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« NAMA formally launches negative equity mortgages today
Is NAMA providing confidential information to Government politicians? »

NAMA negative equity mortgage – gimmick or game-changer

May 9, 2012 by namawinelake

“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.

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Posted in Banks, Irish economy, Irish Property, NAMA, Politics | 10 Comments

10 Responses

  1. on May 9, 2012 at 10:48 am What Goes Up...

    It’s a silly political football.

    NAMA looks like a fat, foolish, middle-aged lothario squeezed into a vice-like green jersey, tight shorts and clown-like boots who has been sent out on to the pitch to give it a bit of welly.

    The most obvious flaw in all this is the fact that NAMA is mandated to *poof*… disappear.

    What’s NAMA’s timeframe? 2020?

    So it has a trial period now, starts rolling this scheme out from 2013 and then stops by 2015 to ensure it can collect/pay out all monies before closure.

    So it stops this effort at pump priming in 2015 and 2017 is when the first loans start being re-assessed. If it hasn’t “started the banks lending again” then it’s doomed to failure.

    But the banks are zombies – and they will continue to be zombies for the foreseeable future based on the deleveraging requirements on them.

    It will fail ingloriously and we shall never speak again of the mid-life crisis sufferer and his rush of blood to the head.


  2. on May 9, 2012 at 11:40 am Sporthog

    In fairness I think it is a good idea. Not every buyer of a property is a scheming conniving selfish person.

    There are families who require bigger homes so that they can have a better quality of living. Some require to get out of apartment life and into a 4 bed semi etc.

    There are people who have to move from residence A to new residence B so that they can be closer to their place of work, or services such as schools for their children etc etc.

    In addition there will be some spin off effects such as extra retail activity as people buy furnishings for their new home etc.

    In other words, people have to get on with their life, regardless of the property situation. Not everybody is in the position to put their life on hold whilst the market sorts itself out over 10 years.

    However again great care should be taken for the person who is committing money into Ireland.

    With landlords having to foot the bill for the provision of services i.e. NPPR tax, household tax, management fees ( private estates ), the TV license and perhaps even water meters, then why would somebody become a house owner?

    Why not rent and the landlord pays for provision of services for which the tenant uses? The disincentives to owning your own home are only increasing with every budget.


  3. on May 9, 2012 at 12:57 pm Vince

    This is neither fish, flesh, nor good red herring. NAMA and the banks need to vent 66% of stock onto the market sans reserve in open auctions. 1000 at a time for as long as it takes. If they hold the remainder for 6 years the wrinkles should be shook out and a better price in a sellers market arrive. What they are up to at the moment is killing trade and to preserve what exactly ?.


  4. on May 9, 2012 at 2:56 pm john gallaher

    One of the underpinnings here is the “availability” of a competing product by that little shop IFG Group,run by Manor Park supremo Joe Moran.
    Regular readers,will not require additional information on the hopelessly insolvent and in receivership Manor Park.Caveat emptor for any buyers of this new scheme from Moran.Hope it works out better than this…………no chance Moran was trying to curry some favor from NAMA here,or shift a few of his own houses with this gimmick.

    “HIGH-PROFILE house builder Manor Park Homes is in receivership with debts of €170 million after the company’s directors told its bank that the business could not repay the money.”
    http://www.irishtimes.com/newspaper/finance/2011/1021/1224306212941.html

    Have they actually written any policies,given their minuscule balance sheet, good luck collecting.

    http://markets.ft.com/Research/Markets/Tearsheets/Directors-and-dealings?s=IJG:ISE


    • on May 9, 2012 at 3:05 pm namawinelake

      @John, Joe Moran is the non-executive chairman of IFG

      http://www.ifggroup.com/gns/about-us/directors-and-management.aspx

      A bit of a stretch to say it’s run by him.

      The IFG scheme works on the basis of the seller placing a %, up to 20% in escrow with a trustee until the period covered by the insurance is up.

      I’ll ask how their product is doing, there seemed to be strong interest when it was launched last September 2011.


  5. on May 9, 2012 at 3:11 pm john gallaher

    The x Lord of the Manor!
    “He has enjoyed better luck with IFG, the other shell company with which he became involved in the late 1980s. He has served as chairman of IFG since 1987. Now a financial services company, Moran’s 5.2m shares are worth €7.7m.”
    http://www.independent.ie/business/irish/lord-of-the-manor-newsmaker-joe-moran-manor-park-supremo-1252806.html


  6. on May 9, 2012 at 3:30 pm john gallaher

    Would not take much to wipe this little shop out,that NAMA is hanging its hat on as a competitor.Excluding any Manor Park deals,be very interested if IFC or the Lord of the Manor,who recently flamed out with atrocious timing, has actually written any.One hopes,hes not advising or calling the market for them,can the share price sustain,any say forced selling to cover bank debts by senior executives.Two ‘buyers’ kicked the tires and walked.
    This is NAMA’s competition,what a joke.

    “……. IFG’s 2011 adjusted operating profit of 22.6 million”

    http://www.reuters.com/article/2012/03/29/us-ifg-idUSBRE82S0FH20120329?type=companyNews

    http://www.bloomberg.com/news/2011-08-23/ifg-group-said-to-seek-offers-from-two-bidders-within-10-days.html


  7. on May 9, 2012 at 3:51 pm who_shot_the_tiger

    So…. we are back in the hands of Wilbur Ross, who recently offered his thoughts on the European crisis, saying that …. of the Continent’s more troubled countries, IRELAND was the only one where his firm had dared to invest, keeping Spain, Portugal, Italy and Greece at arm’s length. His said his investment in the Bank of Ireland was a “play on the recovery of Ireland.”

    So everything must be grand. Wilbur has every confidence……. Unfortunately the Norwegians don’t:

    http://www.bloomberg.com/news/2012-05-04/norway-dumps-ireland-portugal-bonds-amid-euro-challenges-1-.html

    My money is on the Norwegians.


  8. on May 9, 2012 at 6:54 pm Sporthog

    @ WSTT,

    Have you seen the BOI share price today? Dear oh dear…


  9. on May 18, 2012 at 12:17 pm Patrick

    http://www.independent.ie/national-news/nama-sells-6m-worth-of-houses-in-two-weeks-after-guarantee-3111529.html

    Maybe so



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