Archive for January 28th, 2011

There are two surveys out this week that, on first glance, paint a contradictory picture of prices of residential property in the State. This morning saw the publication of the long-running EBS/DKM survey on affordability (with press release here) which concluded that we are today spending a smaller proportion of our net income on new property purchases than any time previously (at least since 1988). And earlier in the week, we had the latest Demographia International Housing Affordability Survey for Q3, 2010 which ranked Ireland (Dublin) as “seriously unaffordable”. So what are we, more affordable than ever or seriously unaffordable?

The DKM study examines the percentage of net income (that is income after tax and statutory deductions) that is needed to fund a new property purchase. They concluded that the amount now needed by an average First Time Buyer (FTB) couple each month to fund a 90% mortgage paying 3.87% interest over 25 years buying a property for €159,500 “has more than halved to monthly repayments of €639 or 12.6% of a couple’s net income”  12.6% average monthly income at €639 infers net €60,857 annual income. This is for a FTB couple. Although there may be some tax variations between couples, a net annual income of €60,857 (that is after tax, PRSI and Universal Social Charge) would infer gross annual income of €82,000. (using the PwC tax calculator for 2011). DKM don’t show the “affordability” over the past few decades but they do confirm that at the peak of the property boom in late 2006 the equivalent monthly % needed to fund a new purchase was 26.4% and DKM claims that the present % is lower than any time in the past 25 years including previous lows of 13.8% in Q1, 1995 and 13.4% in Q2, 1988.

The Demographia survey examines the median house price divided by gross annual median household income. Anything below 3.0 indicates affordability, 3-4 indicates moderate unaffordability, 4-5 serious unaffordability and above 5 severely unaffordable. Ireland (Dublin) was at 4.8, that is the average house price divided by the annual gross salary was 4.8. Where does the magic number 3.0 come from as the borderline between affordability and unaffordability? From pre-1990s experience of what folk back then paid. Is that a decent measure today of affordability? That’s a difficult question. The report states “Ireland: Housing in Ireland was moderately unaffordable with a Median Multiple of 4.0. Housing was generally affordable in Ireland as late as the middle 1990s. Dublin was the least affordable market with a Median Multiple of 4.8 and along with Cork (4.1) was seriously unaffordable. Three of Ireland’s five markets were moderately unaffordable, Waterford (3.2), Galway (3.6) and Limerick (4.0). Ireland had no severely unaffordable markets and had no affordable markets.”

So what are we, affordable or unaffordable? Both it seems. Demographia believe that a return to long term multiples of three times gross median income is “correct” whereas DKM examine proportions of income over a period of time for new purchases and conclude we are today at a low-point.

Of course, none of this really helps purchasers in a market where prices are still apparently declining according to the latest Permanent TSB/ERSRI house price series with declines accelerating in Q4, 2010. Affordability might be less a consideration than availability of credit or views on prices in the short term or wider economic considerations such as weak growth, increased taxation, reduced state spending and interest rate.


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This is the second entry to deal with the allegations made in the last couple of days by Fianna Fail senator, Mark Daly, including allegations made in an interview with Pat Kenny on RTE yesterday morning. The allegations were of shenanigans involving loans acquired by NAMA. There is a full transcript of the interview with Pat Kenny in Part 1 but I extract here what I believe to be the relevant remarks. I have merged some parts of the exchange and you should consult the full transcript to see the sequence of precisely what was said.

Mark Daly:  It’s not so much an allegation as a fact. In one particular case that I have come across in the UK the original loan was €12m, the haircut was €6m, but the asset itself was undervalued and was worth €9m really and the guy, the original borrower of the loan said to his friends “you pay the banks €6m, they’ll be happy and we’ll sell it for €9m” and they made a nice €3m profit. There’s a lot of shady behaviour going on here. The obscenity of it is that on top of this is that the banks are once they’re quite happy to get the money they owe NAMA, aren’t going to go after the borrowers, the original borrowers for the balance of the money. The original borrowers that have been brought to my attention are arranging for their friends to put in the bids. Nobody else is aware that this place is for sale because no-one else knows that this asset is in trouble, is for sale. This is a scam of monumental proportions

Pat Kenny: NAMA had responded that it had addressed this extensively at the Public Accounts Committee.

