“Our aim would be to unveil a product with the two banks in the early autumn which meets a number of key criteria: one which generates sales of property controlled either by NAMA debtors or by receivers yet provides an incentive to purchasers to invest at current prices in the knowledge that there will be a mechanism in place which will offer them protection against the risk of negative equity in the event that prices should continue to fall.” NAMA 19th May 2011
The NAMA CEO and chairman delivered the same speech to two separate audiences this morning. Frank Daly was speaking in Corkto the Cork Chamber of Commerce. Brendan McDonagh was speaking in Dublinto the ACCA (certified accountants). The speeches were the same and are available here. There is also a press release, which is only marginally shorter than the speech, here.
The speeches are described by NAMA as “keynote” and certainly contain some new thinking on reviving both the residential and commercial property markets here. It seems that the kite that NAMA launched into flight two months ago whereby the agency proposed financing purchases of its property, that kite hasn’t been shot down and NAMA is now developing with AIB and BoI a product which will both fund the purchase of a residential property and provide some sort of insurance against future negative equity. There wasn’t any further detail forthcoming but I understand the product that NAMA has in mind to be akin to a normal mortgage and an insurance product of the kind Ulster Bank was considering last year. NAMA is also progressing its staple financing initiative for selling better quality commercial property to “pension funds, insurance companies, private equity firms and sovereign wealth funds” (in other words bottom-feeding vulture funds can get lost!)
Elsewhere we got an update on NAMA’s numbers:
(1) The agency has acquired €72.3bn of loans for a consideration of €30.5bn and that there is a potential €3.4bn of Paddy McKillen/objector loans to acquire
(2) NAMA has approved the sale of €3.3bn of assets (loans and property) with “the majority” disposed of in theUK
(3) NAMA has €1.2bn in cash on hand, and that’s after redeeming €250m of NAMA bonds. That €250m redemption is new and curious as to why NAMA is using its cash now to redeem its bonds.
(4) NAMA has approved €800m in development funding, though presumably only a fraction of this has in fact been advanced
With respect to the developers or “debtors”
(1) The first 30 developers represent €27bn of lending at nominal value and NAMA is “at an advanced stage” with them
(2) The next 150 developers represent €25bn of lending at nominal value and NAMA is engaging with them to have appropriate strategies in place by the end of 2011
(3) Taking the top 180 developers together, NAMA has approved business plans or commenced enforcement in 33 cases
(4) With respect to the small fry, the 670 debtors representing €12bn of lending at nominal value, some 200 of these will have been “determined” by August 2011
(4) In “57 cases to date” NAMA has been left with no choice but to enforce against debtors. It is not clear if these are individual companies or separate debtors. NAMA itself has taken action against some 71 separate limited companies so presumably NAMA is talking about debtors. The 57 cases includes enforcement action by NAMA banks against debtors.
NAMA also spoke about issues with transparency and asserted that the NAMA Act and the original loan agreements guaranteed confidentiality for borrowers. It looks like Minister Noonan might have been pressing for this register of impaired loans as promised in the Programme for Government but it seems new legislation will be needed to deliver on that promise. Whilst taking pains to explain that it was not encouraging lobbying, NAMA announced a liaison mechanism with the accountancy body umbrella group, the Consultative Committee of Accounting Bodies in Ireland (CCABI).
NAMA continues to use any opportunity at all to bang the shield at developers and I leave you with this gem from this morning’s speech about what NAMA claim is the attitude of some developers to NAMA’s overtures “It is akin to falling overboard and then complaining to your rescuer about the colour of the lifebuoy that he is about to throw in your direction”
UPDATE: 19th May 2011 Ulster Bank appears to have withdrawn its Secure Step mortgage product for specific property. But this is the blurb that was available from that bank.
