House Price Database can’t come soon enough, as conflicting reports on the property market continue to confuse

With only one reliable residential property price index in the State (the Permanent TSB/ESRI) which is now produced quarterly and which is based on mortgage transactions with only from one mortgage provider which reputedly has less than 20% of the mortgage market, the new House Price Database, legislation for which has been promised by Justice Minister Dermot Ahern before Christmas 2010, can’t come soon enough.

RTE reports today on an Independent newspaper survey of estate agents which suggests that prices have dropped 8-9% in the four month period May-August 2010 inclusive – the PTSB house price report for Q2, 2010 suggested prices had dropped nationally by 1.7% in the three month period April-June 2010 inclusive.

It is not clear how statistically sound the Independent survey is, whether it relates to asking or actual prices, the degree of rigour in ensuring like with like is being compared when assessing price movement and whether there are geographical variations in the averages reported. All in all, you can’t take a lot from the report except that on balance it would seem prices are still falling. The confusion referred to above is  a reference to the modest 1.7% decline reported by PTSB for the three months ending June 2010 with the pace of decline easing from the first quarter compared with the relatively large 8-9% drop over the four month period ending August reported by the Independent.

Hopefully a House Price Database will dispel the confusion and help with restoring a functioning property market where transparent pricing assists buyers and sellers in making informed decisions. 13% of the loans taken over by NAMA in tranches 1 and 2 related to completed residential housing – in addition 26% of NAMA’s loans relate to development but it is unclear how much is residential development. It is also unclear where the loans are located – overall 67% of NAMA’s loans relate to property in Ireland, 27% to property in the UK and 6% to property in the Rest of World.

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Is NAMA so complicated that even the European Commission has difficulty understanding it? Impaired loans versus impaired borrowers and the NAMA eligible bank assets regulation

Simon Carswell at the Irish Times today reports that the European Commission has responded to long-held concerns of the Fine Gael (together with the Labour party the main Irish opposition party to the governing Fianna Fail party) member of the Seanad (upper chamber of Irish parliament) Senator Eugene Regan. The Irish Times says there has been a series of meetings with Senator Regan and the European Competition Commissioner, Joaquin Almunia and that Sr Almunia has now written to Senator Regan responding to the senator’s concerns.

Senator Regan led the Fine Gael opposition to NAMA at the EC level earlier this year when he submitted a detailed 20-page letter setting out the concerns in January 2010 . These concerns were amplified and added to in a further letter in February 2010 – this supplementary letter argues that unimpaired loans should be excluded from NAMA. When the EC granted approval to NAMA in Febrauary 2010, it dealt with Senator Regan’s protests (paragraphs 134-140), ultimately dismissing them. In particular the EC said:

“the eligibility criteria proposed by the Irish authorities for both participating institutions and bank assets [my emphasis] are in line with the provisions of the IAC (paragraphs (106) and (112)). In particular, the Commission views the inclusion of the associated commercial loans as necessary to capture the entire exposure to the impaired borrower [my emphasis] relationship as well as to help with aligning the measure with public policy objectives”

The eligibility of bank assets in the NAMA scheme is set out in the NAMA (Designation of Eligible Bank Assets) Regulation passed into law on 23^rd December, 2009 and that Regulation makes no reference to impaired or unimpaired assets – it sets out a class of bank asset to be acquired, land and development and describes how other associated loans to the same borrower will also be acquired by NAMA. The EC were in possession of this Regulation (which was passed into law in Ireland on 23^rd December, 2009) when they approved NAMA on 26^th February, 2010. So it would seem that the reference to “the impaired borrower” by the EC is subsidiary to the eligibility regulation and is exemplary rather than prescriptively all-inclusive.

Now it seems that Senator Regan has had further more recent meetings with the Commissioner on the issue of NAMA taking over unimpaired loans, the rationale put forward by the Senator being that this was not necessary to cleanse the banks of toxic loans and that it would reduce NAMA’s portfolio by half (NAMA being seen by the Senator as being too big in size and scope).

The Commissioner’s letter to Senator Regan has not yet been published but the Irish Times reports that the Commissioner “said loans were considered eligible if they were owed by an impaired borrower, rather than if loans themselves were impaired, because the existence of contractual links between loans “may trigger a ‘technical event of default’”. This is apparently being taken by the Senator to vindicate his opposition to NAMA taking over unimpaired loans if none of the borrower’s loans are unimpaired.

Without seeing the letter in full, it is not possible to see the context of the alleged statements. However the EU acknowledges in its February 2010 Decision in various places that NAMA will take over impaired and unimpaired loans. It would seem however that a prompt clarification is required from the Commissioner. To be clear, NAMA has been set up to take over all of the loans from five Irish financial institutions (AIB, Anglo, BoI, EBS and INBS) that can be categoried as being for “land or development” and any loans that are associated with a borrower’s “land and development” loans. NAMA has said that operationally it will not acquire loans below €5m from AIB, BoI and Anglo.

This episode will be examined closely by Paddy McKillen’s legal team who are preparing to take on NAMA, the State and Attorney General at the start of October 2010 in Ireland’s Commercial Court when they will attempt to argue that NAMA should not take over Paddy’s loans (reportedly worth a total of  €2bn though the specific application only deals with a small subset of Paddy’s total loans – €80m reportedly – but it is understood that if Paddy is successful with what is effectively a test case then the result may be claimed to apply to all of his loans). Paddy of course seems to be claiming that all of his loans are performing and are not impaired and that further he only has a small land and development loan and that the vast majority of loans are not land and development but are being subsumed into NAMA because they are associated loans to his small development loan. Remember for the background and all the latest news on the Paddy McKillen case there is a dedicated tab here.

UPDATE: 17th September, 2010: Sr Almunia’s press office has confirmed to NAMAwinelake that the letter referred to above “was a letter by the Commission services and not by Commissioner Almunia, which was addressed to Senator Regan. The letter contained no more information than the one mentioned in the relevant Commission decision Case N 725/2009 dated 26.2.2010 )”. So storm in a teacup it would seem.

UPDATE: 21st September, 2010: Senator Regan has published the response from the Commission to his entreaties. Senator Regan makes some bold statements on his website. He asserts that 20 individuals with €10bn of loans are not at all impaired and should not be going to NAMA. He says that he will be writing to the Minister for Finance to ask that he review the actions of NAMA and ensure those actions are compliant with the EU Decision. Again, it is my view that this is a red herring. It is clear that the EU had considered the terms of sections 69-71 of the NAMA Act which was passed into law in 2009. They would also have had available the NAMA (eligibility of bank assets) Regulation which makes clear that all bank assets (regardless of whether they are impaired or not) are to be transferred to NAMA as long as they meet the criteria enacted into law. Discussion of impaired loans and borrowers is a diversion in my view and the EU’s statements are exemplary not presciptive.

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