Is this the blueprint for the NAMA negative equity mortgage product?

An Irish financial services company has today launched an insurance product which might help residential property buyers have peace of mind about future falls in the value of their purchase. IFG has called its product the Home Price Protection Plan, it’s open to every buyer and seller and places the risk of price falls almost exclusively with the seller. There is a dedicated website for the product here. Here’s how it works with illustrative figures:

(1) The seller has a property for sale for €200,000. The property can be an apartment or house, new or second hand. The seller can be a developer, an owner occupier or investor.

(2) The buyer pays €200,000 for the property and the purchase price can be cash or a mortgage from any bank.

(3) The seller agrees with the buyer that he will refund to the buyer any decline up to 20% of the value of the property over an agreed period of time of between 1-4 years.

(4) The seller agrees to place the agreed decline sum in trust with a third party, the maximum in this case €40,000.

(5) After the agreed period of time, the trustee compares the CSO monthly index with the index value at the time of purchase. If there has been a decline, then the trustee refunds the relevant amount to the buyer. Eg if the agreement was to cover one year only, at the end of the year, the price of apartments in Dublin has fallen 8% the trustee refunds the buyer €16,000.

(6) The trustee is paid out of interest earned on the retained sum subject to a maximum of 0.9% of the purchase price. So the trustee places the €40,000 on deposit at 4% per annum and keeps €1,600 after year one.

(7) The seller shoulders practically all the risk. However the buyer pays €200,000 and pays mortgage interest on 100% of what is borrowed, so the buyer potentially incurs unnecessary mortgage interest over the period of the insurance. Also if the decline is more than the maximum then the buyer bears the additional decline over 20%.

I must say that the product looks like a clever innovation though there will be niggles. The CSO publishes figures at a very high level, so there is only one index for apartments inDublin. And withinDublin, agents will tell you there are several micro-markets, but that is ignored by this product. If the buyer overpays then that is too bad, it is only the change in prices that is recorded by the CSO index. So if the buyer pays €200,000 for a property only worth €150,000 then that difference will not be refunded; but that is the way the market works now anyway. It is not clear what happens if the buyer re-sells during the insurance period but presumably the insurance is stopped and there is a reckoning of the CSO index on the date of sale. It is the buyer who benefits from the interest on the retainer less IFG’s costs (capped at 0.9% or €1,800 in this case).

The product doesn’t appear to be advertised on IFG’s website at present, it is being launched today Thursday so presumably it will be there shortly. NAMA has announced its own negative equity protection product but has yet to confirm details though it is understood the product is to be launched imminently. Charlie Weston writing in today’s Irish Independent says “it is understood that the idea for a negative equity protector was first suggested by IFG to executives in NAMA.”

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Using association with NAMA to flog your property

There’s a Chechen mafia group called the Obshina which is very successful in its criminal enterprises, not just in Chechnya but in neighbouring Russia and beyond. A fearsome group known for its savagery, it has become so infamous that it allows its name to be used in other countries by other criminal groups in return for a fee. So from Berlin to Brighton Beach, if you’re trying to extort Russians, using the Obshina brand certainly helps. And here at home, there is some evidence that the NAMA brand is being used for similar effect, to generate sales and attract attention.

Today the Irish Times reports on 13 apartments currently being sold in Stepaside in south-west Dublin. The apartments were built by NAMA top-10 developer Joe O’Reilly and his Castlethorn Construction group in 2005. What’s interesting about the report in today’s paper is that it mentions NAMA not once but five times in a 220-word article. The article says “this will be the first of Castlethorn Construction’s housing developments to be sold by Nama and the first significant Nama disposal of new homes on Dublin’s southside.”

The thing is that this is not a NAMA sale at all, or at least not in the sense that most people would understand the terms.

Although Joe O’Reilly is reportedly a NAMA developer, NAMA has not foreclosed against him; indeed reporting has suggested that Joe is one of the NAMA developers whose business plan is likely to be supported and approved by NAMA. There’s no receiver appointed to Joe’s company or his assets. As far as can be told, the sale by is by Joe O’Reilly’s Castlethorn group, not NAMA.

So why use the NAMA brand? Probably for the same reason that auctioneers latched onto the term “distressed” after the stunning success of the first Allsop/Space auction. With NAMA there is a perception of distress, fire sale, bargain, teaser-prices. The perception might not be justified but it might be enough to get punters to view and perhaps even commit to buy.

The 13 flats are presently advertised for sale on DAFT.ie with one-bed 484 sq ft at €119,950, two-bed 700 sq ft at €159,950 from three-bed 969 sq ft at €189,950

With apartment prices in Dublin down 13% in the past year and 1.9% in the last month alone and with the real NAMA about to launch a negative equity mortgage product, you would have to have sympathy for selling agents, Sherry FitzGerald (CORRECTED from Savills) which is reportedly holding an open day this coming Saturday.

UPDATE: 15th September, 2011. The Irish Times is still sticking with the contention that the above apartments are NAMA apartments in its report on last Saturday’s open viewing day. Not once, or twice but three times, it is claimed by the newspaper that these are NAMA apartments. The newspaper also claims that deposits were taken on “about four” of the apartments – you’d think that five days after the showing you could get a precise number! The selling agent is now said to be Sherry Fitzgerald.

