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Archive for August, 2010

Emmet Oliver at the Independent is claiming today that Standard and Poor’s (S&P) is predicting NAMA will only recover €16bn from an estimated €40bn of loans (€40bn being the consideration that NAMA is expected to pay for some €81bn of loans). With respect to their position, S&P claim it is “based on information it had seen. It didn’t elaborate any further”.It is elsewhere claimed that S&P said “In our view, the loans that NAMA is acquiring have limited liquidity and cannot readily be sold in the near term. NAMA applied a haircut of 52% to the nominal value of the first €27 billion in assets it acquired from the banks. We view these loans as having value, and as recoveries occur in the medium term we expect them to be available to pay down general government debt. However, based on the information available to us, we would not expect recoveries to amount to much more than €16 billion (10% of GDP) over the time frame that our ratings address. As and when recoveries on NAMA’s assets materialize, we may revise our forward-looking estimates of Ireland’s gross and net general government debt”. I have not seen the full S&P report which is available for $500 from S&P.  So the unanswered questions,

(1) what was the “time frame that our [S&P’s] ratings address”? What is the view of S&P over NAMA’s planned time frame of 7-10 years?

(2) what information has S&P seen that had led it to making its judgment that on the face of it means that NAMA will make a loss of €24bn+ which is higher than even the most pessimistic economists have estimated. UPDATE: a few journalists are suggesting that S&P are viewing NAMA over a five year period eg here and here. If you examine page 10 of the June 2010 NAMA Business Plan it shows that NAMA is planning for 40% of NAMA debt to be paid down by 2015 – has S&P simply taken 40% of €40bn (the approximate consideration that NAMA will pay for loans) to arrive at its €16bn? If so, what’s the big secret?

(3) John Corrigan yesterday claimed that 25% of NAMA’s assets are secured on property in London, with the implication that London is a global city with an established property market and indeed London has seen recovering commercial and residential values since NAMA starting moving loans from the financial institutions. This “25%” was an amazing claim given that the draft NAMA business plan said that 27% was based in all of Britain and Northern Ireland (and we understand that the gross value of loans in respect of Northern Ireland alone is €5bn). The NAMA CEO stated at the Oireachtas hearing in April 2010 that 20% of NAMA loans would be based in the UK and more recently in June 2010 the Minister for Finance Brian Lenihan said that “one third” of NAMA loans were based in the UK. Given the imminent sale of AIB’s UK operation with €3.2bn of UK loans, the decision not to transfer Paddy McKillen’s loans pending the outcome of his application for a judicial review (and one of Paddy’s assets is his share in the Maybourne hotel group – Claridges, the Berkeley and the Connaught hotels in London on which refinancing is “imminent”) and the apparent agreement between NAMA and Anglo that €2-4bn of loans in the US and UK will not transfer due to “reclassification”, that “25%” claimed by John Corrigan for London alone looks very high and frankly, wrong. Would he repeat the claim in a more formal setting than a telephone interview with RTE?

(4) NAMA is valuing loans individually and it is hoped is paying close to their current market values (there are issues around using a Valuation Date of 30th November, 2010, the enforcement deduction of only 5%, Long Term Economic Value and the continuing decline in property prices in Ireland though there has been a recovery in commercial prices in the UK). It is difficult though to see how NAMA could make a loss of a headline €24bn. However there is concern that there is little market for NAMA property (it is claimed that Reuters said that “buyers are as rare as leprechauns”). Further, €14bn of derivatives that NAMA is taking over have an exposure that is unknown outside NAMA. NAMA might have done the nation a favour by publishing a credible business plan which would have created confidence in its actions and clarified its exposure on derivatives (which between 29-31st March 2010 cost NAMA €1.3m according to NAMA’s first Quarterly Accounts).

(5) Elsewhere in the Independent article it is claimed that S&P is predicting an overall haircut applied to NAMA loans on purchase by NAMA of 46% up from 45% previously. This compares with the 30% in NAMA’s draft Business Plan, 49.7% average in Tranche 1, 55.7% average in Tranche 2 (an overall average over Tranche 1 and 2 of 52.3%). However 5% of NAMA’s consideration for loans is in the form of subordinated debt that will not be honoured should NAMA not make a profit so using that information and S&P’s claim that NAMA will make a loss effectively turns the S&P haircut to 51% on an equivalent basis with the other %s. So S&P are saying that future tranches will have lower haircuts than the first two (51% versus 52.3%). Why would they think that?

