Archive for May, 2010

It’s now over two months since NAMA started to acquire the first loans of the First Tranche. At the time, there was much debate as to the derivation of the numbers – why was the consideration paid, substantially lower than the long-term economic value (LEV)? How precisely did the recovery and default discounts work? Were they in respect of the first tranche only or the total predicted loans of €81bn? What went largely unnoticed was the fact that on average the LEV was 11% more than the current market value (CMV). This post examines the effect of this on NAMA’s future financial prospects.

The valuation date, by reference to which the CMVs were assessed in the First Tranche, was 30th November, 2009. Why 30th November 2009? The banks were required to submit their First Tranche data before Christmas 2009 and the valuers had to value to a specific date so 30th November, 2009 was as good as any, particularly against a background of statements from the Minister for Finance that we were close to the bottom in September 2009. Many commentators have pointed out that the market has continued to fall since then and that NAMA may be disadvantaging the taxpayer by perhaps €5bn by sticking with this date. It is unclear from the NAMA Act if the Minister for Finance can designate a new date for future tranches but he would certainly be protecting the taxpayer’s investment in NAMA if he were to do just that.

So, the First Tranche has a CMV of say 100 and a LEV of 111. Since 30th November, 2009 the residential market has fallen by reference to the Permanent TSB/ESRI index by 3.6% in December 2009 and 4.8% in Quarter 1 of 2010 (a cumulative compound fall of 8.2%) so the CMV of the First Tranche is now worth 91.8. Are further falls in prospect for residential property? Who can say but the betting would be yes. But let’s say that March 2010 was the bottom. To break even NAMA would need see the 91.8 increase in value to 110 over the next 9-10 years, ie an increase of 2% per annum compound over 9.5 years (91.8 * (1.02)^9.5). To sell at 5 years NAMA would need see an increase annually of 3.75%. Achievable? Maybe but if residential property were to drop further then both that drop and the time it takes to reach the bottom could severely impact NAMA eg if property were to drop another 18% in the next two years as suggested by Moody’s then at the start of 2013 the CMV would be 75.2 and in the remaining 7.5 years of NAMA’s lifespan, property would need to rise by 5.25% each year compound to get back to the LEV. Again perhaps achievable. Factor in the cost of NAMA’s debt which is running at about 1%+ and you will  be looking at 6-7% per annum compound growth to break even. Perhaps achievable but a long way off the 1% per annum flat rate of growth over 10 years that NAMA set out as a basis to break even last October 2009.

The above analysis relates to residential. There is a mixed picture on commercial. However in the coming weeks when NAMA unveils its Business Plan, much attention will focus on how the market has changed since last November 30th and also the recovery needed so that NAMA can break even.


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An Taisce, the private member-funded organisation designated with providing input to planning and development decisions, and whose motto is “Preserving our built and natural heritage for future generations” has chipped in to the debate over the future of so-called Ghost Estates (built or part-built housing estates from the boom which remain completely or substantially unoccupied).

Using the Ghost Estates as allotments for growing vegetables and house-swapping (where a partly-occupied Ghost Estate is de-peopled by swapping them with housing in more occupied areas) are two ideas floated in An Taisce’s latest (May) newsletter which will be available here – the proposals have been referred to an An Taisce advisory committee on NAMA which might explain why the newsletter is not presently available online.

However, An Taisce has also called for greater openness and transparency at NAMA in respect of property holdings and Ghost Estate proposals and that call will attract widespread support. Without a Business Plan, published Codes of Practice, exclusion from the Freedom of Information Act and very limited updates on operations, NAMA is at risk of cutting short whatever honeymoon period the brave efforts of its personnel may have secured.

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It used to be two –  one to change the lightbulb and another to sue him for malpractice. But if the Law Society have their way it will be three, though in the context of obtaining a loan from a bank to fund a property deal – one for the buyer and one for the seller (the existing set-up) and a new additional one for the bank. The Law Society will be meeting on 25 June 2010 to debate a change in the way property deals are managed with input from lawyers and to examine a proposal to insist on the bank using a lawyer who would oversee aspects of loan transactions.

This comes after banks have launched a barrage of actions against solicitors for alleged failings during the property boom. The London Times reports that in recent weeks, INBS and AIB have launched “at least five actions” (in the case of INBS) and “a similar number” (in the case of AIB) against solicitors for alleged negligence.  BoI and ACC are reportedly also jumping on the litigation bandwagon.