Mark Daly: The problem here is that you need smoking guns you need evidence of emails, phones, cheques, money going. This is all quietly, quietly little chats in a corner over a pint. And the guy who came to me on this one was approached at a dinner party to be the third party to buy a property in the UK and he would then be given a cut. And he came to me because he was so disgusted, that the same people who got us into this trouble in the first place are now doing the same thing again.

Emmet Oliver: I don’t have any evidence and unlike Mark there I don’t have the benefit of privilege in the Oireachtas to say these things. So he does have in the dying days of the Oireachtas the opportunity to put names into the pubic domain.

Mark Daly: And in the next six months the guys who caused all the trouble are still going out there and they’re going to make billions, millions, hundreds of millions, billions off the taxpayer because they’re buying property at less than the asset because they’re arranging for their buddies to put in false bids and thereby buying it for less than the market value –

This entry examines the following
(1) The allegation

(2) NAMA’s codes of practice and the NAMA Act

(3) Banks’ codes of practice and the NAMA Act

(1) The allegation

The loan, the senator claimed, had a par value of €12m and related to a property in the UK. NAMA paid €6m for it. A party related to the developer (“friends” according to the senator) acquired the loan for €6m from NAMA. The underlying property is today worth €9m.

To investigate the allegation further, the Senator needs to identify the transaction. It seems that it was the loan that was sold by NAMA or the bank, not the underlying property. So we probably need more than just the property address because the new buyers of the loan may not have registered a loan charge that is publicly accessible and if they were friends of the borrower and wanted to keep the transaction hushed up then that is all the more likely. It seems to me that probably the only parties that can fully investigate the allegation are (1) NAMA or (2) the bank but if the Senator puts the following information in the public domain then the media can conduct some investigations

(a) The address of the property – the media can then identify the owner, the loan charges on the property, the price paid for the property and can probably have a stab at valuing the property today.

(b) The buyer of the loan – this wouldn’t be required and would be clear if the new buyer of the loan registered a charge against the property. But if they were being cute they mightn’t have done this. So the Senator may need to identify the buyer of the loan.

Only NAMA and the banks will theoretically know how much the agency paid for the loan – the Senator says €6m. But if the Senator puts (a) and (b) in the public domain, and as Emmet Oliver said yesterday, the Senator has the advantage of providing details using his privilege in the Seanad, if he does make this information available then the media can have a stab at verifying the allegation and NAMA and the bank should be in a position to comprehensively judge the allegation (see below).

If, on the other hand, the Senator does not put the information in the public domain, then all we have is an allegation and we must ask how credible this Senator is, and for what reason he does not make the information available given his Seanad privilege. Like informed commenter, Who_Shot_The_Tiger (see comment on Part 1), I am a little sceptical about the claim. This blog has a reasonable audience within the property development (and associated professional services) community and receives quite a volume of confidential messages through the contact form on different aspects of NAMA/the banks and there hasn’t been any message that would confirm the allegations made by the Senator. But given that the Senator is one of 200-odd people in the State that can make this information public under privilege, why doesn’t he?