It is a frustrating aspect of judgments by ratings agencies that they do not always justify their ratings and judgments or respond to specific questions and we may not get answers from S&P to the above. I wouldn’t hold my breath for answers from NAMA either.

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With many people on this side of the border scratching their heads today at S&P’s latest downgrade in Ireland’s credit rating partly attributable to NAMA, Northern Irish Minister of Finance and Personnel, Sammy Wilson, has been meeting with NAMA Chairman, Frank Daly and NAMA non-executive Board member, Peter Stewart about NAMA’s dealings with Northern Irish loans and declares himself happy with how NAMA is progressing. Mr Wilson is reported as saying that “without NAMA we might have had a catastrophe”.

NAMA is reported to have transferred loans with a face value of €360m relating to assets in Northern Ireland in its second tranche, which was completed last weekend. The identities of the borrowers and the assets securing the loans have not been disclosed by NAMA. In all, NAMA is expected to take over the loans of 150 borrowers in Northern Ireland with a nominal value of €5bn (out of a total NAMA portfolio of €81bn at face values).

According to the BBC, Mr Wilson said after the meeting “the meeting today I emphasized the strategic importance of Nama’s work for our economy and Nama representatives assured me again that there will be no ‘firesale’ of assets and that these will be carefully managed over the medium term”

Although the meeting today “was the first of what will be regular meetings following the establishment of the Northern Ireland Advisory Committee [chaired by Peter Stewart]”, Sammy Wilson was present at the Northern Ireland Chamber of Commerce meeting with NAMA in May 2010, in which NAMA sought to assure the local community that there would be neither firesales nor hoarding. “It will be in the interest of all of us that the underlying assets be disposed of in a phased and orderly manner and, where necessary, we will take whatever steps we consider necessary, and are within our power, to facilitate the return of an efficient market to the whole of this island. We at NAMA have no interest in either flooding any sector of the market with property assets or in hoarding assets, which would be equally damaging”

NAMA will need to be careful not to end up constrained by its placating words. It is noteworthy that Mr Wilson gave an interview to the Independent last Saturday in which Mr Wilson heaped praise on Minister for Finance, Brian Lenihan and the entire NAMA project – a subtext to the article was that Mr Wilson is on good terms with Mr Lenihan and regardless of the labyrinthine structure of NAMA, for all intents and purposes Mr Lenihan is the boss at NAMA. The principal objective of NAMA is to make a profit for the Irish taxpayer – that is enshrined in the NAMA Act. NAMA will start disposing of some assets later this year and criteria for disposal will be driven by economic rather than regional political considerations. If NAMA has bought loans at a heavy discount it may be able to offload those loans/underlying assets at what might be considered a firesale price but which generates a profit (and possibly more importantly for NAMA at present cashflow). NAMA has a finite €5bn development pot (which might be augmented by third party investment) and it seems likely that NAMA will have to prioritise how it spends that money against competing demands that are likely to exceed the sum available. Again those decisions should be on purely economic grounds. If Mr Wilson was a politician in the Oireachtas it would be illegal for him to lobby NAMA. Mr Wilson’s comments and language today could have the effect of seeking to commit NAMA to courses of action that may not maximize Irish taxpayer returns, and NAMA should be careful to deal with any such interpretations.

UPDATE: 26th August, 2010. The Irish Times reports on yesterday’s meeting and it seems clear that there will be extensive co-ordination between NAMA (through its Northern Ireland Committee) and the Executive (that is, the government) in Northern Ireland. The degree of co-ordination suggested would possibly be illegal in the State where lobbying NAMA by politicians is illegal and can carry a prison sentence. So why is NAMA allowing lobbying by politicians in one jurisdiction but outlawing it at home, creating an uneven playing field?

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Whilst the headlines today will focus on what the Independent calls a” hammer blow” to the State’s financial standing, buried in the detail of the Standard and Poors (S&P) press release (available here) is negative comment on NAMA. The downgrading of NAMA bonds in line with Irish sovereign debt is to be expected but S&P’s decision to classify NAMA’s bonds as State debt carries a worrying implication.

