Archive for June 21st, 2010

The Maybourne Hotel Group (also going under the name of Coroin) has featured on here before because of the size of its NAMA-bound loans (reported at €500m, 1-2% of all NAMA loans), the involvement of Derek Quinlan and Paddy McKillen (reported in the media as being two of the Top 10 developers being transferred in tranche 1, though there is some dispute about Paddy McKillen) and the paradox of NAMA taking over non-development loans (even though NAMA’s central function was to take over ALL development loans good and bad and investment property lay outside NAMA’s scope, investment property made up more than half of NAMA’s first tranche). It seems from newspaper reporting that there is a race on to refinance the NAMA-bound loans at Maybourne before NAMA absorbs them. This post examines the complexity of NAMA’s operation in relation to some loans and whether there are gaps in NAMA’s operation.

Firstly let’s generalise the subject by referring to generic developer A, development loan B and non-development loan C – the following doesn’t apply specifically to Maybourne.

Now in order for non-development loan C to come within the ambit of NAMA, it would have to have been made by a NAMA financial institution (AIB, BoI, INBS, EBS, Anglo) and would have to have been made to a NAMA developer whose development loans were going to NAMA. Remember NAMA doesn’t do “investment properties” or other assets (helicopters, fine wine collections) unless they are related to developers whose other development loans are going to NAMA or were offered as security for development loans.

So NAMA takes over development loan B, that’s pretty straightforward and so NAMA end up with a field someplace that was intended to provide housing. It so happens that development loan B was taken out by the same person, developer A, who also went to a NAMA financial institution for a loan on a non-development asset C eg a completed office block. Well NAMA snaffles that loan for the non-development asset as well, pursuant to the NAMA (Designation Eligible Assets) Regulation  (What confuses some observers is why there is a gap between taking over development loan B and non-development loan C, didn’t NAMA say that in the first tranche it would take over ALL the loans for the Top 10 developers?).

Now let’s consider the overall financial position of developer A. That field that was backing development loan B is now worth a fraction of what was paid for it – in fact 15% of what was paid for it, and there is not a hope in hell that developer A will be able to develop that asset to the extent that it will ever be worth the original value of the loan.

However non-development loan C is a better prospect – for one thing anything that falls outside the development-land asset class, even magic beans, would probably be a better prospect for recovering loans, such has been the collapse in development property values. More seriously, office property may have dropped 50% in value but with ongoing rental income and the fact that the original loan wouldn’t have been for 100% LTV, there may be possibility of recovering the full value of that loan and being able to finance interest repayments until the asset is sold. Indeed if the property is located in a jurisdiction where property values have not collapsed to the extent they have here, it may be the case that the non-development asset C may appreciate in value so that it worth MORE than the value of non-development loan C. And if that was the case then NAMA might be able to use part of that “profit” to offset the gigantic loss on the loan on that field that is going to appreciate no time soon.

So you would have thought in the above scenario, NAMA would be keen to secure its rights in respect of non-development loan C? Indeed if developer A has his loans transferred in tranche 1, you would want to ask why NAMA has waited until tranche 2 or later to take over non-development loan C.

No doubt we will find out soon what is happening to Maybourne but it seems likely that serious questions will be put to NAMA if it transpires the taxpayer has lost control over a valuable asset, possibly worth more than the loan which secured it (and whose “profit” could be used to offset losses on development loans), whilst at the same time NAMA was breaking its neck taking over a field which may not ever even reach its Long Term Economic Value.

Illustration of effect of abandoning non-development loans where the underlying asset is sound.

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The Irish Independent today reports on a niche financial product, the Negative Equity Mortgage, which is being considered by three Irish banks – Bank of Ireland, INBS and Permanent TSB – and which is presently being offered by Ulster Bank.

A Negative Equity Mortgage will allow a borrower to move house without repaying the negative equity. The good illustration provided by the Independent is where you borrowed €300k on your existing property which is now only worth €250k. Normally if you wanted to move, you’d have to realise the €50k loss and make that up from your personal savings. With a negative equity mortgage you could potentially keep the €300k mortgage and move to another property.

Ulster Bank are reported to be providing 140pc Negative Equity Mortgages, eg property on the market for €200k that you want to move to. Ulster Bank will provide a mortgage of upto €280k which means that if your existing mortgage is €280k or less you’ll be able to move without touching your savings.

Critics of Negative Equity Mortgages say it postpones the reality check that the existing borrower has a substantial loss and that it encourages the artificial proppping up of the property market. Advocates say it recognises the reality where borrowers don’t have the cash to pay off the negative equity and allows borrowers to get on with their lives and hopefully in the end there will be property appreciation which will wipe out negative equity.

A NAMA for the little people?

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