Much has been written about the pricing of the NAMA loan purchases and the consequences for shareholders (including by myself in tomorrow’s Sunday Business Post), but less on the scale and scope of the proposed purchases.
The announced plan is that
“The eligible land and development loans of each bank involved will be transferred – that is the eligible loans secured on development land and property under development. In addition, the largest property-backed exposures of all the banks in the scheme will be transferred.”
Ignoring, for a moment the undefined word “eligible” — which allows an attractive degree of flexibility — what about the two other distinctive features of this proposed scope of purchase:
First, it is not limited to non-performing or impaired or problem loans. Second, it excludes a large swathe of property-related and other loans, including problem loans.
Inclusion of performing loans
I can see that it is an attractive simplification for NAMA’s management to sweep in all of a clearly-defined category of loans, not least because that way you are sure of covering even those loans that have not gone bad yet.
I am less impressed by the argument that including performing loans is good for the taxpayer because they will be serviced. The inclusion of performing loans increases the gross scale of the NAMA operation, and with it the size of the National Debt. It may also, I suppose, complicate the operation inasmuch as both the banks and their non-delinquent borrowers may be very unhappy to be separated.
Exclusion of non-development-property loans
If the goal is to end up with unquestionably clean bank portfolio, should one not also be considering inclusion of other non-performing loans, given the deterioration in the overall economic prospects?
At this stage, I am not sure what to conclude, except that the scope of the purchased assets is an important issue. Clearly, that word “eligible” could come in very handy as the scheme moves towards statutory definition.
Meanwhile, another question worth considering is whether NAMA needs to wait until it has identified all of the loans to be purchased. Here the answer seems clear: best to go ahead with an initial purchase of the most problematic loans as soon as the agency is up and running (assuming, of course, all of the pricing & financial restructuring, governance and transparency issues also sorted).