Remember that the decision by Eurostat in September, 2009 to classify NAMA’s debt (its bonds and subordinated debt consideration for loans bought from the five NAMA financial institutions) as non-government debt was “preliminary” (see letter here). There were a number of reasons Eurostat decided to classify the NAMA debt set-up as off-government-balance -sheet but the two main ones were that NAMA would make a profit (and that the possibility of the government being called upon to guarantee the debt without a NAMA profit was consideredunrealistic) and that NAMA was independent of government. The second condition was achieved through the shady creation of the NAMA SPV with independent investors owning 51% of the SPV – the reason the SPV is shady is that although we know the nominal identities of the investors (pension funds etc) we do not know what in money-laundering parlance would be called the Ultimate Beneficial Owners of the investment. Also the government retains full control over the SPV despite only owning 49% of the share capital. What about the first condition, the profitability of NAMA? Eurostat were assured that the assumptions underpinning NAMA’s finances were prudent and remember this was at a time when NAMA was projecting a €4.8bn Net Present Value over its 10 year life span. Of course more recently NAMA has produced another business plan whose base plan is to make a €1bn Net Present Value (though two other scenarios with NPVs of minus €0.8bn and €3.8bn are also shown).

S&P’s decision to classify 100% of NAMA’s debt as government debt reflects a belief that the government is exposed to losses of 100% of that debt (estimated by NAMA and S&P at €40bn). To suggest that NAMA’s losses may be in the order of €40bn goes beyond what even the most pessimistic of economists has been predicting but the S&P assessment would seem to doubt the NAMA business plan projection of a €1bn NPV.

It should be said that an early reaction by Ireland’s respected National Treasury Management Agency to the S&P release has been to characterise its treatment of NAMA debt as “flawed”. Perhaps Eurostat will have something to say about their original decision, which was preliminary after all. This topic was explored at some length in a recent entry on here.

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Yes – if the toxicity level of the residual loans left in the banks after extracting the NAMA loans is uncertain to a significant extent. This entry examines the residual loan books and uncertainty over residual loan values.

As NAMA makes its way through the transfers of the tranches of land and development and associated loans from the five NAMA financial institutions, it is clear that the residual loans left in the five banks are significant and impaired. First, let’s look at the lending profile of the five banks – the information is collated from the latest accounts (period ending December 2009 for Anglo, INBS and EBS and from the recent half year reports from AIB and BoI). AIB have produced a half year statement without full supporting accounts so there are some assumptions about gross loans and the distribution of impairments.

First a summary of the total loans split between NAMA and non-NAMA

Next a summary of the non-NAMA loans showing the gross loans and provisions for impairment

1. AIB Half Year presentation (page 21 shows an analysis of non-NAMA loans). The more complete accounts are here.

2. Anglo accounts for the 15 month period ending 31st December 2009 (page 8 for total lending, page 90 – note 27 to the accounts – for the breakdown of non-NAMA lending). Anglo are due to issue an update on the first half 2010 performance by the end of August 2010.

3. Bank of Ireland Half Year accounts 2010 (pages 101 and 102 show the breakdown of the gross loans and pages 51 and 104 show the breakdown  of the provisions)

4. EBS accounts for the year ending 31 December 2009 (pages 41-42 of the accounts, notes 13 and 14 provide an analysis of lending and provisions)

5. INBS accounts for the year ending 31 December 2009 (pages 63-65 of the accounts provide an analysis of lending and provisions, assumptions have been made as to the allocation of total lending to the spreadsheet headings)

NAMA is supposedly dealing with “Land and Development” and “Associated” loans only. The residual loans in the banks cover everything from residential mortgages, personal loans and credit card balances to commercial loans (including commercial loans for property that falls outside the ambit of NAMA – mostly investment property you would expect). So let’s examine each of these categories of residual loan to see how clear their value is:

(1) Residential mortgages – part 1 (arrears and default). The latest statistics from the Financial Regulator for the first quarter of 2010 (Q2 is expected later this week) revealed that 32,000 of the 791,000 mortgages in the State were in arrears of more than 90 days and indeed of those 21,000 were more than 180 days in arrears. It is understood that in addition to these mortgages in arrears more than 50,000 mortgages have been restructured following difficulties so that they are now paying interest only, having payment holidays, longer periods to repay or some other reductions. The Financial Regulator has recently published a consultation paper which is set to make repossessions more difficult when borrowers are seen to engage in good faith with their banks.

(2) Residential mortgages – part 2 (losses on tracker mortgages). Ireland has a large number of tracker mortgages – of the 791,000 extant mortgages, 407,000 are trackers and a further 113,000 are fixed rate mortgages leaving 271,000 that are standard variable rate mortgages. Banks are widely suspected of losing money on tracker mortgages that will typically be priced at ECB + 0.75% – that is understood to be less than the cost of finance from depositors and money markets. Now these tracker mortgages might not be impaired but whilst ECB rates are set at a low level (which is certainly the immediate outlook over the next couple of years) banks are exposed to continuing losses which they will book as they occur.