Now NAMA apparently responded to the Pat Kenny show and claimed that this matter was dealt with “exhaustively” at the Committee of Public Accounts (CPA). NAMA has only twice come before the CPA – on 18th November, 2010 and 13th January, 2011. The transcripts for both appearances are available and there is no reference whatsoever to the specific transaction but in general terms the issue was examined in the following exchange between Labour’s Roisin Shortall and NAMA’s Chairman, the hawkish Frank Daly in November:

Frank Daly: On the second part of the question on the phoenix situation, there is a provision in the Act that we are not allowed to sell back properties to the people who are debtors in the first place. We are very conscious, both at the board and in the executive, of the sensitivity of that and making sure it does not happen. I cannot come to the committee and say that somewhere down the road someone will not come back and set up a company or work through a relation, for example, to buy back some properties. It is almost impossible for NAMA to give a 100% guarantee that that will not happen. We are alive to it and we will do our utmost to make sure it does not happen.

Deputy Róisín Shortall: If an outstanding debt is attached to an individual, is there anything stopping that individual from starting up a new development or construction operation?

Mr. Frank Daly: If there is an outstanding debt against an individual that debt is going to be chased up by NAMA and there will be a charge against it. We will use every means to recover it.

Deputy Róisín Shortall: But is there anything stopping one of those individuals from setting up a limited company, for example?

Mr. Frank Daly:  I do not think there is anything. I bow to legal advice but I do not think there is a provision in company law to prevent someone from setting up a company simply while he or she has a debt outstanding somewhere else.

Deputy Róisín Shortall: Would Mr. Daly see that as a weakness in company law?

Mr. Frank Daly:  The Deputy is getting into an area where in the nature of things people have debts and they cannot repay all their debts at once. To have something like that in company law could appear to be draconian. I am not talking about the developers we have in NAMA. I am talking about ordinary business people who might get into trouble. If one prevents such people from ever setting up another company or going into business, one is in danger of becoming too draconian and of stifling entrepreneurship. I emphasise that I am not talking about the NAMA people.

Deputy Róisín Shortall: But Mr. Daly has said that those individuals would not be able to buy back properties.

Mr. Frank Daly:  Yes.

Deputy Róisín Shortall: But could companies with which they are associated buy back those properties?

Mr. Frank Daly:  That is the point I was making, namely, we are precluded from selling the properties back to the individuals who are debtors with NAMA.

Deputy Róisín Shortall: But NAMA could sell them back to companies where the principal is a developer?

Mr. Frank Daly: That is the point I am making. We are very sensitive to that. We will do our damnedest to ensure we do not do that. It is unfair to ask—–

Deputy Róisín Shortall: NAMA doing its damnedest is one thing, but—–

Mr. Frank Daly: That is all we can do within the law.

Deputy Róisín Shortall: Well, I am asking about the law then. Is the law sufficiently robust in this area?

Mr. Frank Daly: That is a different discussion. It goes back to the point—–

Deputy Róisín Shortall: It is an quite important question. What happens in the coming years and the extent to which the people in question honour their debts comprise a critical aspect of Mr. Daly’s work.

Mr. Frank Daly:  It is a quite valid question. One would have to come up with a law that targets particular individuals. One would have to relate it to the NAMA debtors or borrowers. If one tried to come up with a law that applied the principle that if there is debt outstanding, one cannot set up a company or engage in business, that would probably be a much wider issue. This is not a decision for NAMA but a wider question.

Deputy Róisín Shortall: I expect Mr. Daly to have a view on it.

Mr. Frank Daly: I am sure I would.

(2) NAMA’s codes of practice and the NAMA Act

First let’s be clear that NAMA can potentially control two assets – the loan and the underlying property. When NAMA first takes over a loan it doesn’t have full control over the property just like your mortgage company controls your loan but it is your name on the title albeit with a charge registered in favour of the mortgage company. Just as your mortgage company may foreclose on your loan and repossess your asset, NAMA may also do this but Paddy Shovlin/the Fitzpatrick brothers apart (possibly) this has not yet happened though NAMA is in the thick of five receiverships (Michael McNamara & Co, Radora, Paddy Doyle companies, Paddy Burke Builders and from last week John McCann and the betting would be that McInerney later today will become the sixth) and two liquidations (Pierse and the Whelan group). So NAMA doesn’t really own any real property at present and the sales that NAMA recently referred to (€2bn last year and an expected €200m in Q1, 2011) will take place under NAMA’s auspices but it is likely to be the developer that actually sells the property.

