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Archive for June 22nd, 2012

No matter how much NAMA or Minister Noonan try to evade the reality of NAMA having deliberately over-paid for the €74bn loans acquired from the banks – remember the Comptroller and Auditor General recently reported that NAMA had paid €5bn in state-aid so far, and that figure is set to rise further as the due diligence is completed on the remaining 20% of NAMA’s acquired loans – and no matter how much NAMA and Minister Noonan try to talk up the prospects for the property market or minimise the fact that property prices in NAMA’s main market, Ireland, have dropped 22-30% since November 2009, the date by reference to which NAMA valued its acquired loans, the hard fact is NAMA is sitting on what most ordinary people would regard as a paper loss that is now in view of €10bn.

It’s a paper loss because NAMA has another 8.5 years to complete its business, and there exists the possibility that property prices will recover at a faster pace than NAMA is running up its huge operating costs. There are differing views on the outlook for property, and – for what it’s worth – the view on here is probably more optimistic than elsewhere, particularly for prospects in the second half of this decade. But none of us has a crystal ball, so what about today?

NAMA reported losses in its first full year in 2010 of €1.1bn including a so-called “impairment charge” of €1.5bn. In 2011, the provisional management accounts showed a profit of €0.2bn after an impairment charge of €0.8bn. Next month, we will have the audited accounts for 2011 which may see the revision of the provisional 2011 results.

But the “impairment charge” which is supposed to reflect the deteriorating prospects for recovery of the NAMA loans is heavily distorted by accounting convolutions. NAMA calculates the impairment charge by estimating the amount of cash it will receive in respect of any specific loan. That may involve ongoing payments from performing developers, it may involve rent or other incoming on the underlying assets but to a large extent, it involves what NAMA thinks it will get for the underlying asset when it is ultimately sold. How does NAMA estimate the future value of assets?

It’s an important question and yesterday in the Dail, the Sinn Fein finance spokesperson Pearse Doherty asked the Minister for Finance Michael Noonan a straight question – “set out the basis on which NAMA calculates the value of the future disposal of assets and in particular if NAMA makes any assumptions on the recovery of property values.” – but the response remains evasive “the value of the property collateral that will be recovered by NAMA is assessed individually by debtor and by asset” but there is no guidance as to how NAMA assesses that value. Here is the full exchange

Deputy Pearse Doherty: To ask the Minister for Finance further to Parliamentary Question No. 215 of 12 June 2012, wherein he stated that the said National Asset Management Agency’s provisional impairment charge of €810,000,000 was based on estimated future cash flows on individual loans including cash flow from the future disposal of assets; if he will set out the basis on which NAMA calculates the value of the future disposal of assets and in particular if NAMA makes any assumptions on the recovery of property values.

Minister for Finance, Michael Noonan: I am informed by NAMA that its 2011 impairment assessment is based on a combination of a detailed cash flow forecasting exercise for all borrower connections which are considered individually significant (corresponding to debtors managed directly by NAMA) and a collective assessment for the rest of the loan portfolio.

For all individually significant debtors, in accordance with International Financial Reporting Standards, an assessment is made in respect of all future cash flows expected from each individual debtor. This assessment represents a best estimate of the future cash flows reflecting the performance of the individual debtor and other known developments which could impact future cash flows including local economic conditions, the trading performance of the debtor and the value of the property collateral.

In assessing the cash flows for individual debtors, NAMA does not make general assumptions in respect of the recovery of property values. The value of the property collateral that will be recovered by NAMA is assessed individually by debtor and by asset. The value of the property collateral takes into consideration the November 2009 valuation carried out by an independent valuer as part of NAMA’s due diligence process as well as subsequent developments in respect of the property which may have an impact on the value that expects to recover. To the extent that expected disposal proceeds are less than those indicated by the November 2009 valuation, the resultant shortfall is reflected within the overall impairment charge.”

Given the display of obfuscation towards what looks like a straight-forward question, it may be that the only way to get at the level of losses that lurk in NAMA today, would be to have another NAMA process. NAMA itself seems to be in denial about the value of the property underpinning its loans today, it vastly overpaid for these loans by paying long term economic value and also by not revising the valuation date when it became clear the Irish property market was continuing to tank. So today, we end up with an Agency that is beginning to exhibit the denial we experienced with the bankers in 2008-9, with NAMA reluctant to recognise the rotten mess that is the value of its property loan portfolios. In 2008-9, it was the bankers who were hostages to fortune or the valuations shown in their accounts, it seems that in 2012, it is NAMA that has become a hostage to fortune or the valuations placed on its acquired loans.