(3) Personal loans – unsecured. Ireland presently has an unemployment rate of 13.7% (end July 2010) equivalent to approx 292,000 out of a workforce of 2,132,700 (end June 2010). Ireland maintains a Live Register in respect of people in receipt of employment benefits (this includes the unemployed but also those on low wages) and that total is now 466,824 (end July 2010). Over 20% of homes are understood to be in negative equity and headline wages have dropped 0.7% in 2009 and are forecast to drop by a further 2.7% in 2010 according to the Central Bank (Q2, 2010 Bulletin). Take home pay has been reduced by an income levy (2% for income up to €75k, 4% from €75-175k and 6% on income over €175k). There is a new tax on second homes of €200 per annum which worryingly has a far lower rate of collection in 2010 compared with 2009. Approximately 900 homes per month are having their electricity cut off by energy supplier ESB with a further 11,000 homes per month entering into arrangements to restructure their payment of electricity bills all from a total ESB customer base of 1.5m homes. So I think it is safe to say that there will be pressure on the recoverability of personal loans, particularly in the next couple of years until GNP recovery cascades down into people’s pockets.

(4) Commercial lending – property. Development land may have suffered most in the Irish property crash – indeed Savills have recently said that prices are up to 90% off peak – “Spend on development land in Ireland was down an estimated 90% in 2009 from the peak in 2006, while values have fallen by up to 75% to 90% from their peak particularly in provincial towns. Many sites purchased between 2005 and 2007 are now largely uneconomic to develop given the price paid” But we also know that what might be classed commercial investment property (finished offices, shops and industrial space) has dropped considerably in value. According to the IPD commercial capital values are now 58% off peak  and the recent trend has been an acceleration in declines despite attempts by property companies to reassure and stabilise the market. Of course these assets are not acquired for development but the severe decline in their values must place non-NAMA property loans at some considerable risk.

(5) Commercial lending – non-property. Besides a property crash, Ireland is suffering a good ol’ fashioned recession with GNP declining by 17% from 2007 to late 2009 and expected to decline by in excess of 1% in 2010 before recovering in 2011. It has been ““the deepest and swiftest contraction suffered by a western economy since the Great Depression” according to economist Morgan Kelly. There were 917 corporate insolvencies in the first seven months of 2010 (compared with 1,406 for the full year 2009 and 773 for the full year 2008.

The analysis of the accounts and half year statements above show in relation to the non-NAMA loans that there is an overall estimated provision of €11.5bn against total loans of €261.7bn (a “haircut” of 4.4%) – is this adequate in light of the severe pressures on Irish businesses and households? Will external providers of funding to banks still consider there to be potentially nasty shocks in store after the NAMA loans have transferred?
So how much financial certainty will there be in the non-NAMA residue of loans  in the five NAMA financial institutions come 2011 when NAMA is due to finish its transfers? There will plainly be some degree of uncertainty, the important question is whether the uncertainty will significantly impede the banks from attracting external non-government funding so that they can indeed return to normal lending to “viable homes and businesses”. And I think the answer to that question is far from clear.

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Now that the tranche 2 transfer of loans from the five NAMA financial institutions to NAMA is complete, NAMA must seek EU approval for the valuations. If the experience of tranche 1 is anything to go by (completion of transfers to NAMA on 10th May, 2010, EU approval granted on 3rd August, 2010) then EU approval may take several months. The entry examines potential problems with tranche 2  that may lead to the EU rejecting valuations.

The first loan valuations were undertaken in December 2009 and delivered by the banks to NAMA just before Christmas 2009. NAMA had selected a Valuation Date of 30th November, 2009 by reference to which the loans were to be valued. As we now know, the first tranche did not transfer until 10th May, 2010. The delay has never been fully explained but the EU only approving the NAMA scheme on 26th February, 2010 (and making some changes to the way loans were valued) and the worse-than-expected condition of the loan documentation must have played a part. Regardless over five months elapsed between the Valuation Date and the completion of the first transfer. During this time, it became apparent that property prices (residential and commercial) in Ireland were continuing to fall though the UK fared better with a robust recovery in commercial prices and a more modest recovery in residential prices. November 30th, 2009 clearly though was not the bottom of the market. And that is one of the principles underpinning NAMA – NAMA buys distressed loans at the bottom, nurses them until there is a recovery and sells them at a profit (or at least enough to cover the long term economic value premium it has gifted the banks). The latest property indices for Ireland are for the quarter ending 30th June, 2010 (the next Irish indices will not be released until the start of October, 2010 in respect of Q3) – the latest indices show that commercial and residential property in Ireland has dropped 8-10% compared with 30th November, 2009. Whereas the EU might have accepted a Valuation Date of 30th November, 2009 for the first tranche will it reject the second tranche and demand that NAMA re-base its valuations by reference to a more recent valuation date. Otherwise NAMA banks are getting far more State-aid than was envisaged – they were supposed to get a Long  Term Economic Value premium of 10-15% over the Current Market Values – in fact they are getting 25%-plus premia – is this just too much State-aid? UPDATE: 24th August, 2010. Professor of  finance at Trinity College Dublin, Brian Lucey, discussed the issue with NAMA’s Valuation date of 30th November, 2009 on RTE’s Morning Ireland – his contribution is about 15 minutes into the podcast. In particular he draws attention to the fact that Irish property prices have declined since last November.

