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Archive for August 20th, 2012

This afternoon, the Irish Banking Federation (IBF), which claims to represent banks which account for more than 95% of all mortgage lending in (the Republic of) Ireland, has released its mortgage approval statistics for the three months ending 30th June 2012. The euro figures show a slightly stronger than usual increase over the traditionally quiet Q1 with lending overall up by 16% over the dismal first quarter of 2012, though lending is down by 16%.(coincidentally!) from Q2, 2012. During Q2, 2012 a total of €524m was approved compared with €450m in Q1,2012 and €624m in Q2, 2011. Lending is down an astounding 95% from the peak of €55.6bn in Q4,2005. So, modestly good results but given the very low base, for practical purposes there is still a mortgage lending drought. When you consider than Bank of Ireland ALONE was supposed to make €1.5bn available for mortgage lending in 2012, and with a market total of €1.1bn in the first two quarters, you can readily see that all is not as planned. Here is thevalue table of mortgage approvals in €m.

In terms of euro values, it is noteworthy that Buy to Let mortgages continue to wither whilst first time buyers and movers are up. Here is the volume (number of mortgages approved) table.

The number of mortgages approved is healthier than the euro values, with 3,225 approved in Q2, 2012 up 23% from Q1, 2012 and down just 9% from a year ago in Q2, 2011. First time buyers account for most of the increase in volume. And lastly, here is the average value table.

There has been a steep decline of 8% in Q2, 2012 in the average first time buyer mortgage which now stands at €151,000 down from €164,000 in Q1, 2012 and a peak of €252,000. Remember you can’t directly translate that into house prices because mortgages don’t take account of deposit levels, and in 2012 the loan to value is lower than it was at the peak.

Commenting on the latest data, Pat Farrell, IBF Chief Executive, stated “These latest figures show that contraction in activity continues to slow significantly and the second quarter of this year has actually recorded modest growth in both first-time buyer and mover-purchaser activity – something not seen since the first quarter of 2006.  Taken together with recent comments from property economists signalling stabilisation in house prices in key sectors of the Dublin market, we will be looking to the next quarter’s data for confirmation of the trend indicated in this quarter.  The period to the year end is key as mortgages taken out after 31st December next will not qualify for mortgage interest relief.” Pat is trying to paint the best possible picture from the table, but is unfortunately talking bollocks, as in Q2, 2011 there was also an increase in both first time buyer and mover activity, and indeed there is a seasonality to Irish mortgage lending with Q1 traditionally being quietest. And in respect to stabilisation in “key sectors of Dublin”, it is more estate agents rather than economists making pronouncements. Key difference, that.

You can see the mortgage lending analysis for Q1, 2012 here.

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Part 1 of this two-part blogpost on NAMA’s cash position examined the targets that NAMA has imposed on itself for the redemption of its debt – remember NAMA used €32bn of IOUs to buy €74bn of loans from the banks, and these IOUs need to be honoured/redeemed/repaid by 2020; NAMA has published a plan which sets out by year the redemption of these IOUs, the first milestone in the plan, which is the payment of €7.5bn by the end of 2013, has recently been incorporated into the Memorandum of Understanding with the bailout Troika, but the other scheduled repayments haven’t (yet!) – they are:

End 2013 – repay €7.5bn (incorporated in Troika memorandum in May 2012)
End 2015 – repay additional €4.5bn (cumulatively €12bn)
End 2017 – repay additional €12bn (cumulatively €24bn)
End 2018 – repay additional €4.5bnn (cumulatively €28.5bn)
End 2019 – repay additional €1.5bn (cumulatively €30bn)

Remember NAMA is sitting atop a mountain of cash today, but it has a veritable Mariana Trench of IOUs that it needs redeem by 2020, so that cash mountain will be depleted. NAMA has a particularly large “funding cliff” at the end of 2017.

Part 1 assumed that NAMA could sell its loans and underlying property at the same price as it paid for the loans, which was by reference to property values in November 2009. This assumption is threatened by the fact that property in NAMA’s main market, Ireland, has declined by 20-30% since November 2009 and even though some other markets have improved – the UK, and London in particular, for example – the calculation on here is that, from today, NAMA needs a 25% increase in property values overall just to break even. Now a 25% increase between now and 2020 mightn’t seem so unrealistic, but in addition NAMA needs to cover its substantial operating costs and interest expense, and it is unlikely that NAMA will wait a full eight years before it disposes of 100% of the remainder of its property, most will be disposed of before 2020.

Despite NAMA’s claims to the contrary, it is simply impossible to predict today in 2012 if any growth in the value of NAMA’s assets will be offset by NAMA’s considerable annual operating costs, or indeed if the value of NAMA’s assets will decline further. It is ironic that NAMA has consistently bad-mouthed developers whose business plans were based on the wish to hold onto assets for as long as possible in the hope that prices would recover, because guess what,  NAMA itself is, according to the well-informed word on the street, doing EXACTLY that in the case of Irish assets – holding onto the asset, collecting rent where possible, mothballing elsewhere and investing a relatively small amount of money in development.

