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.