The minutiae of NAMA’s valuation methodology has never been fully understood by the public or indeed academia. However both the Long Term Economic Value Regulation and the EU Decision indicate that NAMA will deduct from the Long Term Economic Value calculation a sum to compensate NAMA for the fact that on a proportion of loans NAMA will need foreclose and enforce the security. The deduction for enforcement authorised by the EU is 5% and in the EU Decision in February, 2010 this is what the EU had to say on the derivation of this 5%.

“The seizure of the underlying property by NAMA could be achieved in a number of ways, including by legal enforcement. The costs associated with a full legal enforcement process are approximately 15.00%. It is however very difficult to predict ex-ante the proportion of assets for which NAMA will have to go through a full legal enforcement process. The Irish authorities propose to apply enforcement costs of 5% to all the assets. This corresponds to over 50% of the non-cash flow producing loans incurring a 15% enforcement costs. The Commission considers, on the basis of the information available, that this is a reasonable and prudent assumption.”

Now I don’t know how the EU arrived at the conclusion that 5% was an adequate average contribution by the banks to NAMA for enforcement costs but I do recall that in the draft NAMA Business Plan the assumption was that a maximum of 20% of loans would default so perhaps the calculation was as follows

Industry standard enforcement costs x proportion of defaulting loans or

15% x 20% or

3%

And since 5% is greater than 3% and the 20% default rate was supposed to be prudent, perhaps that is how the EU arrived at its conclusion.

The problem is that in Ireland, the 20% default rate was seen by many as being too low. It was apparently based on the experience of Barclays in the UK in the early 1990s when the UK suffered a property crash. However the UK crash was not anywhere near the scale of Ireland’s (in nominal terms) and Barclays seem to have had better lending standards and practices than the likes of Anglo Irish and Irish Nationwide Building Society. The new NAMA Business Plan in July 2010 did not specify an up to date assumption on defaults. However consider the following:

(a) We now understand that the loans of Paddy McKillen will not transfer pending the outcome of an application by Mr McKillen for a judicial review of NAMA’s dealings with his loans. Apparently Mr McKillen’s loans are performing.

(b) We now understand that AIB is selling its UK operations which includes over €3bn of what are assumed to be peforming loans.

(c) We now know that the estimate of Bank of Ireland loans to be transferred has fallen from €16bn in 2009 to €12bn today and the understanding is that the difference, €4bn, related to performing loans that were redeemed.

(d) Anglo has recently stated that NAMA is agreeable towards €2-4bn of loans in the UK and US not transferring to NAMA. Again the assumption is that these are performing loans.

(e) NAMA itself has reduced its estimate of the proportion of performing loans in its portfolio from 40% at the draft NAMA Business Plan stage to 25% today.

In light of the above should the 5% contribution by the banks for enforcement increase?

And lastly what will the EU have to say about NAMA allowing apparently performing loans to be sold (in AIB’s case), retained (in Anglo’s case) or potentially not being taken over (in Paddy McKillen’s case)? NAMA is entitled to deduct a premium from the Long Term Economic Value to reflect the digout it is giving banks. Should that premium increase?

So in conclusion, I do not think that NAMA should be confident in getting EU approval of the second tranche valuations as it would seem the amount of State-aid being provided to the banks is significantly more than was envisaged when the EU granted approval for the NAMA scheme.

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In most property markets, first time buyers (FTBs) are seen as critical for the smooth operation of the market – they are assumed to buy “starter” homes to get their feet on “the property ladder”. And like bottomfeeders in a marine ecological system, FTBs are seen as vital to the market by buying homes which will in turn enable the sellers to trade up. FTBs are also by definition new entrants to the property market and traditionally they are seen to be adding to an existing market which is good for property sellers, builders and property prices.