UPDATE: 25th May, 2011. Although NAMA has not formally provided any further details of its negative equity mortgage product, its spokesman seems to provide snippets to selected media outlets. The Irish Independent today reports that NAMA’s loan fund will amount to some €1bn and that NAMA may allow non-NAMA banks to participate in the scheme. It is unclear if these statements relate to residential sales only or to both residential and commercial, the latter being offered alongside staple financing. The Independent states that NAMA has “indicated” that it “may” sell properties below their November 2009 valuations. Remember NAMA paid an average of a 10% long term economic value premium and both residential and commercial has dropped 10-20% in Ireland since November 2009 so NAMA may well end up selling below its acquisition price if it wants to dispose now or in the short term. We get this strange wording from the NAMA spokesman again on the subject of sales prices “NAMA has been clear that market prices are dictated by what people are willing to pay not what sellers are hoping to get.” So lets say we have two buyers in the market looking for a house, Buyer A and Buyer B. Buyer A has some cash put away and his credit union will lend him three times his deposit there. So Buyer A can afford to pay €100k for a house. Buyer B has far less cash and his bank is not so keen on lending him money. But NAMA says it will advance him a €108k mortgage as long as Buyer B puts in €12k cash and also NAMA will postpone the imposition of an additional €30k loan for five years contingent on the market not falling further. So in this case what are “buyers willing to pay”? €100k or €150k? Plainly NAMA’s provision of the mortgage product will distort the market but is that 50% distortion acceptable for a short period of time? It might be, but I can foresee competition and other problems for NAMA. In another article in today’s Independent, there is apparent clarification from the NAMA spokesman that the schemes will only be available for Irish properties (that’s presumably Republic of Ireland) and not for “overseas” properties.
UPDATE: 27th July, 2011. NAMA has provided more information and illustration on how its proposed mortgage product will operate when it is introduced in October, 2011 on a limited trial basis through AIB, Bank of Ireland and Irish Life and Permanent. The full graphic is here. The modified version consists of a disclaimer
How the product will work at the time of the property purchase and following 5 years.
And what happens when theer is an independent valuation at the end of the 5 year period.
NAMA Wine Lake 
Mmmm, it’s an interesting idea, but who would take on the insurance risk of the Irish property market at a reasonable price?
Lets say I buy a house from NAMA with an insured mortgage for €200k. Then house prices half, so I can now get twice the house for the same money. I have a great incentive to sell my house, burn the insurance company and buy a bigger house.
It would be great to see more detail on how the insurance is structured. Either the insurance is not worth the paper its written on, or the downside self perpetuating risks for the insurance company seem quite large, too large to make it cost effective.
JC
@Justin, am trying to get more detail from NAMA (unlikely to provide it at this stage), Ulster Bank (which touted a similarly-sounding scheme last year) and other sources (negative equity insurance is not new) and will post an update later.
Quinn Insurance can provide the insurance! Sure we’ll figure that out (that’s the Irish way)…. Frankie and Brenda are actually openly trying to create a false floor on property prices in Ireland.
I find it quite ironic that NAMA are now trying to manipulate market prices which was the exact thing it was setup to put certainty on. Oh well I suppose adminstrating these new loans should add a few more years to the NAMA gravy train…..
@BR, the reason this blog is called “wine lake” is to do with the concern that NAMA would distort the market and prop up prices in the short term above their natural clearing prices. NAMA is smart enough to know that when a bubble bursts, prices will naturally drop below their long term averages or prices based on “hard” valuation methods (affordability, cost of construction, rent yield, demand:supply equilibrium, average earnings) so what the agency is doing is addressing the dearth of credit evidenced by the mortgage data released two days ago and also the concern about future declines (remembering the baseline stress test scenario from the Central Bank of Ireland in March suggested 30%+ declines from current levels).
So yes, NAMA is distorting the market but I think this is potentially a clever and innovative way to minimise losses by preventing clearing prices going too far below long term averages. The proof of the pudding though will be demand levels once the supply is put on the market and the detail of the mortgage/negative insurance product becomes clear.
His comments on developers lifestyle being funded through cuts to education and hospital were absolutely disgusting. They show him up for what he truly is.
No developer I know would agree with them. Which you may say is all well and good, why would they? But many are anxious to do the right thing and such charges only serve to drive a further rift between debtors and the agency. How are they to maximize returns when such contemptuous remarks are being made and go unchallenged?
Shame on you Mr Daly!