One of the main reasons for setting up NAMA was to place a certain value on loans in our banking sector associated with property which had gone bad, and which had doubtful values. In the end, NAMA paid €32bn for €74bn of these loans. It seems on here that the only way we’ll uncover the true level of losses in NAMA today is to create a brand new NAMA to acquire the loans from the old NAMA

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“Another misplaced claim made during the debate is the legislation represents a bailout for developers. This is just not so. Let us be clear. NAMA is not designed to be, and will not be permitted to operate, in practice as a bailout mechanism for developers who have operated irresponsibly. The amount a borrower owes will not change because of the transfer of a loan from his bank to NAMA. The agency will have a statutory duty to maximise the taxpayer’s return and will, therefore, be expected to use its entire means to this end. The Bill also provides the agency with the wide range of powers it needs to pursue borrowers and enforce security. In some cases, this will mean borrowers’ personal assets will have to be assumed by NAMA and, in such circumstances, I cannot understand how the misconception that the agency will bail out developers continues to run other than pure political mischief making” Former Minister for Finance, the late Brian Lenihan during the second stage debate on the NAMA Bill on 14th October, 2009

Last week, the Minister for Finance Michael Noonan told Sinn Fein’s finance spokesperson Pearse Doherty that “debt forgiveness has not formed part of these agreements” – the “these agreements” meaning the agreements NAMA was reaching with its developers for the repayments of loans.

But a week is a long time in politics.

This week, Minister Noonan is saying that NAMA will release developers from “personal guarantees or personal recourse” which to many people will sound a lot like “debt forgiveness”!

Minister Noonan was responding to questions in the Dail yesterday from the Fianna Fail finance spokesperson Michael McGrath and from Pearse Doherty. The full exchange is as follows:

Deputy Michael McGrath: To ask the Minister for Finance if the National Asset Management Agency has agreed deals with debtors which involve a reduction or dilution in any form of any personal guarantee the debtors may have given in respect of their loans now held by NAMA; if he will provide details of the number and nature of such deals; and if he will make a statement on the matter.

Deputy Pearse Doherty: To ask the Minister for Finance further to Parliamentary Question No. 226 of 12 June 2012 wherein he said that debt forgiveness has not formed part of agreements entered into by the National Asset Management Agency with debtors, if he will confirm if NAMA has entered into agreements where personal financial commitments and obligations by debtors have been reduced or waived as part of any agreement.

Minister for Finance, Michael Noonan:  I am advised by NAMA that it did not pay any consideration to participating institutions for personal guarantees attached to acquired loans. This is because it did not consider that such guarantees had any residual value in the vast majority of cases as the amounts potentially recoverable were limited to the value of secured assets.

The policy of the NAMA Board from the outset has been to pursue all personal guarantees to the greatest extent feasible where there is value to be obtained. I am advised by NAMA that, with respect to co-operative debtors who have made full disclosure of assets and liabilities, it may, on a case-by-case basis, consider the release of personal guarantees or personal recourse two years after the value of all assets have been realised. I am also advised that the NAMA Board has recently decided that it will review this issue again in the light of any revised personal insolvency regime that may be introduced following enactment of legislation by the Oireachtas.”

What you are getting above is a reluctant response that has to be draaaaagged out of the Minister, and his response last week may seem to some to be downright misleading. He may well now couch his response in conditionality – NAMA “may” and “consider” and “case by case” – but the bottom line is that NAMA is writing off personal guarantees and personal recourse. NAMA may not have paid anything for these personal guarantees but you and I certainly have with the €42bn losses notched up by the banks when they transferred €74bn worth of loans to NAMA and only received €32bn in return.

What does this mean for NAMA? Not a great deal, it makes commercial sense for the Agency to maximise returns from its loans and if it forms the view that incentivisation – be it profit shares or forgiving personal guarantees or recourse – of specific developers will lead to such a maximisation, then that is in line with the Agency’s remit.

Politically this is dynamite of course. Remember former Minister for Finance, Brian Lenihan and his solemn commitment that developers would not be allowed walk away from their debts? Citizens that have borrowed to buy homes may feel they are being unfairly treated by not being given the same deal as developers – the deal being that they work as best they can with their borrower for a couple of years, then walk away from their mortgage keeping their personal assets.

Minister for Justice, Equality and Defence Alan Shatter has another eight days to publish his Personal Insolvency Bill. Yesterday’s revelations have just upped the ante for him to deliver a system which will be regarded as equitable and fair for the debt-burdened in this country.

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