But has the nature and significance of FTBs changed in the Irish property crash? Mortgage figures published by the Irish Banking Federation yesterday show that FTBs make up 60% of the volume (56% of the value) of new mortgage lending for home purchases in Q2, 2010. That compares with the peak (by reference to volume of mortgage lending in Q4, 2005) when FTBs made up only 36% of the total volume. So FTBs are a very significant cohort of buyers in the present mortgage-bought market, there is no doubt about that. But are they distinguishable from other buyers?

According to the IBF statistics, the average mortgage obtained by a FTB in Q2, 2010 was €193k. Unfortunately we do not know either the location of the purchases or the deposit available to the FTB. The highest LTV currently available with standard Irish mortgages at present is 92%, though there are suggestions that buyers may need 25% deposits in the present credit market. This would mean that a €193k mortgage would enable a home purchase of €210-257k (92% – 75% LTV). The average price of a home in the State according to the latest Permanent TSB/ESRI index for Q2,2010 is €201k nationally (Dublin €242k and Outside Dublin €182k). So unless FTBs are predominantly buying in Dublin and have high LTV mortgages then they are not buying “starter homes”, they are buying average homes.

And what of the role of FTBs in enabling sellers to trade up? This is based on the assumption that sellers stay in the market and that may not be true for a number of reasons. Emigration continues at a very high level and is likely to mean that our population stays flat in 2010 compared to 2009 or indeed suffers a slight fall. A second reason is that in Ireland the rental:purchase price:yield framework has gotten completely out of equilibrium and it would seem (anecdotally at least and certainly at the mid- to upper-end of the market), renting makes more financial sense than buying. So FTBs may not be fulfilling their traditional role of buying “starter homes” at the lower end of the market enabling a chain of trading-up by existing owners.

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NAMA has just confirmed that it has completed the transfer of the second tranche of loans and that the haircut applied to Anglo’s component of the tranche (€6.75bn) was 61.93%. Here is the final overview of tranche 2.

The information released today regarding the second tranche tells us that the Long Term Economic Values is 9.78% above the Current Market Value or of loans, down from 11% in the first tranche and telling us that NAMA needs a marginally smaller recovery in the property market than implied by tranche 1 to break-even on loans on which it needs foreclose. Remember NAMA is due to deliver the second Quarterly Report at the end of September 2010 which might contain further information. The Finance and Public Service Committee has committed to getting the NAMA CEO to attend a hearing soon after the Committee returns from the summer recess at the start of September, a few weeks before the Oireachtas returns. Also Anglo are due to make a statement by 31st August 2010 on its first half year performance (though if AIB’s recent half year report is anything to go, don’t bank on Anglo disclosing very much with respect to the either the remaining tranches of NAMA loans or indeed the residual NAMA loans – in its half year report two weeks ago AIB was projecting an 18% haircut on its remaining tranches despite running up 42% and 48% haircuts in tranches 1 and 2 respectively).

So what does tranche 2 tell us about NAMA? Very little with respect to the finances of NAMA – it has been said that INBS’s large 72% haircut in the second tranche was a result of taking hits on development land in Ireland and that future tranches would perform better, particularly those located in the UK. As regards Anglo, Mike Aynsley said in the Independent on Sunday last that “it [the haircut] depends on the mix of, and the number and the volume of, loans that are associated with the land”. So despite the haircuts in tranche 2 being higher than in tranche 1, you can’t necessarily project that on future tranches – the haircuts might be higher or lower. Though that won’t stop some commentators broadcasting their own jeremiads on the NAMA banks capitalization needs. NAMA is still predicting that it will transfer €81bn of loans though it’s not clear if this accounts for AIB’s sale of its UK operations or Anglo’s recent agreement to possibly withhold €2-4bn of US and UK loans. Page 13 of the detail of the Tranche 1 &2 transfers tells us that tranche 2 had more UK loans than tranche 1. That is worrying because the UK has experienced a modest recovery in residential and commercial prices since last November 30th, 2009 – NAMA’s Valuation Date. NAMA has now taken over loans on 48 hotels.