@Marcin, although not included in the speeches or the press release yesterday, there seem to have been some conciliatory words from NAMA towards developers. Several media outlets are reporting that NAMA say that developers and banks should no longer be demonised. “”It is totally unrealistic to think that we should continue demonising developers, builders and banks and that we will still have a successful country in the future. We need them as part of our infrastructure in the future,” he [Frank Daly] said. ” is what the Irish Examiner reported.
http://www.irishexaminer.com/business/nama-chief-says-we-must-stop-demonising-developers-155130.html
I don’t think they’re talking about a 3rd party insurer. The closest insurance product (that I’m aware of) is mortgage insurance (I think this might be called mortgage indemnity insurance in Ireland). However this product is very different to the type of insurance NAMA describes. Mortgage insurers price (mostly) on default probability.
It’s more likely NAMA would directly compensate the borrower. If so, the banks are in an odd position given they’re eventually supposed to levied for any losses NAMA makes. I guess you could extrapolate and say the taxpayer is offering potential buyers is covering the risk.
From a buyer perspective, depending on conditions, this could be very attractive. Though there is ‘insurer’ default risk.
It’s notable that NAMA refers to negative equity in relation to this product. It’s not clear if they’re ‘insuring’ the purchase price or the LTV*purchase price. Also, it isn’t clear why you’d restrict this offer to purchasers that require a mortgage – why not offer the same to cash purchasers?
Come to think of it, given NAMA has booked a loss, will the banks have to set aside some provisions?
Try this: http://www.cmegroup.com/trading/real-estate/residential/SandP-case-shiller-home-price-index_contract_specifications.html
Or, just get Paddy Power to do it.
@Jake, very interesting link, who knows perhaps some institution in Ireland will develop a similar product based on the CSO index. However I very much doubt that the NAMA product will be anything other than the 15% guarantee against losses in 5 years that Ulster Bank was offering last year (and Ulster Bank was requiring the developers stump up the 15% contingent guarantee). I don’t think the product will allow month to month valuations of the property with compensation to the borrower.
@ Jake,
I had a quick look at the link. It’s not exactly a tailored insurance product. :) Anyway, given the Irish Times article, it doesn’t appear NAMA was thinking of getting 3rd party insurance.
[…] NAMA Chairman Frank Daly gave an interesting speech today. NAMAWinelake analyses the speech in detail here. […]
There seem to be two distinct elements to this, the first of which relating to straightforward swapping of loans to developers for loans to new investors appears difficult to argue with.
The second though is troubling.
“Our aim would be to unveil a product with the two banks in the early autumn which ………………….. provides an incentive to purchasers to invest at current prices in the knowledge that there will be a mechanism in place which will offer them protection against the risk of negative equity in the event that prices should continue to fall”
The “insurance” or “put option” would be provided, presumably by the state – or purchased by the state from a third party.
A straightforward insurance against negative equity for an 80% Loan to Value would not kick in unless the price fell by 20%, so the purchaser would still have a downside, have to think carefully about a decision to buy, and the 20% hurdle would provide some significant protection for the state.
However, NamaWL understands the insurance element might be intended to be similar to the withdrawn (presumably because prices are falling rapidly and the insurance was going to end up being expensive for Ulster Bank) Ulster Bank product that would totally protect the purchaser from the entirety of the price decline – up to a limit of a 15% price decrease (after 5 years).
Effectively here, if the state follows this format, it will be giving away to the purchaser of the property an at the money put option, whilst holding a put option with an exercise price 15% lower – for partial protection. The difference between the value of those two options would be the value of a subsidy by the state to the purchaser of the residential property.
If government policy is to massage the property market by skewing it in an upward direction with subsidies to buyers then this mat achieve that aim. To the extent buyers purchase at higher prices than without the subsidy, there will be an offset – if the state was the party selling the asset.
Big stamp duty payments used to be a source of funds from property transactions. It would be ironic if these were to be replaced by an additional liability to the taxpayer.
There is another kite being flown here though:
“Given that NAMA is effectively providing state funds for this purpose and the pillar banks will be largely state owned, it raises a question about whether such mortgages should be offered beyond the limited set of residential properties owned by NAMA.”
A taxpayer subsidy to purchasers of Nama properties is one thing – as claw-backs by Nama from the largely nationalised banks may be reduced as an offsetting effect. An extension to ALL residential property transactions amounts to a charge for the insurance facility against the taxpayer, for the benefit of private sellers of houses (by inflating the eventual selling price) and a benefit to the purchaser (the value of the insurance provided, less any extra he was enticed to bid for the house because of the insurance facility).