Why? Because solicitors are accused of failing to execute undertakings. “During the boom, solicitors often breached undertakings given to banks over how to use funds released by banks to complete deals, and in some cases diverted the monies elsewhere instead of paying off existing mortgages on the property or paying stamp duties.”

And what is the Law Society’s response to this history? Introduce a third set of legal eyes into the transaction on behalf of the banks. The Irish Banking Federation says this will push up loan costs. And examining the circumstances, you would have to ask why the two existing lawyers can’t just do their jobs properly. And that isn’t a joke.

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If I were Frank Daly, the NAMA Chairman, opening up the Sunday Independent this morning I would probably be choking on my granola at the headline: “NAMA: the truth it’s a bailout for developers”. Based solely on a couple of sentences from his speech last Thursday at the Association of Compliance Officers in Ireland lunch, where he said that NAMA’s “core objective will be to recover for the taxpayers whatever it has paid for the loans in addition to whatever it has invested to enhance property assets underlying those loans. It is expected that Nama will have a lifespan of seven to ten years and when it has achieved its core objective, it will be wound up”, this, according to the Independent, is proof positive that NAMA will abandon the pursuit of developers for the original loan and call off the chase as soon as the sum paid by NAMA has been recovered. And elite developers will continue to fly overhead wolfing down Beef Wellingtons (with truffles), champagne and fine wines as they go, on their way back from the K-Club to the helipad of their trophy house on Ailesbury Road etc etc

I think on balance that the Independent’s interpretation is wrong and that Frank simply used ill-judged language. The draft NAMA Business Plan in October 2009 after all clearly showed the recovery of more than NAMA would pay for the loans. However I don’t think Frank would be justified in feeling too aggrieved at the “damned medja” – if NAMA had produced a robust, defensible and transparent Business Plan then there would be no vagueness about the objectives (core or otherwise).  And whilst NAMA may now need to go into overdrive to clarify Frank’s comments (which will distract from the work at hand), the Department of Finance  might again consider how NAMA’s secrecy and lack of transparency may undermine public confidence on a widespread, and significant, basis.

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NAMA website costs revealed!

On a light note to finish the week and for those of you who think the NAMA website looks like it was put together by a class of senior infants, you might be interested to know that it was revealed in the Oireachtas yesterday that the annual cost of maintaining, operating and monitoring the five NTMA web sites, including NAMA’s,  is €2,457 – so I suppose €500 a year or thereabouts for the NAMA.ie website.

For one of the world’s biggest property funds, it looks a little basic and if NAMA is going to attract investors to marry up with distressed developers or promote itself overseas or sell off property (albeit through third parties) then it might be worth throwing a few bob at it to bring it up to a standard that won’t unsettle its intended audience. NAMA of course will execute much of its business through third parties, but even so…

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A few years ago I remember the elder statesman of BBC foreign-correspondent journalism, Martin Bell, reminiscing about his experiences with Arkan, the Serbian warlord and gangster, who had just been gunned down in a “hit”. Now Martin Bell is a very well regarded journalist, widely travelled, educated and from all accounts a decent person. Arkan was accused of torturing, raping, terrorizing his way through the new states forming from the crumbling Yugoslavia and given he was indicted by the UN for crimes against humanity, there was probably more than a little truth in the accusations. It came as a bit of surprise then to hear Martin Bell talking about Arkan as a “friend” and that “I don’t think that you necessarily have to feel moral approval for people whose company your enjoy”

I am reminded of this incident today when reading NAMA Chairman, Frank Daly’s speech to the Association of Compliance Officers yesterday in which he described the origin of the term “Groupthink” and then applied it to borrowers whose loans are being transferred to NAMA. Whilst you wouldn’t expect NAMA to dehumanize developers, you would expect NAMA not to lower any stated standard in recovering loans which might involve NAMA being tough to the point of ruthlessness in pursuing borrowers. Some of these borrowers are big personalities, as genuinely charming and affable as you could hope to meet. They have in the past enjoyed (and indeed some in the present also enjoy), wealth beyond the previous horizons of the NAMA CEO or Chairman. It is to be hoped that NAMA personnel develop sustainable boundaries in dealing with developers. It wasn’t though Frank Daly’s description of groupthink as applying to “otherwise intelligent, well meaning and moral individuals” which gave rise to concern but the following:

“In essence, NAMA’s core objective will be to recover for the taxpayer whatever it has paid for the loans in addition to whatever it has invested to enhance property assets underlying those loans. It is expected that NAMA will have a lifespan of seven to ten years and when it has achieved its core objective, it will be wound up.”