One thing tranche 2 does tell us is that NAMA is falling behind schedule. At the start of April 2010, the Irish Times who were displaying familiarity with NAMA at the time, were saying the second tranche should have transferred by “the end of May or early June”. At the Oireachtas hearing in April 2010 the NAMA CEO said the tranche 2 transfer would be complete in the “second quarter”. Why the delay? NAMA is not saying but it is a fact that on 19th July, 2010 NAMA confirmed it had completed tranche 2 for the other four banks and then went on to say that ““due to the amount of paperwork involved in the process”” there were delays with Anglo. So what about the remaining tranches – 13 in all if you take what was said at the NAMA Oireachtas hearing in April 2010. NAMA has been given until the end of February 2011 by the EU to complete the transfers but ultimately that is an artificial deadline and may be extended. However it should be remembered that the principle underpinning NAMA is that it cleans the banks of a class of loans, many of which are toxic, so that there can be clarity as regards the finances of the banks, and that the banks can consequently attract market capital and can return to lending to “viable businesses and households”. Delays at NAMA delay the achievement of that objective.

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Reinforcing the recent message from the IAVI that sales volumes picked up in Q2, 2010, the latest mortgages statistics from the Irish Banking Federation show that both total volumes and values picked up ion Q2, 2010 compared with Q1, 2010 though the value of an average new mortgage fell. The IBF represents lenders responsible for “well in excess” of 95% of the Irish residential mortgage market. Here are the volumes with an analysis of the volumes compared with the peak, Q1 of 2010 and Q2 of 2009.

And here are the values, again with a comparative analysis at the bottom.

And finally here are the average values for mortgages in the different categories

What do the latest figures tell us?

(a) Volumes of “real” mortgage lending (as opposed to top-ups or remortgages) are up 17% in the quarter with first time buyers up an impressive 27%. Buy to let mortgages continue their steep decline. Top-ups and remortgages are up 5%.

(b) Volumes are still at a very low level, 86% off the peak and 38% off a year ago.

(c) Values have grown in the quarter but not at the same rate as volume. The average first time buyer mortgage has fallen from €202k in Q1 to €193k in Q2. Whether this reflects houses prices is unclear as statistics on the level of deposit are not published. If the deposit level has stayed constant then it would show that average first time buyer prices had fallen 4.3%.

(d) The average value of a mortgage for movers has fallen from €248k to €235k, a 5.3% drop but again because deposit information is not available it would not be safe to say that translates directly into a house price drop of 5.3%.

(e) The value figures showing an increase in the second quarter lend credibility to recent claims by the Independent Mortgage Advisers’ Federation reported by the Sunday Tribune that residential mortgage lending in the State in 2010 will be 35,000 loans worth only €6bn, down by a quarter from the 46,000 loans worth €8bn in 2009. To the end of June 2010 there were 14,781 new mortgages worth €2.5bn. In November 2009, the user 2Pack on the http://www.thepropertypin.com forum was predicting €6bn total mortgage lending in 2010 .

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There are two newspaper pieces today on Anglo’s second tranche which the Anglo CEO, Mike Aynsley, said yesterday would be transferred in the weekend just gone. In the Irish Times, Barry O’Halloran asserts that Anglo’s second tranche has an €8bn nominal value and a 60% haircut, this according to Barry means than NAMA is paying “slightly less than €4.8 billion” for Anglo’s second tranche. God knows whether the €8bn and 60% are accurate but if they are, it would mean NAMA was paying €3.2bn for Anglo’s second tranche – not €4.8bn. Elsewhere Barry tells us that Anglo’s discount of 60% was higher “than the average discount applied to the debts owed to the other banks” – if Barry is talking about tranche 2 then that is correct as the average discount applied to the second tranche of loans for AIB, BoI, EBS and INBS was 47.46% (Barry says 48%) though of course INBS had a discount of 72.4%. Barry also tells us that “Nama is taking over all property-related loans worth more than €5 million owed to the five banks involved.” Of course NAMA is taking over land and development loans and “associated loans”, if your loan with the NAMA bank is purely investment property and you don’t have land and development loans you stay outside NAMA, and NAMA is taking over ALL such loans from INBS and EBS regardless of value, the €5m minimum applies to AIB,BoI and Anglo only (see page 8 of the draft NAMA Business Plan). Not a great day on the accuracy front for the Irish Times.

Emmet Oliver at the Independent seems to be more on the ball and he asserts Anglo are transferring €7bn in the second tranche with a haircut of 61%. Again God knows if the €7bn and 61% is right but at least Emmet has calculated that applying a 61% haircut to €7bn will give you a payment to Anglo of €2.73bn. Emmet says that NAMA should issue a release today or tomorrow confirming the transfer.