Most of us can identify with the sale of property and at some point in our lives will actually be at either side of a transaction. On the other hand few of us get involved in the sale of loans, that is where our bank sells our loans to another party. But this is not uncommon with commercial loans though in the past it has been more popular in other jurisdictions, particularly the US. Loans are referred to in the NAMA legislation as “bank assets”. It seems to me that the subject of the Senator’s specific allegation was the sale of a loan, not the underlying property, but that doesn’t take anything away from the potentially scandalous consequences.

NAMA’s operations are governed by the NAMA Act (section 172 appears particularly germane), two Regulations (eligible assets and long term economic value) and one Order (the NAMA commencement date), two (one and two) directions (both associated with the accelerated transfer process announced in September 2010) and the five NAMA Codes of Practice (the Disposal of Bank Assets is the most relevant to the questions here). The Disposal of Bank Assets (aka loans) makes reference to the disposal of property and states that NAMA will abide by the terms of the Code of Practice for the Governance of State Agencies 2009.
Sections of the NAMA Act referred to by Senator Daly yesterday:

Section 18

18.—(1) There shall be a Board of NAMA, whose functions are as follows:

(a) to ensure that the functions of NAMA are performed effectively and efficiently;

(b) to set the strategic objectives and targets of NAMA;

(c) to ensure that appropriate systems and procedures are in place to achieve NAMA’s strategic objectives and targets and to take all reasonable steps available to it to achieve those targets and objectives.

(2) For the purposes of the Board exercising its functions under subsection (1), and without prejudice to any of its powers at law, the Board may provide for the performance of any such function by an officer of NAMA.

(3) In performing its functions, the Board shall act in utmost good faith with care, skill and diligence.

Sections 23 and 25 refer to the appointment of board members and the remuneration of the Chairman of NAMA and seem to be irrelevant to the allegations. I think the Senator meant to refer to section 35 which stipulates “Within 3 months after the establishment day, NAMA shall prepare codes of practice for approval by the Minister” which NAMA did and those codes were published in July 2010 some three months after the Minister had received the.

The assertion by NAMA’s chairman at the November 2010 appearance before the CPA, where he said “there is a provision in the Act that we are not allowed to sell back properties to the people who are debtors in the first place.”  Presumably refers to section 172 of the NAMA Act which says at subsection (3)

“A person who is the debtor in relation to an acquired bank asset, who is a person referred to in any of subparagraphs (i), (ii), (iii), (v) or (vi) of section 70(1)(b) or who is a person on whose behalf the debtor or the person referred to in one of those subparagraphs acts as a nominee or trustee in relation to an acquired bank asset shall not, if any of those persons is in default in relation to any acquired bank asset, acquire from NAMA or a NAMA group entity, any legal or beneficial interest in property comprised in the security forming part of any acquired bank asset in relation to which the default has occurred.”

However this section refers to property. What the Senator was alleging related to the sale of the loan (aka a “bank asset”) and the relevant section of the NAMA Act is, I believe, 139 which says

“NAMA may validly transfer, assign, convey, sell on or dispose of an acquired bank asset to any person notwithstanding—

(a) any restrictions on such a disposal at law or in equity,.

(b) any contractual requirement, or any requirement under any enactment, for the consent of, for notice to, or for a document from, any person to such a disposal, or

(c) any provision of any enactment that would otherwise prohibit or restrict such a disposal.”

So I think that NAMA can sell a bank asset (that is, a loan) back to the developer as long as NAMA complies with its own code of practice for the disposal of loans. And its own Code of Practice merely says that the NAMA board will develop a procedure but that it will be guided by the principle of maximizing income and if the loan is worth less than €100m will be independently reviewed by one appraiser and if more than €100m by two. In fact the Code of Practice is a dreadful piece of work in that it lacks meaningful detail.