This would quite literally be replacing a boom-time capital tax revenue for the state (stamp duty) with a bust-time cost to the state per transaction in order for the Irish state to provide another blanket guarantee aimed at manipulating a market.
This time an Irish government would be putting its taxpayers on the hook for a hunch the market was unduly pessimistic about house prices. Last time it was an Irish government putting its taxpayers on the hook for a hunch the market was unduly pessimistic about the banks.
I see the Group Think (in Policy makers) has not gone away
Why not simplify it and just give non recourse home loans?
@DG, the cynic in me is saying that NAMA is providing limited detail at this stage which might encourage potential residential buyers to believe they will have absolute cost-free insurance against negative equity but when the product is actually announced, it will (a) be limited in its protection, it might only protect against a 15% fall for example (b) will be for a fixed period, eg five years so if you sell beforehand you might have to absorb the loss yourself (c) will have a cost attached, for example a monthly insurance premium though NAMA might be able to build the cost into the sale price. I must emphasise that this is speculation on my part, but the point I would try to make is that this new product might not be as wondrous as it first sounds. But it is in NAMA’s interest to let the perception of a perfect solution percolate before the actual product is announced.
Non-recourse loans could potentially be more expensive than a limited negative equity insurance product and would leave NAMA with an incertain potential liability, which I don’t think the agency would embrace.
UPDATE: Actually it seems the speculation above might not be too far off the mark. According to the Irish Times today, the negative equity insurance might be 20% (not 15% as speculated above) and the time period covered is five years.
“For residential properties, Nama would waive 20 per cent of the purchase price if there was no recovery in the market.
The remaining 80 per cent would be covered by a 10 per cent cash deposit and a 70 per cent loan from one of the two banks.
If the market recovered, the borrower would agree under the purchase agreement to draw a further 20 per cent and pay this to Nama after about five years.”
http://www.irishtimes.com/newspaper/finance/2011/0520/1224297354450.html
That’s an interesting idea that the insurance might be for a fixed period. Since Nama is supposed to sell all its assets by the end of this decade, they might want to give buyers a false sense of security in order to increase property prices until then. Nama would know that prices will fall back after the insurance expires but they would not care. If so, it will confirm many people’s suspicion that Nama is just a Ponzi scheme.
Fair comment. I think it is a ball of smoke myself. Will be interesting to see how this plays out with the Non NAMA banks whos properties will start to get a smell of them now if they cant avail of this product (assuming it wont be rolled out for every property).
Based on the mess the Banks have gotten into with the last ‘complex’ product they launched, tracker mortgages, I would be nervous about this I must say.
Very roughly I seem to remember the loans orignally to be acquired were
1) Land
2) Development
3) Associated
I assume everything that would be sold under this plan would have to fall under the associated bracket? (well, theres bound to be some enhancing of value with regards some of the development properties as well).
I would have thought that the loans in the associated category were the most attractive as they were the finished article so to speak – what hope for the land and development sales if Nama needs to provide finance just to shhip the most attractive part of its portfolio?
@Rob S, yes the staple financing initiative is aimed at completed assets which are revenue producing so that will exclude incomplete land and development. Remember though that a shopping centre might be subject to a “land and development” loan if it was being built, it would have been subject to an “associated” loan if the purchase of a completed shopping centre was being funded.
Yes indeed, NAMA does face particular challenges with incomplete land and development but the agency has hopefully reflected these challenges in the loan acquisition prices paid to the banks.
The Irish Times are not really interested in saying “if the crash continues and prices continue to drop you are shielded by up to 20%”. There is a thin line between reporting the facts and a self fulfilling prophecy.
I know cars are guaranteed to depreciate rapidly but what is to stop the same logic being applied by the SIMI?
Not a chance, Frank! We would have to see the following to assume positive price growth: Improving buyer traffic and an end to the current overhang of second hand property which will take five years plus.
BTW, Is this just another way of conning the folks to achieve an extra 20% over current value?
That’s an extra 25% of an 80% base of course. And it goes without saying that real liquidity is needed – not just NAMA’s 3 card accounting tricks.
I’m not sure that the “owl and the scowl” live on the same planet as the rest of us. Though they do seem to read this blog, as most of their speech refers to criticism raised here.
In short summary:
Residential: The mortgage suggestion is clearly in contravention of European competition law and is a non starter unless it is offered to purchasers of non-NAMA properties.
