Deputy Lynch then stated “I agree 100% with Mr John Corcoran that it is a rigged and distorted market”

    Mr Michael White of Great West Life, our 500 Billion landlord in Grafton Street blamed me for the Government banning upward -only rent reviews in all future leases and then threatened me by saying ” Now that we have you overrented we are going to teach you a lesson and we have lots of support from other landlords in Dublin” Was he referring to the “cartel”?. When I explained this threat to a large Dublin landlord he said ” I don’t blame Great West Life life sure you’re the Sean Fitzpatrick of the tenants”

    Our leases could be described as neutron leases i.e. upward only rent reviews tied to long leases were designed like a neutron bomb –they destroyed the occupier , the tenant, but the building remained in tact.

    This ruinous lease law also incentivised corruption of the arbitration system. Brian Goff stated at the same meeting “There is a greater problem in the arbitration process than mere transparency . From tenants point of view the process is deeply flawed. They have lost confidence in a process where the perception is that the odds are stacked in favour of the landlord against the tenant. It is more than a transparency problem” Nick Crawford (Auctioneer) then went on to explain the tricks used , and how the system was operated against the tenant.

    This ruinous lease law did not just destroy my business and your business –it destroyed our country.

  34. John corcoran Says:

    What caused Irish property crash?

    Madam, – The euro zone is a group of 17 countries with a combined population of 330 million people. All the member countries have the same currency, the same central bank, the same interest rates and the same commercial lease law, except one – Ireland.

    Ireland has entirely different commercial lease law to all other euro-zone countries. The two components of all countries’ commercial lease law is the length of the lease and the method used to review the rent. In all other eurozone countries lease lengths are short – say three to 10 years – with break clauses, and rents are adjusted annually by increases/decreases in the consumer price index. In Ireland lease lengths are long (say 25 years) with no break clauses, and rents are reviewed every five years by method of the ratchet upward only rent review.

    Irish commercial lease law was a twinheaded monster which incentivised the massive overrenting of tenants, and more devastating, it was the rocket fuel for the valuation model in valuing commercial property which created the massive commercial property price bubble. Irish banks lent 10s of billions against these toxic leases, not against the properties. If Ireland had regular euro-zone lease law it would have been impossible to have had a commercial property crash. – Yours, etc,

    JOHN CORCORAN, MSc Economics,
    London School of Economics and Political Science,

Leave a Reply