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Irish residential rents continue to stabilise with 0.2% rise year on year, mortgage interest costs up a hefty 14.6% year on year

This morning, Ireland’s Central Statistics Office (CSO) has released its inflation figures for August 2011. The headline Consumer Price Index (CPI) was up 0.2%  month-on-month and 2.2% year-on-year (down from 2.7% in July 2011). The biggest driver of inflation in the past 12 months continues to be the CSO category of housing-related costs, and within that, the most significant component is mortgage interest* which has risen a hefty 14.6% in the past 12 months and indeed 0.7% in the past month alone as ECB and domestic bank-driven interest rate rises take effect. Mortgage interest comprises nearly 7% of the CPI so the effect is significant.

Elsewhere it seems that private rents continue to stabilise, though there was a small monthly rise of 0.1% in August 2011, and an annual rise of 0.2%. It seems that in our financial crisis, the big correction in rent took place in 2009 with a 19% maximum decline, compared to a decline of just 1.4% for all of 2010. Since the start of this year there has been a 1.7% increase (mostly recorded in February 2011). So on that basis, I think it fair to characterise rents as stabilising. There is a view however that rents are artificially elevated at present as a result of the social welfare rent assistance programme. Although it is the case that many properties that are advertised for rent will not accept rent-assistance claimants, it is arguable that landlords for these properties still reference their prices to rent assistance provided by the State, which by the standards of other countries, is seen as generous (the latest allowances are available here) Will rent assistance survive the budget cutting as we to deal with our deficit? Minister for Social Protection, Joan Burton, has signaled that rent assistance may be in the firing line for the December 2011 budget.  We currently spend €500m annually on rent assistance.

*The CSO notes the following in respect of mortgage interest “In line with normal practice for a fixed base price index, the current approach to measuring mortgage interest in the CPI reflects the situation in the base reference period December 2006 when the standard variable rate was dominant. Subsequently, tracker mortgages have become more popular. This did not give rise to any difficulties while the standard variable and tracker mortgage interest rates moved broadly in line with one another, which would be the normal expectation. However, the decoupling that has taken place since August 2009 has resulted in dramatically different trends emerging. For example, between September 2009 and September 2010 the standard variable rate increased from 2.93% to 3.66% whereas the tracker rate did not change. The Mortgage Interest component of the CPI, which is largely determined by the trend in the standard variable rate, increased by 25.1% as a result and contributed +1.25% to the overall change in the All Items index. It is crudely estimated that the latter impact would have been reduced by between 0.2% and 0.5% had the Mortgage Interest component been calculated on a current weighting basis. Users should take this “weighting effect” into account in interpreting the mortgage interest related movements in the index”

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Debt forgiveness NAMA-style: the NAMA deal on developer family homes

Emmet Oliver at the Irish Independent today reports on a document which that newspaper has seen which sets out how NAMA is approaching the thorny issue of trophy developer homes which are co-owned by the NAMA developer and his wife. It seems that NAMA is requiring the wife (and it seems to always be “the wife”) to agree to surrender her legal rights to the usual one half share in the family home. In return the developer and his wife get two things – (1) co-operation from NAMA and (2) the first €500,000 from any future sale. So how does the deal supposedly work?

Sean Dunne’s home, “Walford” (video tour with the Irish Times environment correspondent Frank McDonald here) on Shrewsbury Roadwas bought for €58m in 2005 and although that might represent an extreme, during the boom it wasn’t unusual at all for developers to live in homes worth €5-10m. These homes might be worth a fraction of the peak prices today, we have seen 60-70%+ declines at the top end of the market, but the homes may still be worth substantial sums and not be subject to a mortgage.

So a developer owns a home jointly with his wife which is worth €2m today. The NAMA deal requires the wife to agree to her half, worth €1m, to be brought into the pot which the developer will use to pay down his loan or develop his projects. This may require the house to be sold or the wife might have her own unencumbered wealth, a bank account in her own name for example, of €2m (to cover both the husband’s and her shares) which if handed over to NAMA would allow the couple to remain in the house. In addition to helping secure cooperation from NAMA which might see the husband’s debt partly forgiven, the wife will also be entitled to the first €500,000 from any sale. Debt forgiveness NAMA-style.

Of course many ordinary people will still view the deal as generous but given a wife generally has the legal right to one half of the family home, then unless NAMA can show a transaction with the wife was undertaken to deprive creditors, the agency is powerless to confiscate the wife’s share. So NAMA is using its power and influence to force the wife to sign away her rights.

Emmet Oliver also refers to other means employed by NAMA to force cooperation from developers

(1) denial of any new funds to finish off projects

(2) enforcement of personal guarantees

(3) control of the salary that a developer is paid

(4) appointment of outside individuals to sit on the boards of companies

(5) threatening to appoint a receiver or liquidator to the developer’s companies or assets

Interestingly Emmet writes “NAMA has often appointed outside individuals to sit on the boards of companies”. Other than the case of Harry Slowey’s appointment to Glenkerrin, these appointments have not been publicized and a concern exists over the transparency with which NAMA selects these individuals which are foisted upon developers. It has been suggested by some that NAMA is acting like Don Fanucci in the Godfather with these appointments of “nephews” to businesses under duress – it is certainly an under-reported aspect of NAMA’s method of operation.

NAMA declined to provide the Independent with comment on the document which gave rise to the report. Elsewhere in the Independent today, the paper’s legal affairs correspondent Dearbhail McDonald reports on the “arsenal” available to NAMA to get at the wife’s share of the family home, in reality it’s a list of hurdles. You might also be interested in these previous entries on developers wives

Developers’ wives. Is NAMA now taking action?

Prime Time Investigates NAMA developers. But exactly what new information was revealed?

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