4 in every 10 of NAMA’s negative equity homes sold to buyers who didn’t opt for negative equity mortgage

Despite the delays with its introduction, I think NAMA deserves credit for its “negative equity mortgage” or the “80:20 deferred payment initiative” as NAMA calls it. The 80:20 deferred payment initiative is also known as the “negative equity mortgage” and protects buyers of such property against further declines of up to 20% over five years.

Since its introduction in May 2012, NAMA has (a) generated a lot of interest and column inches in its “for sale” portfolio and (b) it has sold 120 homes and generated €22m in sales. The downside to NAMA is limited, though it should be remembered that prices have declined by 3.3% in the past 12 months, and NAMA is on the hook for this. But fair play to NAMA for the initiative and the sales it has generated on the back of it. NAMA has recently expanded the scheme and now has 265 homes for sale with the negative equity mortgage (after taking into account the 120 that it has to date sold).

It emerged in the Dail last week that four in every 10 of the homes were sold to cash buyers. That’s not a failure from NAMA’s point of view, it means that NAMA hasn’t picked up a contingent liability for these sales. It does demonstrate the power of promotion though, and it remains a disappointment that NAMA’s foreclosure list is still an error-ridden database that looks almost design to flummox people who might want to buy NAMA assets. It also emerged that just one of the three banks offering the negative equity mortgage, Bank of Ireland, EBS or Permanent TSB had provided mortgages on the other six out of every 10 properties sold. The bank providing the mortgages wasn’t identified, but it does beg further questions as to whether all Irish banks are really open for new mortgage business.

The information on the negative equity mortgage arose in a parliamentary question from the Sinn Fein finance spokesperson Pearse Doherty to the Minister for Finance Michael Noonan. This is the full parliamentary question and response.

Deputy Pearse Doherty: asked the Minister for Finance further to the recent statement by the National Asset Management Agency that it had sold €22m of Irish residential property with its 80:20 deferred payment initiative, if he will confirm the overall value of the 80:20 mortgages that have been extended to buyers of such property and the overall value of sales which have not involved the 80:20 mortgage.

Minister for Finance, Michael Noonan:   As the Deputy will be aware the mortgages under the 80/20 Deferred Payment Initiative are provided by Bank of Ireland, AIB through its subsidiary EBS, and Permanent TSB the details of which are not made available to NAMA. However, I am advised by NAMA that of the houses available under the scheme 60% were acquired using the deferred payment mortgage through one of the participating banks the balance were acquired mainly by cash buyers.

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Upward Only Rent Review leases in Ireland under threat after landmark court case

[UPDATE: 25th March 2013. The judgment is here]

This is potentially a major development in Irish case law which puts in doubt the ability of a commercial landlord to enforce so-called “Upward Only Rent Review” terms in pre-February 2010 leases. RTE is reporting that Judge Peter Charleton this morning ruled in a rent dispute over the iconic Bewleys Café outlet on Grafton Street in central Dublin. The landlord which includes the colourful Johnny Ronan failed in its attempt to enforce the UORR term in the lease and the Judge has apparently ordered the rent to fall to current market levels, which are more than 50% less than peak rents in 2006-8.

Unfortunately the judgment is not yet online at the Court Service, though attempts will be made to get it so that it can be posted here.

The RTE report on the judgment is sparse and really doesn’t explain the basis for the judgment but it does say “the decision of Mr Justice Peter Charleton will have huge repercussions for landlords who have been claiming upwards only reviews and will be widely welcomed by hard pressed shop tenants” which implies that the judgment will be relevant to other UORR leases.

NAMA, commercial landlords and commercial tenants and their representatives will be following developments in respect of this case closely.

[Note: UORR lease terms were common in Ireland in commercial leases pre-February 2010 when they were abolished for new leases entered into after that date. UORR leases provided for periodic reviews of rents but the reviews could only be upward or flat, and reductions were not allowed. This means that if rents were set during the boom, they are probably more than double the current market rent following the financial collapse. This Government promised to abolish such terms in older leases but in December 2011 abandoned the commitment stating it was incompatible with the constitution and would be too expensive to implement]

UPDATE (1): 25th March, 2013. The Irish Times is now reporting the outcome of this case and it too, indicates that the case will have far-reaching repurcussions when it states “The case was regarded as a test case in the contentious area of upward-only rent review lease agreements” The report provides some additional information on the lease which apparently has rent set at €1.5m from 2007, but there is still little on the principle which allowed the Judge to reduce the commercial rent in this case, let alone anything to show why the facts of this case would be widely applicable to other UORR leases.