For what it is worth, the issue of NAMA selling property back to the original developers was examined on here in a “moral dilemma” way back in September, 2010. And the conclusion was that this mightn’t be a black-and-white area because if the original developer can pay the highest price for a repossessed asset and has the unencumbered financial wherewithal to fund the purchase then on balance it might be better to sell back to the original developer. Take a look at the entry and you might see sincere arguments on both sides of the table.

(3) Banks’ codes of practice and the NAMA Act

Now this is an area which has been the subject of disquiet on here before eg here and here). Although the NAMA Act provides for NAMA to be involved in decisions affecting NAMA-bound loans, it is not at all clear how that involvement has been effected.

The NAMA Act states at section 71

“(1) A participating institution shall, until it has been served with a completion notice or NAMA directs otherwise—

(a) administer, service and deal with all of its eligible bank assets in the same manner as, and with the same level of professional skill, care and diligence as, a prudent lender acting reasonably would so administer, service and deal, and

(b) so act in relation to those bank assets in good faith having regard to the purposes of this Act.

(2) A participating institution shall not without the prior written approval of NAMA—

(a) deal with any of its eligible bank assets otherwise than in the ordinary course of its business,

(b) deal with any of its eligible bank assets in such a way as to prejudice or impair NAMA’s prospective interests or priorities in relation to such a bank asset,

(c) compromise any claim or release, vary, relinquish or otherwise take or omit to take any action if its doing so could reduce, lessen or impair any security, right, obligation, ranking or priority held or enjoyed, directly or indirectly, in connection with such a bank asset, or

(d) amend or vary any contract relating to such a bank asset unless contractually obliged to do so.

(3) NAMA may issue guidelines or policy statements in relation to the kinds of transactions that it is likely to be prepared to approve under subsection (2).”

To me this section seems quite loose and is capable of abuse. And it may indeed be the laxness of this section that might have allowed this alleged transaction to have taken place.


The allegations by the Senator give rise to at least two concerns

(1) NAMA (or NAMA banks) is selling loans for substantially less than they’re worth

(2) NAMA is selling loans to parties associated with the original borrower with the implication that the borrower is profiting from the bank crisis to the tune of €3m on this one transaction alone

According to the Code of Practice for the disposal of loans, NAMA is required to get at least one independent valuation for loans worth less than €100m. You would expect the banks to adopt a similar code but that is not mandatory and the NAMA Act is vague on the precise steps to be taken by banks when disposing of NAMA-bound loans. So if it was the bank that sold the loan, there may not have been an independent valuation but NAMA should have been consulted on the sale. If NAMA didn’t demand an independent valuation, then I think there is a prima facie argument that someone at NAMA was negligent. If an independent valuation was obtained that suggested the loan was worth €6m and it later transpires it was worth €9m then I think the valuer would have questions to answer, though it should be remembered that valuation is an art, not a science (though it’s not astrology either so there should be a clear basis for any valuation).

It seems to me that there is no bar on NAMA selling loans to either the debtor or an associated party. Whilst the NAMA Act seems to bar sales of real property to a debtor or associated party, there doesn’t appear to be any such bar on the sale of bank assets (aka loans). That would appear to be a gap in the NAMA approach and it is surprising that the Minister passed NAMA’s Code of Practice without making reference to this provision that applies in the case of real property disposals.

So in conclusion

(1) We need the Senator to reveal details of the alleged transaction

(2) If the allegation is well-founded, NAMA needs investigate how the loan was valued

(3) NAMA needs review its Code of Practice in relation to the disposal of loans and specifically whether the bar on sales of real property to the original borrower should extend to sales of loans

(4) NAMA needs to tighten up the procedures used at banks to dispose of loans, to ensure that banks adhere to the same standards as contained in NAMA’s Code of Practice

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