Does this mean that NAMA has ditched the objective of trying to recover the nominal value of the loans and will now only focus on recovering the sum paid for the loans? Given the State’s expected €22.3bn dead-money injection into Anglo (and possibly €20bn of that will be to make up the haircut NAMA applies to Anglo loans), the public would be outraged if NAMA were moving goalposts and effectively writing off a large part of the original loan. Hopefully this interpretation is incorrect, and that NAMA will leave no stone unturned in pursuing the recovery of loans.

UPDATE: 30th May, 2010, The journalists Alan Ruddock and Ronald Quinlan go further in today’s Independent with their unequivocal headline ” NAMA: the truth it’s a bailout for developers”. They don’t, however, have any additional evidence to NAMA Chairman, Frank Daly’s perhaps ill-judged sentence reported above.

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Minister for the Environment John  Gormley is reported in today’s Irish Times to have replied to a question in the Oireachtas to confirm that loans relating to the Irish Glass Bottle (IGB) site have been taken into NAMA. It was widely speculated, eg here though never confirmed by NAMA, that developers Bernard McNamara and Derek Quinlan were amongst the top 10 developers whose loans across up to five institutions would pass to NAMA in tranche 1. Bernard McNamara and Derek Quinlan have previously been reported as being heavily involved in the IGB site and Tranche 1 was completed at the end of April 2010.

Yet John Gormley has apparently said that the Business Plan will be produced by the end of July, ie possibly three months plus after the loan was supposedly acquired by NAMA. Why has NAMA apparently abandoned its 30-day rule, that developers produce Business Plans within 30 days of NAMA taking over the loans? Is it because of the government-owned Dublin Docklands Development Agency’s involvement in the project?

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Ever since property prices started to fall in 2007, property owners (developers, banks, advisers) have faced a dilemma – sell now or wait for the market to be restored to previous price levels. And to remind ourselves of where we have been with national average house prices, this is the picture from 1999 to the end of March 2010, courtesy of the ESRI/Permanent TSB:

And what about the future? No-one can tell you with certainty so you are left with sources whose credibility, prejudices and methodologies are subjective. So what are commentators currently saying? Here’s a bouquet:

a1.On 1st June, 2010,  Standard and Poor, whilst predicting that prices will drop 10% from today until a bottom in 2011, say that prices are undervalued by 12%. Their workings have not been made available so it has not been possible to test their prediction.

a2. The OECD said on 27th May, 2010 that house prices had fallen by 57% “in real terms” from peak and prices were now at their long term average values in terms of household income. They observed that prices were still out of kilter with rental levels, commenting that there had been a distortion during the crash. Workings not made available.

