When the Comptroller and Auditor General published its special report on NAMA in May 2012, we learned quite a lot about NAMA’s operations. The above extract introduced many of us to the term “connection management agreements” which plainly provide for what most of us would commonly refer to as “debt forgiveness”.
By way of example to explain what we’re talking about – imagine you are Developer A and you have a company called “Developer A Limited”. Your company borrowed €100m from the bank to develop a site. The bank required you as Developer A to give a personal guarantee of €5m secured on your own house. The property sector collapses and your €100m loan is transferred to NAMA which wants its €100m back. Trouble is, the site for which you borrowed the €100m is now only worth €20m, so NAMA hasn’t a hope-in-Hell of getting its €100m back from that. And your personal guarantee of €5m won’t make a huge dent in the outstanding debt either, but you are on the hook for it. So NAMA says “right Developer A, if you manage your site which is worth €20m today so that we can sell it for €50m in three years time, we will not come after you for your personal guarantee”. Developer A really doesn’t have a choice – he either works with NAMA or loses his house now, so he says “yes”. And this agreement will then be written up and referred to as a “connection management agreement”.
However, citizens of this country will want to know more about these agreements. After all, developers whose debts crippled this country when the Government decided to guarantee the banks, will walk away from their loans without having to give us the assets pledged under personal guarantees. In the above example, it makes financial sense for NAMA to forgive these personal guarantees if, through the labour and sweat of the developer, the site appreciates in value from €20m to €50m in three years. NAMA gets an extra €30m and in return “pays” the developer just €5m in waiving their personal guarantee. So the above might be a sensible commercial decision.
It is political dynamite however, because every under-water mortgage-borrower in the country might rightly conclude that their asset is worth just 50% of the mortgage outstanding and their “other assets” – which the bank might have recourse to if it forecloses – are practically worthless, so why won’t the bank offer them a deal over three years as well. Why is there one rule for the developers and another rule for other borrowers?
That is presumably why Minister for Finance, Michael Noonan was apparently unwilling to give Sinn Fein’s finance spokesperson Pearse Doherty a straight answer on the matter in the Dail during the week when Minister Noonan cryptically said that “debt forgiveness has not formed part of these agreements”. The full exchange is here:
“Deputy Pearse Doherty: following the recent publication of a special report by the Comptroller and Auditor General, the number of connection management agreements the National Asset Management Agency entered into with debtors; and the amount of debt to be forgiven in such agreements. [27956/12]
Minister for Finance, Michael Noonan: I am advised by NAMA that two-thirds of all debtor cases are going forward on a consensual basis, with terms signed in 187 cases. Connection management agreements, to which the Deputy refers, are used only in very specific circumstances where significant restructuring is involved: NAMA advises that, to date, it has signed connection management agreements with two debtors, agreed terms with a further four debtors and is in negotiation with an additional two debtors. The most common form of agreement between NAMA and debtors is a Letter of Support. I am advised by NAMA that debt forgiveness has not formed part of these agreements.”
Those last two words in the exchange above – “these agreements” – ambiguously could refer to “Letters of Support” but the question asked was whether or not, connection management agreements provided for debt forgiveness, so you would expect a forthright answer to confirm or deny if debt forgiveness forms part of connection management agreements. And waiving a personal guarantee is, in the eyes of most people, debt forgiveness.
NAMA won’t want to confirm it is offering debt forgiveness. The Government won’t want to confirm it either. But the Comptroller and Auditor General has confirmed that “These agreements, known as Connection Management Agreements (CMA), set
out the incentivisation arrangements including arrangements in respect of personal guarantees that will apply if the debtor meets the targets agreed with NAMA and complies with any other terms set out in the agreement.”
Where are the “incentivisation arrangements” for the little people?
NAMA Wine Lake 
Great work NWL.
Isn’t it curious that our lazy media have not covered this story.
One critical point, can we all stop use the forgiveness word.
It is pejorative.
It frames the discussion with religious connotations of sin.
We made stupid financial decisions but
sin has nothing to do with this issue.
When companies like Eircom go bust nobody talked about forgiveness
or indeed moral hazard.
It’s only when we talk about the problems of us little people
that religious connotations are used to bias the discussion.
Can we leave forgiveness to the men in black robes?
Debt relief is the correct term.
I have long argued this point both here and elsewhere.
Nama is effectively forgiving €40 bn of (gambling) debts incurred by about 850 developers. Legislation to facilitate this was pushed through the Dail. The banks’ balance sheets got hammered as a result and had to be restructured by taxpayers with help(?) for the troika.
