NAMA formally launches negative equity mortgages today

The European Commission still doesn’t appear to have any written approval of the NAMA mortgage scheme on its website, but regardless, NAMA has this morning announced that it is now open for business with its negative equity mortgage product, or as NAMA calls it the “80:20 Deferred Payment Initiative”.

Here are its features

(1) It’s open to most buyers of residential property, both first time buyers and movers but NOT investors/Buy to Let

(2) It’s initially available on 115 houses in 12 developments in Dublin, Meath and Cork

(3) It’s available from AIB, Bank of Ireland and Permanent TSB

(4) You’ll be protected against declines in the value of your property of up to 20% over a fixed five year period

(5) You’ll need a 10% deposit for your home

Separately Permanent TSB has this morning confirmed that it will be offering its 80:20 mortgages at 3.69%. So how will it work? Here’s NAMA’s illustration and NAMA advises that you consult the FAQs on its website as well.

Although this will be widely known as the NAMA 80:20 mortgage, NAMA is keen to point out (1) NAMA doesn’t own the houses, the developers do (some may eventually be controlled by receivers, but the point stands, it’s not NAMA that you’re buying the property from) and (2) NAMA doesn’t provide the mortgage, PTSB, BofI and AIB do.

According to the NAMA press release, the NAMA CEO Brendan McDonagh said this morning “Based on market research which we have carried out, concern about potential decreases in house prices in the future is a significant factor for house buyers in the current market. We are piloting this initiative to allow some buyers, who are putting off their purchase in the expectation that prices may fall further, to buy now with the knowledge that they may not lose out even if the value of their home falls by up to 20% over the next five years. Together with initiatives introduced in the recent budget, we believe that this measure will help encourage greater activity in the housing market”

There is a similar product on offer from IFG in Ireland which was reviewed here last year, but please don’t take it as read that the products are identical.

UPDATE: 8th May, 2012. More detail is emerging about the scheme.

(1) It is initially applying to 115 homes with asking prices of €30m or an average of €260,870 which is considerably north of what average homes cost in the State at present (less than €190,000 in Dublin, and less than €160,000 nationally)

(2) The asking price is not negotiable. NAMA chairman Frank Daly is reported as saying there will be no haggling “Chief executive of Nama Brendan McDonagh said the State agency would not haggle with buyers as the 115 houses were already priced at a “fair value”.” reports the Irish Times

(3) The asking prices in two locations represent 61-80% declines from peak asking prices reports the Irish Times.

(4) The scheme may be rolled out to 750 homes worth an average of €200,000 apiece or €150m in total.

(5) According to NAMA chairman Frank Daly, the European Commission is okay with the scheme – “The commission was “very comfortable” with the plan” – there is still no decision available from the commission on their decisions webpage.

UPDATE: 11th May, 2012. With respect to the IFG product which was announced last September 2011, it is understood that this product has not in fact entered the market yet and IFG will be formally launching it next month. The company says that the product is “virtually identical to the NAMA product, except that it applies to all properties, new and second hand, and to all banks, whereas the Nama product is restricted to their own properties”  Why hasn’t the company sold any product before now? It says “IFG has been educating developers, estate agents and other industry players by presentations and road shows in anticipation of the NAMA product been launched”

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Deputy Pringle’s court case to force the Government to hold a separate referendum on the ESM Treaty set to proceed

“The State’s organs cannot contract to exercise in a particular procedure their policy-making roles or in any way to fetter powers bestowed unfettered by the Constitution. They are the guardians of these powers – not the disposers of them.” Judge Hederman in 1987 in the Crotty v. An Taoiseach case which established the need for referenda inIreland where governments of the day seek to change EU treaties

Newbie in the current Dail and Donegal South West Independent TD Thomas Pringle is taking the Government to court. In March 2012, following the decision by the Government on 28th February to hold a referendum on the Fiscal Compact, Deputy Pringle wrote to the Government to set out his concerns about this State’s involvement with the so-called European Stability Mechanism.

This could all very easily get confusing but remember there are two treaties before the Irish people at present

(1) The Stability Treaty, otherwise called the Fiscal Compact or the Intergovernmental Treaty on Stability, Coordination and Governance in the Economic and Monetary Union. This is the document on which we’re having a referendum on 31st May.

(2) The European Stability Mechanism Treaty or the ESM Treaty. This is the document which establishes the new EuroZone bailout mechanism which will have oodles of cash – about €500bn to start with – and which Ireland hopes to be able to access in 2014 if we can’t get the traditional bond markets to lend to us at reasonable rates.

Deputy Pringle is unhappy that we are having a referendum on (1) but not on (2). He points out that the €500bn funding for the ESM doesn’t magically appear from nowhere – it is provided by the members of the EuroZone and Ireland’s initial contribution is €11.145bn though the Treaty does make provision for countries in bailout programmes and not all of the cash is payable upfront. Having said that though, the ESM Treaty allows the amounts to be raised “at its sole discretion at any time in the future”, according to Deputy Pringle and given the initial contribution is almost one third of our national annual tax take, this is a matter of no small importance! And so the challenge to the Government is to force a referendum on the ESM Treaty because it is so significant and entails such a potentially colossal financial obligation for our State. The 1987 Crotty case is set to be extensively invoked as justification for the matter to go before the people – this was the court case where Raymond Crotty successfully established the principle that major changes to EU treaties required amendment of the Irish constitution, and consequently referenda.