  1. DKM Consultants in association with the Education Building Society (EBS) produce a periodic affordability report which examines the % of wages required to service a mortgage on a property. Their most recent report this week also predicts a further fall in property values with Annette Hughes predicting a fall from €200,000 today to €140,000 at the bottom (another 30%). Her methodology is taking 3.5 times the average salary. DKM are a long established consulting group and regularly advise the government.
  2. Moody’s last week predicted that prices will drop by 18% between now and the start of 2013. Their methodology is unclear. As a ratings agency, Moody’s are seriously regarded. Their predictions on property prices seem to be informed by present levels of arrears. Workings not made available.
  3. David McWilliams, author and economist, in April 2010 was observing that property prices needed to drop by an average of 45%if they were to come into equilibrium with rental prices (roughly property prices should be annual rent multiplied by 14/15 years).
  4. Trinity College Dublin, Professor of Finance, Brian Lucey wrote in his introduction to a DAFT.ie survey in April, 2010 “So the crash is slowing. However, it is not over. The Daft.ie index peaked in May 2007. To expect the trough to be reached less than three years later is to fly in the face of historical evidence. Referring back to Morgan Kelly’s prescient, eye-opening ESR article which for many of us represented the key moment when our critical faculties on property were rebooted, a fall of 50% is likely. Based on a straight line projection of average declines in value since the peak this would see another 18 months of declining prices. That would be 50 months of house price falls, or just over 4 years, towards the lower end of historical experience. It is probable that as we decline towards the trough, the speed at which house prices fall slows down. And this is what we are starting to see – in the last six months, the average decline has been lower than the previous six months, itself lower then the period before.”
  5. The Minister for Finance, Brian Lenihan, said at the start of April 2010 that prices were now realistic and buyers could buy with confidence. His remarks were taken to mean that we are presently at the bottom. In September 2009, Mr Lenihan also seemed to be calling the bottom by reference to historically high yields. NAMA has recently started taking on €50bn or thereabouts of property-backed loans.
  6. A basket of pundits in January 2010 were reported by the Irish Times as predicting a median fall in average prices of 9% in 2010 with a fall to the bottom in H1 followed by a recovery in H2 of the year.
  7. Paddy Power (why not? At least when allotting odds they need to look at the profitability of their business so arguably they put as much thought and research into it as anyone else). In January 2010 they were offering odds-favourite to prices dropping by 9-12% by the end of 2010. I cannot see today’s odds but if Paddy Power provide them I will post them here. I understand they took a bath on the results of the British general election but as a betting company they are successful so I guess will be right more often than not.
  8. Morgan Kelly, UCD academic turning media star, in November 2009 was seemingly predicting a further fall of 50% from price levels at that time. At the start of 2009 he was predicting a fall of 80% from peak values.
  9. Rogoff and Reinhart undertook research into historical bubbles and reported that it took an average of 6 years from the peak for prices to start to recover (our peak was the start of 2007).

There may well be other commentaries that I have omitted but these are the most recent predictions I have noted.

So if you were a property seller today what considerations would you take into account in deciding to offload or to mothball.

  1. When will the market reach its bottom? Of course the market can be segmented according to location and property type but as far as I can see most commentators appear to be pointing to a bottom at least one year away, possibly 2-3 years away.
  2. How much further will property fall before reaching the bottom? If we say that we are 35% off the peak today (the Permanent TSB/ESRI) then on average the future predictions are that we lose another 20-30%.
  3. What are the costs of mothballing property until the bottom? Interest on loans, insurance, maintenance and the opportunity cost of losing out on recovering property markets in the UK, Europe and beyond (and indeed there are even opportunities in Ireland)
  4. When the bottom is reached, what will be the profile of any recovery? Now we appear to be getting into medium range forecasting which is even more precarious than the short term forecasts listed above. The ESRI were saying last year that it may take until 2020 for prices to recovery to 2007 levels. The ESRI were also producing population projections which ignored completely the POSSIBILITY that emigration would exceed immigration over the next 15 years.
  5. Avoiding firesales or oversupply. Given that there is an overhang which has been estimated at between 35,000-300,000 dwellings and it seems to be the case that sellers have been holding back, they will want to avoid the property being flooded in a short period which may lead to a disorderly collapse in prices. Given that there are NAMA-banks, NAMA, non-NAMA Irish banks and foreign banks, it may be difficult to control the supply of property.

Personally, I feel in my waters that matters are beginning to come to a head. NAMA has taken on the first tranche and is examining the first developer business plans. The tranche transfers will be complete in the next 7 months. Despite banks having restructured an estimated 45,000 mortgages there are still over 30,000 in arrears for more than 90 days. Repossessions are still at a minimal level but will that change? Non-NAMA and foreign banks appear to be disposing of assets. Trade seems to be brisk at the Commercial Court where lenders are seeking judgements on loans and personal guarantees. The famed “Bottom” would not appear to be in immediate prospect and there appears to be an emerging concensus that double digit % falls are on the way. Credit availability is still restricted and NAMA appears not be having any immediate effect – the Financial Regulator is looking to banks recapitalising by the end of 2010. Interest rates are rising.

So offload versus mothball? There are plainly a lot of factors to consider and for your pleasure I provide a spreadsheet below where you can play around with various scenarios but to illustrate one scenario – with a present market value of €100k, a present cost of €75k, annual interest on the cost of 5%, 2 years to the bottom, a 20% fall to the bottom, 10% per annum property price inflation after the bottom, €1000 per annum starting annual maintenance/insurance costs and 2% inflation for adjusting profit and annual maintenance/insurance, it will take 9-10 years to get to the same position as today. This is what the profile looks like.