Now we had NAMA to police developers and put a stop to fantastical hopes of property prices rebounding, but who exactly is policing NAMA to stop it doing the exact same thing?

NAMA will eventually run out of cash if it fails to generate enough from its loans to cover the original purchase price of the loans plus advances made to developers plus the Agency’s operating costs plus interest on the NAMA IOUs. What NAMA will ultimately get for its loans is difficult to predict but there are some actions which can minimise the risk of NAMA running out of cash.

(1) Do NOT let Minister for Finance, Michael Noonan copper-fasten more scheduled payments by NAMA into the Memorandum of Understanding with the Troika. This preserves the maximum freedom of action on NAMA’s part to manage the assets so as to maximise value by 2020.

(2) Open discussions with our EU partners to transfer the risk of the NAMA operation as part of the renegotiation of our banking debt. It is almost incredible that this has not even been considered, given the fact that NAMA paid €5.6bn in state-aid for the loans, which represents a premium over what the loans are worth, and that property in Ireland has declined 25-30% since. It MAY come good by 2020, it may not, NAMA can “hope” for a recovery and we can all “hope” they see their “hope” fulfilled. Right now, NAMA represents a massive downside risk.

(3) Ensure NAMA has adequate internal asset management expertise. NAMA is an unusual asset management company in that (a) it needs to wind down by a fixed point in the future, 2020 (b) it is not acquiring new assets, though it is spending relatively small sums on developing assets (c) it does not have the freedom to enter into joint venture and (d) it has an incredibly cheap source of funding in the Government-guaranteed IOUs it used to buy the loans. In the lightweight Geoghegan review of NAMA last year, the Agency was seen as not having an adequate commercial approach to deal with its portfolio. If you believe Minister Noonan, NAMA has remedied that deficiency but it is hard to see how exactly – the Agency hasn’t employed any new category of professional, it has just rearranged people under different department headings.

(4) Ensure there is someone outside NAMA to police the Agency and stop it generally hoarding property in the hope that the longer it is held, the better the prospects of recovering what was originally paid. Given that NAMA is running up substantial operating costs, this strategy cannot be unquestioningly accepted. NAMA recently told  the High Court in London in the Paddy McKillen case “The Agency’s objective is to obtain the best achievable financial return for the Irish State on this portfolio, and in the case of each individual loan to achieve such a return as soon as practicable in order to reduce the value of the portfolio to zero as soon as commercially practicable.” Someone external to NAMA needs to challenge and police the Agency to ensure this happens.

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It will be Friday this week when our own Financial Regulator, Matthew Elderfield publishes the mortgage arrears data for the second quarter of 2012. Sadly on this occasion, the data will again be confined to owner occupier mortgages, but it is hoped that in November 2012, we will start to get data on Buy-to-Let mortgages as well. This is what the historical data looks like:

As usual, the Financial Regulator will provide home repossession data on Friday as well, but it is unlikely that there will be much change to the miniscule number of repossessions that take place in (the Republic of) Ireland. Since 2009, there have been about 500-600 repossessions per year, and there has been little absolute change in the last three years, to quarterly statistics despite the intensifying crisis of unemployment, reductions in take-home pay and collapsing property values.

Contrast this with our neighbours over the Border who on Friday last published repossession data from its courts system for Q2,2012. The figures show that between April and June 2012, there were 713 repossession orders granted by the Northern Ireland courts, of which 205 were suspended and 6 were “suspended possession combined”

Northern Ireland is a jurisdiction with a 7.6% unemployment rate compared with 14.8% on this side of the Border. Their residential property has declined by about 50% since the peak in 2007, about the same collapse as our own, though with higher inflation across the UK than in Ireland, the real collapse in Northern Ireland has been slightly worse than our own. And remember in Northern Ireland, they don’t have a problem with vacant housing that we do here (see bottom of table below).

So on a pro-rata house basis – and taking account of immediate possession orders only – the repossession rate in Northern Ireland is 8 times greater than in the Republic. Taking account of all repossession orders, actual and suspended, the repossession rate is 11 times that of the Republic.  These comparative  results are based on total number of dwellings in both jurisdictions – we don’t have mortgage statistics for Northern Ireland, in the Republic there are about 764,000 mortgages.

An unpleasant but inevitable consequence of adopting a UK model for personal insolvency would be an increase in repossessions, and in this country we have a troubled history with eviction and dispossession under occupation. But as a society and economy, we need to ask ourselves if it is better to leave people in property which they cannot afford but under austere conditions which blight their lives and their contribution to the economy or to release them to get on with their lives in a humane way but which may mean the repossession of their home. Supporters of a UK-style insolvency/bankruptcy model will need confront these unpleasant consequences.

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