On 9th March, Deputy Pringle’s solicitors, Cork-based Noonan Linehan Carroll Coffey wrote to An Taoiseach setting out the concerns and asking that the Government give consideration to the matter and hold separate referenda for the ESM Treaty and the amendment to article 136 of the Treaty on the Functioning of the European Union. An Taoiseach rejected the approach and on 13th April, 2012 Deputy Pringle made his application in the High Court – case reference 2012/3772 P. The Government has said that it will defend the action “vigorously” It is set to be mentioned tomorrow in the High Court where I understand Deputy Pringle will be seeking a hearing date.

If the High Court ultimately decides in Deputy Pringle’s favour, we may need to have at least one more referendum this year. Of course if President Elect of France, Francois Hollande has his way, then the Fiscal Compact itself may be renegotiated and then the wording of the amendment to our Constitution in the 31st May referendum – the treaty “done” in Brussels in March 2012 – would be obsolete and then we might need a third referendum. All in all, we look set to have a booming referendum business here over the next 12 months!

You can keep abreast of the progress of Deputy Pringle’s case on his website here. There is a blogpost on here examining the financial obligations imposed on Ireland in the ESM Treaty – there’s also a nice piccy of Minister Noonan signing the Treaty last summer, though the Treaty was altered at the start of this year to make access to the ESM conditional on signing up to the Fiscal Compact.

UPDATE: 17th May, 2012.  The case was mentioned at the High Court yesterday. The Irish Times reports ” Mr Justice Roderick Murphy yesterday gave lawyers for Mr Pringle permission to serve short notice on the Government of their intention to seek an expedited hearing.  The application was made with only one side represented and the judge made it returnable to next week.”

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How many state-owned bad banks does Ireland need?

“Not all of them have yet abandoned the extravagant mindset of the 2003-2007 era” NAMA chairman Frank Daly speaking in May 2010. He was talking about developers but could the same be said of politicians and civil servants?

We’re not a huge country, but Officialdom has a tendency to think we are – 166 TDs representing an average of 28,000 constituents, 34 local authorities each having city or county managers on close to €150,000 per annum and some earning nearly €200,000 plus an expensive Seanad which contrasts with the political system of one of the donors to our bailout Denmark which abolished its second chamber half a century ago. But the empire building and expansion extends beyond the strictly political withIreland set to have not one, not two but three official bad banks. Each with its own management, systems, premises and best of all, they will be dysfunctionally competing with each other.

First up we have NAMA, the custom-built “bad bank”, though it should be said that a fraction of its loans are performing so it’s not all “bad”. NAMA has 210 staff employed directly, plus 400-500 staff working at the banks plus an army of professional firms providing legal, accounting, insolvency and other services. NAMA has new personnel, teams, systems and operates under new legislation.

Secondly we have IBRC, the entity that emerged from the merger of Anglo and INBS last year. Now IBRC was not custom-built as a bad bank. When its CEO, the very handsomely-rewarded Mike Aynsley was recruited in late 2009, it was intended that Anglo would continue to operate and grow as a bank. However, despite what looked like intense resistance from within Anglo, the Government was eventually forced to fall in line with European Commission wishes and wind down Anglo and INBS. And so IBRC also became a “bad bank” with a 5-7 year lifespan to wind-down its loans.

So now we have two official bad banks, both asset managing loans, mostly based on property lending. We have two expensive sets of management and we have political oversight over both institution. Not only do IBRC and NAMA compete together for staff and resources, which is bad enough, they also compete with each other when flogging off loans or underlying property. Dysfunctional? You betcha, though Officialdom has so far avoided any examination of the cost.

So if two state-owned bad banks weren’t enough, we are now to have a third official state-owned bad bank. Enter the Permanent TSB where it is expected to produce an  outline plan to create a bad bank by the end of June. Thereafter we won’t just be duplicating, but triplicating management, systems, premises, staff, procedures and political oversight. And of course Permanent TSB will be competing with NAMA and IBRC as it seeks to wind down its loan book. Arguably most of its loans will be personal such as loss-making tracker mortgages and impaired mortgages, but nonetheless the core competencies are the same across each of the three institutions.

And finally we should remember that AIB, which is practically state-owned is doing its own deleveraging though it hasn’t formally created a “bad bank”. Quadruplication?

Is it not high time to call a stop to the empire-building, cost and dysfunction and have our well-paid politicians and civil servants design a single state-owned bad bank? Or are they too clinging on to the extravagant mindset that prevailed in the 2003-2007 era?

[There is a blogpost here which compares NAMA with IBRC, and highlights the duplication of costs/function in those two institutions]

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