UPDATE (2): 25th March, 2013. The colorful judgment from Mr Justice Peter Charleton is now available here, though it is not yet available online from the Court Service website. It would appear to me from the judge’s remarks that he is sympathetic with the plight of commercial tenants.The 35-year lease was entered into, in 1987 when the rent on the 4-storey café on Grafton Street was set at the equivalent of €213,000. In 2007 the rent was revised upwards to €1,463,964

Threshold lease versus Upward Only Rent Review lease – Bewleys contended that the lease was a so-called “threshold lease” and that the initial rent in 1987 of €213,000 was a base and no subsequent review could lead to a rent below that level. Ickendel contended it was a normal Upwards Only Rent Review lease, and that each rent review couldn’t lead to a rent below the immediately-previous review. So,Ickendel was contending that the 2012 review couldn’t result in a rent below the rent set in 2007 of €1,463,964.

The judge recognizes that the Irish Supreme Court “have made it clear that no re-writing of what the parties have agreed could possibly be permitted either in the guise of sympathy for any party struck in a financial quagmire or pursuant to any notion of the courts construing public policy in aid of a result”

Each rent review provided for a rent that was “equal to or greater of (A) the rent payable under (sic) during the preceding period or (B) such revised rent as may from time to time be ascertained in accordance with the provisions in that belief contained in the clause 6 hereof (whichever shall be greater) “ and the all important “clause 6 hereof”, clause 6.2 states “the anterior rent to be so determined by the arbitrator shall be such as in his opinion represents at the Review Date the full open market yearly rent”

Where the Ickendel lease fell down, in Judge Charleton’s view,  was that it failed to use the term “immediately preceding” and the Judge has interpreted the expression  “the preceding period” to mean any period preceding the current period, and that could be the rent in 2002, 1997,1992 or 1987.  This interpretation is likely to instill fear hearts in many commercial landlords who may have believed that “the preceding period” meant the period “immediately preceding the current period”.

Will this judgment have wide repercussions? It seems that property lawyers are suggesting it will have which would indicate that many UORR leases make reference to rents not falling below the previous period but fail to qualify “preceding” with the word “immediately”.

Personally, the judgment looks dodgy to me. When reference is made to “the preceding period”, it seems the word “the” is referring to a single period and not plural periods. And that a reasonable construction in commonsense English the “the” would refer to the immediately-previous period. The judgment may be appealed, and this blogpost will be updated with any news.

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Even “thieves in law” have honour that is missing in EU parliaments

I don’t know if Germany still has guilds of criminals like those portrayed in the Fritz Lang movie “M” but Russia certainly has “thieves-in-law” – oftentimes tattooed with certain symbols including the crucifix to indicate the thieves crucified with Jesus Chris – so it was amusing this morning to hear an apoplectic Russian president, Dmitri Medvyedev describing the EU as just plain thieves. President Medvyedev was commenting on the latest bailout deal for Cyprus that was hammered out in Brussels last night and in addition to calling the bailout terms “theft” is reported to have said “the stealing of what has already been stolen continues”

You see, the Russian concept of “thieves in law” relies on thieves respecting a basic code of conduct.

In Germany’s case, it insisted in November 2010 as part of the €85bn Irish bailout, that Ireland repay the (widely perceived to be) substantial German bondholders in Irish banks, as part of that bailout. As a result, we’re all presently shouldering €70bn of bank bailout debt – equal to 43% of our GDP – including €6bn of state-aid premiums that NAMA paid when it acquired loans from the banks.

Now, Germany has insisted on a deal in Cyprus which will see both senior bondholders and large depositors at two Cypriot banks burned; in the case of Laika Bank, the burning might be 40% of deposit balances over €100,000. Russians are understood to have somewhere between €5-20bn in Cypriot deposits, so the Russians are set to heavily lose out. Germany benefits from the Cypriot deal because another pesky competitor in the EuroZone has been taken out of action, with depositors set to flee Cyprus as soon as they can get their hands on their cash. Germany itself was not exposed to losses in Cyprus. The alternative would have been the provision of additional funds from Germany, for which there would be risk.

So, you see, Germany has broken the thieves-in-law code by imposing two different deals which, in both cases, protected German interests.

Just common thieves so.

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NAMA appoints receivers to Meath property

Although it hasn’t turned up on Iris Oifigiuil yet, the BBC is this morning reporting that NAMA has had receivers appointed to a (Republic of) Ireland incorporated company that is part of a group operating from county Down in Northern Ireland. On 15th March 2013, Arthur Cave and William O’Riordan of PricewaterhouseCoopers were appointed receivers to Soll Holdings (ROI) Limited whose registered office is in county Louth and is a company owned by Michael O’Sullivan and whose directors are Michael O’Sullivan (51) and Carol Treer (63).

Soll Holdings (ROI) is reported by the BBC to own property at at Cruicerath in Donore, county Meath  where in 2007 the company obtained planning permission to build almost 140 homes, along with shops and offices. The BBC reports the company owes its banks which include Ulster Bank and Danske Bank as well as NAMA €40m but that the value of its land has collapsed to €1m. Ouchie!