Elsewhere both papers say that NAMA CEO, Brendan McDonagh, has written to the CEOs of the five NAMA banks seeking better co-operation in respect of future tranches – Mike Aynsley at Anglo, Colm Doherty at AIB, Richie Boucher at Bank of Ireland, Fergus Murphy at EBS and Gerry McGinn at INBS. Now this is confusing because the NAMA CEO told the Oireachtas Joint Committee on Finance and the Public Sector in April 2010 (in response to a memorable question from Deputy Arthur Morgan who asked the NAMA CEO when he was going to tell the banks to “piss off!” because of delays in providing loan information)

“On due diligence, the Deputy understood why there were issues regarding tranche 1 and asked when we would tell the institutions to give us the information rather than ask them nicely for it. It is no longer the time to do that. Under Part 6 of the National Asset Management Agency Act we have the power to issue directions. Last weekend we issued directions to the institutions in which we set out that they have to give the information relating to tranche 2 onwards in a certain format which will allow us to get through the process much more easily.”

Part 6 of the NAMA Act is wide ranging but is it still not sufficient to compel the banks to provide information in a timely manner? And will a letter be more effective?

In terms of future tranches, Emmet Oliver says that NAMA will relax its information requirements. That is worrying and carries an implication that NAMA may not be in full possession of the facts on a loan when valuing the loan and the fear would be that NAMA will overpay for the loan. Emmet claims that the letter from NAMA’s CEO to the banks says that tranche 3 should transfer in September, tranche 4 in October, tranche 5 in November and tranche 6 in December and “it is possible a small number of the loans will still have to be transferred early in 2011, but the amount of loans involved at that stage will be small.”Again this is confusing because the last time the NAMA CEO made reference to a number of tranches was at the Oireachtas hearing in April 2010 when he said there were then 15 tranches.

“Deputy Flanagan asked about the total number of tranches. We will try to condense it to about 15 overall.”

Is NAMA going to fail to meet the EU imposed deadline of February 2011? More important than this artificial deadline that can in any case be varied even if it treads on some egos is the fact that delays at NAMA mean delays at banks getting full access to credit markets and being able to lend to “viable homes and businesses”.

And lastly we learn from both newspapers that NAMA has appointed Deloitte to be its internal auditor. Take a look at NAMA’s tenders and it seems that they have not updated that tender with Deloitte’s appointment. In NAMA’s first Quarterly Accounts it revealed that it had paid more than €2m to Pricewaterhouse Coopers for secondment of staff – it was the single largest expense by reference to a company in the Quarterly Accounts yet there was no tender for the secondment. Is NAMA getting sloppy?

UPDATE: 7th September, 2010. NAMA has confirmed (effective 26th August, 2010) that Deloitte and Touche has been appointed to the internal audit role in NAMA.

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Whilst politicians seem to be taking seriously the ban on lobbying NAMA – Willie O’Dea was unusually concerned last month about approaching NAMA regarding health and safety issues with a site in Limerick and Tourism Minister Mary Hanafin first trumpeted a forthcoming meeting with NAMA to discuss the hotel sector, only to go very quiet subsequently about whether any meeting had in fact taken place – it seems politicians are queuing up outside the Anglo CEO’s door to lobby on behalf of borrowers.

In today’s interview with the Independent, Mike Aynsley confirms that politicians across the spectrum have been making representations on behalf of borrowers. In respect of Anglo’s dealings with Arnotts recently (which saw Anglo along with Ulster Bank take an equity stake in Arnotts after the Dublin department store ran up debts reported at €300m) he does not deny that the government had lobbied him. He does go on to say that Anglo takes decisions on commercial grounds.

So let’s get this straight. A politician, particularly a government politician, cannot pick up the phone to NAMA CEO Brendan McDonagh to lobby for certain treatment in respect of a loan in NAMA but that same politician can do exactly that with Anglo. And Anglo is totally dependent on government support for its survival, look at the 2009 Anglo accounts to practically see the extent of that support (€12.3bn at that point) and the gratitude of Anglo for that support. Of course the NAMA Act prevents certain actions by Anglo which might impact a loan. Section 71 of the NAMA Act is designed to stop certain activity by the banks that might damage NAMA but there is nothing to stop a bank foregoing recovery action or making additional loans.

So perhaps Willie O’Dea and Mary Hanafin should have been lobbying the NAMA banks themselves for action in certain areas before the loans transfer to NAMA. It certainly seems to be open season and given Anglo’s dependence on the State for support they are likely to be offered a receptive hearing before Anglo makes a commercial judgement – and remember “commercial” judgements can involve many different considerations on Anglo’s commercial prospects.

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