Commercial: There is not a chance of Frank’s “acceptable” buyers entering this market on NAMA’s terms. All equity funds are “vultures” and they will not invest in a falling market where they have to amortise the loan over 5 to 7 years, which any asset manager should know is impossible. There may still be no banks at all willing to effect a take out or refinancing of an Irish investment property in 5 years time. So what Fund is going to risk losing their 30% deposit when NAMA calls the loan? If Frank wants to make these loans, he is going to have to extend that period to more than 10 years, more likely 20 years.
The Developers: The developers realise at this point that whatever colour the NAMA lifebuoy may be, it’s not a lifebuoy that is being thrown to them – it’s a garrote.
Liquidity: This is what it is all about, Frank – focus on it!
The Sunday Independent today carries reaction to the proposed scheme (such as it is, given we have so few details) from personal finance guru, Eddie Hobbs, who seems negative on the proposals, though I’m not clear on the precise objection. He sees the inevitable ECB interest rate rises as an obstacle to the scheme and calls for 20- or 30- year fixed rates and says the scheme is doomed to failure as it seeks to place a floor under the market.
A NAMA spokesman gets a look-in and says “The market will set the price, not the developer or the seller. The value of a property is what people are prepared to pay” NAMA might want to abandon this line because the truth is that credit availability will be a determining factor in setting prices. Remember the 2000s, it wasn’t that long ago when cheap euro credit was blamed for fuelling the property boom. Credit availability is now restricted with the annualised equivalent of some 10,000 mortgages being handed out. So even without the new NAMA scheme, there is a “market”, both mortgage and cash. It seems disingenuous of NAMA to suggest that NAMA offering its negative equity mortgage product will not interfere with “setting the price”. And NAMA proposing that “the value of the property is what people are prepared to pay” looks deeply ignorant.
http://www.independent.ie/national-news/namas-equity-plan-is-doomed-by-ecb-rates-2654223.html
Been thinking about this over the weekend, from NAMA’s point of view, it may not be the worst idea in the world. A stylised version might go like this:.
– NAMA pays €100k for a house (was originally €200k loan)
– NAMA looking for a mug to buy the property everyone knows its only worth €40k.
– Worst case scenario for NAMA is the house is never sold, so €100k loss. Second worse case scenario for NAMA the house is sold for €40k.
Why not write into the contract that NAMA will protect against any future drop in price. Offloading the property prevents the worst case scenario outlined above.
This logic makes sense because the tax payer is damned is NAMA does and damned if NAMA doesn’t. As it stands the tax payer is on the hook for the amount NAMA paid for the loans, this measure does not mean NAMA can lose more that they have already paid for the loans, unless they give out the loans to actually purchase the property too, now that would be really stupid(…they’re what? Oh god no!). So, the bit protecting the value of the house = good, the bit giving the loan at the same time = bad.
JC
It smells like a Ponzi, it looks like a Ponzi, it feels like a Ponzi.
For information, the Financial Regulator Matthew Elderfield yesterday said on the sidelines of a speech he was delivering at an insurance conference, that he would “”have to take a closer look” at NAMA’s plans to provide finance to property investors if the scheme involved “regulated activity”
“Offering a product that gives support to the market makes sense from a commercial point of view,” he added.
“I don’t have strong views on it in terms of any standards in regulation.””
http://www.independent.ie/business/irish/aib-should-be-allowed-to-break-pay-cap-says-elderfield-2655125.html
So I don’t think NAMA will be worried by this intervention. I think NAMA might be more concerned by an intervention by the Competition Authority or a non-NAMA bank.
Providing the finance on a property you already own is double or quits, its mad. Why have a war on one front when you can have a war on two fronts?!? Double the exposure, potential loss, etc. etc. It’s crazy.
This highlights that the fate of NAMA is inextricably linked to the fate of the banks. If the banks provided the loans and NAMA provided the capital guarantee there would be some common sense to the plan (excusing the questionable morality and social economic good of NAMA), but of course our banks can’t loan, their bankrupt.
Yet another reason to let the banks sink. But of course, if we had let the banks sink we wouldn’t need NAMA, wait, I’m confused, if we fix the banks, we don’t need NAMA, if we don’t fix the banks, NAMA doesn’t work…my head hurts :)