Will new mortgage restrictions place a ceiling on house prices?

During the height of our property mania it required upto 17 times an average salary to buy an average property in Dublin. And with the flames of economic expansion, double-digit annual growth in property prices, a perceived shortage of housing and salaries inflating nicely, there was no shortage of buyers for those properties.

Now that the crash has come and with over 10% of mortgage borrowers experiencing some sort of stress (32,000 > 90 days in arrears, an estimated 45,000 mortgages have been restructured and 16,500 mortgages are in receipt of State mortgage interest supplement – 93,500 mortgages in total out of 790,000-odd mortgages in the state), the Sunday Tribune reports that the Financial Regulator is considering steps to prevent more mortgage madness and another housing bubble. Arguably closing the gate so soon after the horse has bolted is toe-curlingly unsympathetic to the widespread damage already done but with First Time Buyers making up the largest portion of new mortgage lending and in a property market that still appears to be falling and where unemployment is at a high level (though stabilising) and where wages may come under increased pressure, maybe the Financial Regulator’s rumoured proposals are not as ill-timed as they first seem.

According to the Tribune the new rules would seek to put ceilings on Loan to Value rates (the percentage of the value of a house that the bank will advance as a mortgage – typically 75% these days though it was as high as 125% during the boom).  With an average price of just over €200,000 at the end of March 2010 according to Permanent TSB/ESRI, a First Time Buyer might have to come up with €50,000 of a deposit, a substantial sum which might bar buyers from the market for some time or cause property to fall further. Non-First Time Buyers might need to come up with even more because they may first need to pay off any negative equity (affecting an estimated 150,000-200,000 mortgages with an average negative equity of €38,000). Of course 60% of properties in the State don’t have mortgages and apparently as a nation we have been saving. However it is difficult to see how any new rules restricting the value of mortgages might not lead to a reduction in prices.

There have also been rumours that new systems might be put in place so that the overall credit position of an individual might be assessed when considering additional credit.

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€2bn more for Anglo. But why now?

As Anglo pursues its plans for a good and bad bank, with wags saying the good bank will be so small it will only need to operate out of the back room of a Bureau de Change, it is deeply confusing why the government have chosen now to inject another €2bn into Anglo bringing to a cumulative total of €14.1bn (€3.8bn in 2009 and €8.3bn announced in March 2010 plus €2bn announced 1st June, 2010), the sums injected into that institution with a further commitment of €8bn in reserve. RTE reports that “A statement from the Department of Finance said the bank needed new funds because of the losses it had taken on the loans transferred to the National Asset Management Agency and because of further losses on its remaining loans.” Because no split is given between losses with NAMA and “remaining loans” or between NAMA tranche 1 or 2 (tranche 2 is expected to be transferred to NAMA by “the end of the second quarter”), it is a little difficult to understand the precise accounting but there is a concern that Anglo is being allowed take an unrealistically optimistic view of future losses from  NAMA and indeed may be operating on an insolvent basis.

Consider the following numbers:

Tranche 1 – Gross loans €9.27bn, Consideration €4.17bn, Haircut €5.1bn (55%). Completed by 10^th May, 2010. Note that at the start of April, the Anglo gross was estimated at €10bn. The c€0.7bn shortfall was attributed to poor paperwork and issues with security. Notwithstanding the fact that Anglo may come back with these loans and gain some consideration for them, would it have been more accurate to assess the effective haircut at 62%?

Anglo’s accounts at 31 December 2009. €35.602bn of gross loans to be transferred to NAMA. Cumulative provision for losses of €10.120bn (28% haircut). At 31^st December 2009 Anglo had a core tier 1 ratio of 6.3% (€4.6bn tier 1 capital as a proportion of €73.055bn risk-weighted assets). This position was after the government had injected a cumulative total of €12.1bn into Anglo (€3.8bn in 2009 and €8.3bn announced in March 2010 but applied to the December 2009 accounts).

Anglo’s accounts at 31 December 2009. €37.453bn of non-NAMA loans with a cumulative €5bn provision.

Tranche 2 – forecast by NAMA to be completed by the “end of the second quarter” and having €13bn of gross loans though there has not yet been any indication of the split of the €13bn amongst the five financial institutions nor any update as to progress with transferring this tranche.

So why did Anglo need the €2bn last Friday 28^th May, 2010. It should be noted that the €2bn is in promissory notes which would merely bolster the capital position, not cash and also it should be repeated that the DoF said that the €2bn injection was because of losses on NAMA and remaining loans.

So how could Anglo’s loan position degrade by €2bn between 10^th May, 2010 when the completion of the first tranche was announced by NAMA and 28^th May, 2010? The only explanation appears to be that Anglo increased its provision on NAMA and other loans by €2bn – remember NAMA did have a provision of €10.12bn and other loans had a €5bn provision. When the first €9.27bn of NAMA loans were transferred to NAMA at a loss of €5.1bn the NAMA balance in Anglo’s books would have fallen to €26.332bn gross loans and €5.02 provision (19% haircut). If the entire new injection of €2bn was used to increase the NAMA bad debt provision then the €5.02bn would go to €7.02bn (26.6% haircut).

So even after the experience of Tranche 1 with a 55% haircut and the decision to abandon for the time being the €0.7bn because of poor paperwork and security and even if the €2bn additional injection had been 100% used to augment the NAMA provision in Anglo’s books then Anglo is still only carrying a 26.6% haircut provision for the remainder of the NAMA-bound loans. Given that some of the €2bn was to cover Anglo’s losses on “remaining” [ie non-NAMA] loans then that 26.6% is at the upper limit.

So either the experience of Tranche 1 meant that the remaining provision of 19% was indefensible (though is 26.6% meaningfully any more defensible?) or Tranche 2 actual losses were €7.02bn on a transfer of upto €13bn (at least 54% haircut) and Anglo has now no further provision whatsoever against the remainder of upto €13.332bn of NAMA loans. Neither of these two explanations is satisfactory (though the first would be logically more likely) as a 26.6% provision looks reckless against the experience of Tranche 1 and to have no provision whatsoever against the remaining NAMA loans would be beyond reckless.

Is our Financial Regulator satisfied with this? Is he satisfied that Anglo appears to be making a % provision for remaining NAMA-bound loans of less (possibly substantially less) than half that indicated by Tranche 1 (26.6% max cf 55%)? Is Matthew Elderfield satisfied that Anglo is not operating on a significantly insolvent basis?

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