To date, nothing has been done on any scale for householders with mortgage repayment problems, who in the vast majority of cases, were unwitting participants in a ponzi scheme orchestrated by greedy developers. bankers and their camp followers. Instead of putting these mortage holders through hell and messing with personal bankruptcy schemes, why cannot the Government institute a Nama Lite and sort out the mortgate problem at a single stoke? The cost might be about €10 bn (already provided for in the balance sheets of taxpayer-owned banks) but many tens of thousands of households would benefit. In one step, the country’s citizens could be free of this crushing debt (which is going to have to be written down in any event) and some semblance of confidence restored.
Obama considered this debt overhang to be the biggest single treat facing Ireland. He said “Yes we can” and didn’t say that we should kick the can further down the road to nowhere.
treat should read threat – only Nama offers treats to its debtors.
The example assumes that the private residence is unencumbered or that NAMA is in a position to forgive mortgages/debts held by others.It only works if NAMA owns the mtg. on the home,most developers were very highly leveraged by a variety of lenders,not all in NAMA.Its a hope ticket,some carrot to go with the stick.
An example of extremly high mtg. on a private residence by a developer.
“The McFeelys obtained an interest-only mortgage of €9.5m in December 2006 from the Irish Nationwide Building Society, which they had defaulted on. Over €580,000 is also outstanding in unpaid interest, and the order for possession was sought by NAMA.”
http://www.independent.ie/national-news/courts/developer-tom-mcfeelys-wife-told-to-leave-home-by-august-3133162.html
Would it not make sense to pursue them for all personal assets and then, going forward only, pay them a salary/ offer debt relief on personal debts remaining after all assets had been surrendered, if it made sense to keep employing them in the business?
@otto this a decent explanation of the approach.
“There will be cases where enforcement proceedings will be necessary, where NAMA will itself take control of the underlying security. The choice for debtors is either one of consensual agreement or of enforcement. There are good reasons why debtors should wish to assist NAMA in maximising the realisation of assets through a consensual approach. These debtors; be they house builders, land speculators, developers or collectors of property assets have played their part in bringing the economies of this island to the present state. They cannot simply blame their misfortune on the world financial crisis or the over-exuberance of the bankers. They now have an opportunity, through working with NAMA, to make some amends for the damage that has been done. Secondly, they have the opportunity to avoid enforcement proceedings. Whilst it will be necessary in some cases to go through the full enforcement process, we believe that the debtors would also prefer that we do not have to go through the process of judgements, judgement mortgages, liquidations, bankruptcies, High court examination of debtors, disqualification of Directors, garnishee orders, instalment orders, and committal orders for failure to meet instalment orders. But be in no doubt that where it is necessary to take such steps, they will be taken. Our team at portfolio management have engaged with the first tranche of developers and we believe that there is an increasing air of realism about these discussions. This is not to say that we have yet achieved full agreement on the way forward but we are making good progress and we anticipate that we will reach a consensual approach in most cases”
http://www.templetonrobinson.co.uk/blog/112/NAMA-Comments-by-Chairman-of-the-Northern-Ireland-Advisory-Committee
Thank you. I think removing the debtor from home ownership and installing them in rented accommodation must be part of any settlement. Yet more so when the current home is a trophy one.
“Where are the “incentivisation arrangements” for the little people?”
I love NWL, and I know this remark is about debt relief etc, but it rubs me the wrong way, because it panders to a widespread Ireland-does-nothing-for-the-little-people attitude which is a largely evidence-free assertion about contemporary Ireland. Ireland does a huge amount for the “little people”, taxing their income almost not at all, and offering some of the most generous welfare state benefits known to human history. One of the factoids to emerge from the Richard Tol ESRI storm in a tea-cup was the following:
The D of Social Protection “said a working married person with four children earning €28,000 per year had a net annual income, after benefits but excluding rent, of €43,092.”
For a single person to earn €43k net of taxes, their income would have to be more than twice that, around €65k in the private sector, or maybe €80k in the public sector. But that is the income available to someone on average-to-low earnings with a large family in Ireland today, after four years of austerity. Ireland does a huge amount for “the little people” and it doesn’t do reality much justice to pretend otherwise.
Reference:
http://www.irishtimes.com/newspaper/breaking/2012/0612/breaking49.html
Nama was, is and always will be a bailout vehicle for the Irish developer class. It’s entire purpose was to dig them out of theie holes at public expense.
It is a classic banana republic construction.
We all have choices. They may be limited but we all have them. We will soon have new bankruptcy laws. The debtors (developers) choice is to take the bankruptcy option and start again – not necessarily in Ireland, or to work with NAMA on the best deal they can negotiate to maximise the return on NAMA’s assets – because they are now NAMA’s assets. Whatever the developer may think, there is no equity in those assets for him. If there was, the assets would not be in NAMA.
