NAMA negative equity mortgage – gimmick or game-changer

“If nothing else, the promotion had the merit of simplicity. Buy a Hoover vacuum cleaner for at least pounds 100 and receive two free flights to America or Europe. It couldn’t fail to boost sales, trilled the ill-fated marketing department in Wales. How right they were. More than 200,000 people bought Hoovers they didn’t want. Satisfying the demand for free flights would have required more than 500 jumbos.” One of the most disastrous marketing gimmicks of all time – buy a cheap electrical product, get a flight worth more, it ended the corporate independence of one of the world’s greatest electrical brands

You have to have some sympathy for NAMA. Faced with a residential property market that has not risen in any month in the last 53, and with a general consensus that further falls are in prospect and the Holy Grail “bottom” being some way off, and yet nursing a portfolio of loans secured on 10,000 residential properties with politicians, the commentariat and the general public waiting for it to sell, what was the Agency to do? Well, I think the Agency deserves some credit for recognising the problems and setting about developing some scheme which might encourage necessary transactions. And so the Agency focussed on a negative equity mortgage product which would give buyers some confidence and protection in their purchase of a NAMA property.

Fair play to NAMA for trying.

What the Agency came up with was the product launched yesterday, which it is calling the “80:20 Deferred Payment Initiative”, a scheme whereby buyers can obtain mortgages from three state-guaranteed banks – Bank of Ireland, Permanent TSB and the EBS unit within AIB – and then buy a selected NAMA property with a guarantee that if the properties have declined by up to 20% in five years, the buyers will be refunded the decline up to 20%. Buyers have an initial choice of 115 properties inCork, Dublin and Meath but it is understood the scheme will be rolled out to 750 properties after the initial pilot phase.

Details of the scheme are still emerging and being clarified, but at this stage it would be fair to say the scheme is getting a luke-warm and almost cynical reception. Whilst the asking prices on the properties in the scheme might be up to 80% off peak asking prices, questions are emerging as to whether the current asking prices are still too high. Importantly, the NAMA chairman is seemingly saying the asking prices are fixed, there will be no haggling as these prices are claimed to be realistic. There is also contradiction in the NAMA FAQs where on one hand it is stated that no interest will be paid on the deferred amount for the initial five year period, but elsewhere it is suggested the mortgage repayment will be the same as a normal repayment mortgage based on the full mortgage amount.

But with the Hoover example above in mind, there may also be loopholes which have the potential to cost NAMA dearly. Whilst the scheme has the headline of being for a fixed five year period, the FAQs indicate you can sell the property at any time with NAMA’s consent which is not to be unreasonably withheld and at that point – be it two weeks or two years after buying the property – there will be a reckoning of the fall in value which will be quite easy I would have said, there is the initial purchase price and the subsequent sale price. As long as the decline is less than 20%, you’ll apparently get your deposit and principal repayments back and you can walk away with NAMA settling with the bank. You’ll have had the benefit of the property for two weeks or two years having re-paid principal (which you get back in the sale) and interest (which you don’t, but the interest is seemingly limited to the 70% of the purchase price). You’ll also have the initial stamp duty of 1% and you may have estate agent fees when you sell. But on the other hand, you’ll apparently get a spanking new home and with rental yields in the market well above interest rates, it may well be a terrific deal for you the buyer. And indeed if prices do continue to decline, there may be an incentive to sell when they reach the bottom, you cash out, buy another property at the bottom and benefit yourself from the recovery rather than NAMA. On the other hand, the NAMA developer will have the nurse whatever loss is realised when the property is sold, and given these spanking new homes will suffer wear and tear, there may well be a loss even if the market has stayed flat. But all of that is NAMA’s risk, not yours as a buyer.

Your risk as a buyer is that the asking price today is artificially high, a suggestion rejected by NAMA who say the prices are realistic and not open to haggling. But absent a proper house price database and a dearth of transactions and limited mortgage finance, it is quite difficult to place values on property anyway. And speaking with a valuer’s hat on, it is not unusual for two valuers to arrive at prices that might be 30% apart – remember valuation is an art, not a science, though it shouldn’t be astrology either.

Your second risk is that if you do wait for the full five years, then the so-called “independent” valuer who NAMA pays to value your property, may be – subconsciously of course – influenced to value the property at the higher end of what will usually be a range. So after five years, you might believe that property has declined 20% but if the NAMA valuer thinks it has declined by less, then that is a risk you bear though there is a limited procedure which can be invoked if NAMA or you are unhappy with the valuation, but that limited procedure still depends on a NAMA-appointed valuer.

The mortgage deals seem to be average with interest rates between 3.4-4.2%, but if you have a tracker on an existing home, you would think long and hard before giving that up.

The scheme announced yesterday is not open to investors, and that is telling. Investors would be more ruthless and suffer less from inertia and emotion when it comes to disposing of property. And maybe that is what NAMA is banking on, that even if prices do fall, that the buyers will not cash out and leave NAMA with less valuable second-hand property.

So the view on here is that if the buyer is happy with the purchase price, then this may be a very good deal. But the deal might work best for the buyer if they treat the purchase as an investment, monitor price trends and dispose of the property at the bottom, buy a new property then and pocket the recovery themselves. If you wait the full five years, it may be NAMA that pockets any recovery.

The announcement yesterday has certainly generated headlines for the Agency and already there is analysis of the asking prices of the homes available through the scheme. There is genuinely a concern that prices will decline further – if you believe the CSO figures which exclude cash transactions, we are down 49% from peak and it seems on here that the consensus forecast centres around a 60% decline before we reach the bottom – so protection for a 20% decline may well be attractive. And if the pilot homes are snapped up, then NAMA may well extend the programme and it may encourage others to sell their homes with similar insurance – IFG offers an insurance product that might be of interest. And with a growing number of transactions, a degree more stability and confidence might return to the market, and that could indeed be a game-changer.