Remember you can see the list of NAMA’s enforcement actions here and in this regularly updated spreadsheet.

 

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Cyprus in remission as a funding deal is reached

It seems that, there is agreement that the EU will provide €10bn in funding to Cyprus in return for a range of domestic measures, including in the short term, the burning of €100k+ depositors in two of the country’s banks, Bank Laika and Bank of Cyprus. Bank Laika itself will disappear with its good loans and sub-€100k deposits transferred to Bank of Cyprus, whilst the €100k+ deposits and toxic loans will be transferred to a bad bank which will be wound down. A LOT of uncertainty still surrounds the deal, and perhaps just as importantly for Cypriots there is DOUBT over whether the banks can re-open tomorrow, Tuesday 26th March 2013. Cypriot politicians should know the full details of the deal later today, and then they’ll have to confront the reality that their banking system is dead anyway.

The Cyprus fiasco is becoming more and more relevant to Ireland. Our deposits are fundamentally no less secure than they were a fortnight ago , though events in Cyprus will increase mistrust and possibly fear. So, it’s not really about deposits but about the mechanics of our own bailout deal back in 2010. Consider the following

(1) If the German Secret Service or the Bundes Nachrichten Dienst (BND) today has the skinny on Cypriot money-laundering and Mafiosi deposits, then what did the BND know about the identity of senior bondholders in Irish banks in 2010? As widely believed, did the BND know that German banks and German interests were amongst the main beneficiaries of repaying bondholders 100%?

(2) If Cyprus is such a hotbed of international moneylaundering and financial shenanigans, then why haven’t Cypriot banks been investigated and fined. Like HSBC which the US has found facilitated moneylaundering from Mexican druglords and Iranians. Or Barclays which is to the fore of rigging the LIBOR interest rate. Or Lloyds and its involvement in insurance and interest rate swap misselling.

(3) Forcing Cyprus to raise its corporation tax rate by 2.5% from 10% to 12.5% is little short of economic warfare on the part of France and Germany. It really doesn’t matter what the increase is – even if it were just 0.1%, Cyprus has lost its corporate tax BRAND. Investors know that future changes, forced upon Cyprus externally, are on the cards. We know all about this in Ireland, and we know that as soon as you increase your corporate tax rate, companies will immediately modify their behavior and Cyprus may find in the space of weeks that the income to which its new higher rate applies is significantly reduced. This measure has nothing to do with helping Cyprus, and everything to do with satisfying France and Germany, whose outlook on low corporate tax rates is familiar to us here in Ireland.

(4) We now know what pressure An Taoiseach Enda Kenny must have come under in March 2011, when he came into office and deployed everything he had in reducing the interest rate on our bailout, but he endured a “Gallic spat” with the French who were adamant that we raise our corporate tax rates. Even when our rates were ultimately reduced in July 2011, in line with Greece and Portugal, we, uniquely had to give a commitment to engage constructively in discussions on the Common Consolidated Corporate Tax Base.

(5) We now know better what a bunch of bullies the ECB are. We didn’t get a two sentence warning from the ECB in 2010.

No, in our case, the correspondence from the ECB to then finance minister Brian Lenihan has been withheld. But we did get a sense of the approach of the ECB in 2011 when it said “In the meantime, we may have to come to the conclusion that it doesn’t really make sense for the ECB to keep putting €100 billion into Irish banks.   What we are doing is actually illegal, but we have being doing it because we want to help Ireland.  Maybe we might come to the conclusion that we should stop”

Of course, we recognize that there are limits to the ECB’s provision of liquidity, but when we are on our knees, forcing us to repay 10s of billions of bonds to German and French (and British) banks, this behavior looks distinctly like extortion.

(6) The Germans are now at pains to point out that it was a Cypriot idea to burn depositors with less than €100k. But here you have a tiny EuroZone country, 1.1m people and a GDP of €18bn, with a small unicameral parliament, and it has been requesting assistance for over a year after the EuroZone decision to allow Greece to burn bondholders which consequently led to losses in Cypriot banks. Even if it was a Cypriot idea, then better-informed, resourced and experienced finance ministers should have had alarm bells ringing, and if there is any sense of solidarity in Europe, the Greek finance ministers should not have been allowed leave that room at 3.30am on Saturday morning a week ago, with a proposal which has undermined the entire Cypriot banking system. The uniform message from the Germans on how they weren’t the source of the burning of sub-€100k depositors, reminds me of the uniform message from German politicians last year who all understood that Ireland had shouldered a huge bank bailout which assisted Europe – ultimately, all that sympathy didn’t lead to a debt-writedown or Germany shouldering any more of the burden, did it?

Minister for Finance Michael Noonan is telling the media today that Cyprus has little to do with Ireland – no doubt he’ll refer to feta cheese or olives presently – so what is unfolding at the far end of Europe is of little relevance to Ireland. I think it tells us a lot about our own bailout.

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