His only incentive, in working with NAMA, is that he can get a salary to keep his family, in return for any enhancement he might make to NAMA’s (read Ireland’s) property values. And that at the end of the period when the property is sold off, he is seeking promise that NAMA might agree a settlement on his personal assets including his home – that’s in the unlikely event that he has any personal assets left.
NAMA’s choices are founded in their assessment of whether it needs the developer or not to enhance the value of the assets (this is a commercial choice based on good asset management). NAMA has been making these choices. McNamara, Liam Carroll, Treasury etc – No; Cosgraves, Mulryan etc – Yes.
Without the ability to make agreements on personal guarantees with its debtors, NAMA will find it even more difficult to fulfill its brief which is still to return a profit on its acquisition price for the taxpayer. It will be left in a little corner by itself to play with the PE vultures and the receivers (busy collecting fees of €500 per hour for doing nothing the longer this goes on). No buyers, nobody to manage and complete the assets, just disposal at Alsop’s level. NAMA has Hobson’s choice, the developers, IMO, would be better beginning again – but that’s their choice.
@Otto utilizing NWL’s example,if you have the skill set to turn a 20mio site into one worth 50mio you could care less about NAMA,you ain’t renting either!
Say,you are a preferred developer for Aldi/Dunnes,have built and delivered on time on budget numerous stores,NAMA needs you,not other way around.
Keep in mind the old Clash song,London Calling !
If you had modern BK laws mirrored on the UK’s a lot of developers would file,throw ALL the keys on the table and start again.The delays,head scratching is political and gives NAMA way too much leverage,time to level the playing field.
Maybe you are right! But of course with actual bankruptcy you would have to give up the family home, and many are reluctant to do so. And – forgive me – I am not sure that all our Irish developer friends could be expected to succeed in London, which is both a more competitive and a more quality-orientated/regulated market.
NB those “modern” UK bankruptcy laws are only 10 years old I think. One of Blair’s under-appreciated changes to UK life.
@otto I think it was Brown,the story goes he copied/cut and pasted the California ones.
Agreed,most of them not worth keeping but the better more skilled ones are not even in NAMA,some people are well capitalised and able to navigate the cycles,actively buying developing now !
http://www.printweek.com/news/426296/Govt-review-insolvency-laws/?DCMP=ILC-SEARCH
@otto,
Let’s personalise it a little.
You are a developer. You owe €100 million to the banks. NAMA has purchased your loans for €45 million. The underlying assets are currently worth €35 million. You are facing negative equity of €55 million.
You had bought a house on the back of your new found wealth in 2006 for €5 million with a €4 million loan from the bank. That house is now worth €2 million. You are underwater on your mortgage to the tune of €2 million. What value do personal guarantees have?
Let’s even be a little optimistic and assume you were not quite so dumb. You bought a house in 2006 for €2 million from assumed “profits” of your business and you now owe nothing on it, but you were foolish enough to mortgage it to the tune of €500,000 in 2007 when you thought that by feeding your banks and paying the accumulated interest on your business loans it would buy you enough time to ride out the “soft landing”.
The house is now valued at €700,000. There is net equity of €200,000. Your wife is entitled to 50% of it. So NAMA are chasing you for €100,000 and they want a charge on your wife’s interest too. Your Portfolio Manager treats you like a criminal. You are summoned to meetings to meet your “parole officers” like a criminal. You are denigrated and despised by your resentful fellow citizens and live in an atmosphere of depression. NAMA offer to pay you €70,000 per annum to manage and liquidate your portfolio over time – a negative task – with oversight by arrogant hostile pricks, who never took a risk in their lives. Your accountant tells you that the ESRI says that you are better off on the dole. Your option is to sell the house for €700,000, pay the bank and leave for Australia or Canada where jobs as a bricklayer are plentiful and well paid.
What choice do you make?
All these people sound like property business geniuses!
We should save them all!
@WGU, I thought that might awaken you :-).
The developers don’t need saving. Ireland is not the only market in the world. Mostly “wagon train” people by nature anyway, they have options.
It’s Ireland that’s the immovable object that needs saving. There’s only one leader in Europe currently and unfortunately she’s not on our side.
@WSTT there is another option,build a local football stadium,thereby buying some votes with creditors money,get elected as a TD!
It was reported last year. Front page of Sunday Tribune biz section before it closed and front page of Sunday Times on July 31.
@Neil,really do you have nothing better to do with your time,no links as usual.