And here is your calculator. It’s a google docs spreadsheet. Only update the green shaded area.

UPDATE:  The Irish Times reports on 27th May, 2010 that until sellers clear their stock the perception will linger in buyers’ minds that we are still some way off the bottom. The article reports that foreign banks are bringing forward disposals and describes an overseas bank seeking a single buyer for  a €2m block of 35 flats.

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A couple of weeks ago here, I explored the curiosity of the burst in Ireland’s bubble not leaving a trail of mortgage defaults and repossessions. I compared Ireland’s experience with that of Nevada (US state with a population of 2.7m where property prices are 56% off peak and 70% of mortgages are in negative equity and unemployment is over 13%) and where there were 180,000 repossessions in the last 12 months compared with less than 500 in Ireland.

Today sees the publication of our still relatively-new Financial Regulator, Matthew Elderfield’s quarterly report on mortgages in which I think we are beginning to see that the cracks caused by the bursting of our property bubble together with GNP contracting by 17% from 2007 to late-2009 (with further falls forecast for 2010), “the deepest and swiftest contraction suffered by a western economy since the Great Depression”. However the figures are understood to hide the true scale of the stress facing mortgage holders because they exclude those mortgages where banks have restructured loans, for example, by allowing borrowers to take a payment holiday, pay interest only or extend the term of the mortgage. These have most recently been estimated in January 2010 at 30,000 with that figure increasing by 3,000 per month according to a report in the Independent in April 2010. Might it be reasonable therefore to assume that those over 180 days in arrears have already exhausted the restructuring option and are heading for default?

With respect to impaired mortgages, the table below shows the figures from the last three quarters. Incredibly until the present Financial Regulator was installed in January 2010 (appointment announced in October 2009), the State did not collect or publish comprehensive statistics on mortgage arrears so there are only three quarters available. The table shows that arrears continue to climb steadily in number. Again to what extent the figures are meaningful is debatable because restructured mortgages are not shown which might be disguising the underlying level of stress. Repossessions are up very slightly but still point to well below 500 per annum.

The Financial Regulator is reported to have raised two ancillary concerns

  1. That banks may be exploiting the situation of those in arrears by forcing them to abandon tracker mortgages in favour of standard variable rates. “We do not believe that this practice complies with the code which requires firms to act in the best interests of their customers and to recommend suitable products only”. It is to be hoped that the Regulator will robustly deal with any cases where the weakened circumstances of the borrower are exploited to enhance the bank’s financial prospects. UPDATE: 30th June, 2010. The Irish Independent reports that the expert group set up to examine ways to help mortgage holders experiencing hardship has confirmed the practice of banks strongarming borrowers in distress to change from tracker mortgages to other products in return for help with restructuring the mortgage.
  2. The challenges of managing arrears and repossession will not be easy, as there will be a tab to be picked up somewhere, possibly by taxpayers in general. He said “we need to recognise that the cost of any support will be borne by those neighbours who avoided excessive borrowing themselves or are gritting their teeth and meeting their obligations”

Quarter 3, 2009 statistics from the Financial Regulator are available here. Q4, 2009 is here and Q1, 2010 here.

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The Minister for Finance, Brian Lenihan, has today announced Steven Seelig’s appointment to the board of NAMA – see NAMA press release here. Mr Seelig was, according to minutes of a meeting between the IMF and government in April  2009, reported to have expressed the view that NAMA will not result in more credit reaching Irish households and businesses.

While no-one now believes that NAMA will directly result in a “wall of cash”  immediately washing over households and businesses, it was hoped that NAMA would be a vital part of the jigsaw of guarantee, balance sheet cleansing and recapitalisation that would restore lending to normal levels. Given NAMA’s disproportionate involvement with Anglo (€36bn of the €81bn loans are expected to be from Anglo) and the severe haircuts across all financial institutions, NAMA’s role may diminish in importance when compared alongside the recapitalisations.

Anyway, good luck to Steven Seelig – it won’t hurt to have an international-centric set of eyes contributing to  NAMA’s operation. Interesting protocol that it is the Minister for Finance, not the NAMA Chairman, t of the Board, that makes the announcement of an addition to the NAMA board.

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