Ronan Lyons has an interesting post over on his blog discussing whether NAMA can deliver on its promises. His big worry is whether those running NAMA have got their assumptions right vis-a-vis fall from peak to time-of-tranfer, the yield, and how yields might correct. Given the data he presents, he suspects that their assumptions are off and concludes, “If NAMA could show that it’s aware of these very basic facts about Ireland’s property market before it starts taking over any loans, I would be a lot less worried about giving it access to tens of billions of euro worth of current and future taxpayers’ earnings. If it doesn’t, the elephant is very much still in the room.” One suspects that given the drop in land values, the oversupply of both residential and commercial property, and the downward trend in residential and commercial prices and rents – all noted by Lyons and discussed in loads of posts on this blog (see here, for example) – is that the elephant is very much in the room. The wonder is that certain parties seem completely blind to it. It must be a lonely elephant as, no matter how it tries to make itself visible, it is ignored! Is this a case of blind faith? Time will tell. Like Ronan, one would be a bit more confident if, a) one felt that those organising NAMA, and are responsible for trying to stabilise the economy and get it back into growth, gave the impression they knew what they were doing, rather than making it up as they went along, b) we had a lot more info about what assets will be in the NAMA portfolio, where they are, and a realistic LTEV in relation to loan value, so we could judge things for ourselves.
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Ireland after NAMA
%d
March 9, 2010 at 10:46 pm
As this is becoming very convulated could someone explain how NAMA will financially deal with the following hypothetical.
Say I’m a developer. I bought a site in 2002 for €88m and took a loan from Anglo for €68m (77% Loan To Value). I have a rolled-up contract and presently I owe €9m in interest (principal and interest is therefore €77m). The property is worth €47m today. My loan is one of the eligible NAMA loans and I understand NAMA will pay Anglo €54m for the loan.
Could anyone illustrate what will happen in NAMA if
(a) I am one of the planned 80% of borrowers who repay their loans 100%
(b) I am one of the planned 20% loan defaulters whose assets will be liquidated by NAMA.
March 10, 2010 at 12:29 pm
@namawinelake
It seems that the gap between how NAMA should work in theory and how it is expected to work in practice gets wider with every newspaper report of heavier “haircuts” and cherrypicking of toxic assets. In response to your two scenrios outlined above, I have a few remarks on how I interpret the NAMA response, based on media commentary to date. All corrections are welcome!
In case (a), NAMA steps into the shoes of the bank and the loan obligations (€68 million) are met as normal. The bank have transferred the the loan because the collateral has fallen in value (€47 million), but I expect that the original loan obligations still stand. Naturally NAMA would be in a position to restructure the payments and so on. The question of the difference between the market value and the proposed longterm economic value refers more to the price NAMA pays for the transfer of toxic assets from the bank to NAMA.
In case (b) NAMA takes ownership of the asset as the debtor is unable to repay his/her loan. NAMA can then either sell the asset or maintain it/ provide funds for it to be developed further. If NAMA opts to sell off the asset quickly, then the value NAMA recovers for the asset could be far lower than the longterm economic value NAMA paid for it. If NAMA holds the asset or develops it further, the gap between the market value and long term economic value depend on how the property market performs/recovers over the coming years.
I suspect that, in reality, events will unfold in a much more complicated manner!
March 10, 2010 at 1:23 pm
Declan, a welcome response but as you yourself say with respect to (a) where I as the developer am one of the 80% that will repay my loan and rolled-up interest 100% (the original loan was €68m and the rolled-up interest is €9m) and I guess that any further interest accruing between now and when I actually pay off the principal will also be paid 100% – in that scenario, there is no relevance whatsoever in what NAMA pay Anglo for the loan. As long as they pay less than the €77m, NAMA will make a gross profit. And consequently in that scenario, how far property has dropped, the actual value today, the LTEV and LTEV premium, how property prices perform in the future – ALL of that is irrelevant in this scenario because the loan is being repaid 100%.
And the NAMA business plan estimates that this scenario will apply to 80% of the €77bn loans and rolled-up interest?
Sorry if this is the case and understood by all – I just got the impression from the intense exchanges on value, yields, LTEV, LTEV premium, haircuts and all the “€10,000 per citizen” millstone around generations necks etc that maybe far more than 20% would default.
And if I am one of the 20% that do default then the NAMA business plan says that they will realise €4bn from the €15bn (4/15 = 27%) from defaulters’ assets so as long as they get 27% of my €77m loan or €21m then they will have met their business plan. And they have given themselves 5 or so years before they start liquidating the defaulters’ assets. So the land I bought in 2002 at €88m would have to be worth €21m in 5-9 years time for NAMA to met its plan.
Again any comments gratefully received.
March 10, 2010 at 6:50 pm
@namawinelake
Agreed that many of the assumptions on which NAMA estimations were based are highly questionable, particularly the 20% default rate contained in the NAMA business plan. The justification for this 20% default rate is presented on p10 of the business plan: “Over a five year period in the early 1990s, one UK bank experienced a default rate of less than 10% on its whole book. Given the concentrated nature of the prospective NAMA portfolio and the risk of a prolonged recession, a 20% default rate assumption has been made”.
Not very reassuring, I think you’ll agree!
March 10, 2010 at 7:03 pm
@Declan
Indeed I have started a series examining this 20% rate – the first entry is below but to summarise it, the UK residential market had a peak- to-trough drop (on an annual basis) of 10% during the early 1990s. We’re down over 30% already with no sign of falls levelling out.
March 10, 2010 at 8:36 pm
@namawinelake
Your study of UK and Irish default rates is certainly a compelling indication that the actual default rate may be over 30%. As you suggest above, this in turn increases the risk of the taxpayer taking a massive loss.
In response to your second post above, I think the reason why current market values, the LTEV and LTEV premium, and future property prices continue to receive so much attention is because of their consequences for bank (under)capitalization – the lower the amount paid to the banks for the toxic assets, the larger the capital injection needed by the banks.
March 11, 2010 at 7:39 am
@Declan,
To be fair, I would guess NAMA would say that whilst defending the 20% default rate (and the reciprocal 80% non-default rate) that they won’t know at the outset which borrower falls into which category and therefore it is important to ensure valuations are correctly undertaken.
However the fact remains, if NAMA are right on the 20% default rate, then it really doesn’t matter if they realise ANYTHING from the defaulters’ assets (plan estimates €4bn realisation from €15bn of loans) because NAMA is already planning a profit of c€5bn. And for the other 80% who’ll repay their loans 100% NAMA just need ensure they pay a discount sufficient to cover NAMA financing and admin costs. Arguably valuations don’t affect the primary NAMA objective of protecting taxpayers’ investment.
However agreed that valuations do affect the recapitalisations that must follow. I’m am trying to understand better the nature of Barclays default rates in the early 1990s and how it relates to Ireland in the late noughties.
March 12, 2010 at 12:15 am
[…] Ireland after NAMA has an interesting blog post which links to Ronan Lyons assumptions about whether those running NAMA have got their assumptions right with regard to the “fall from peak to time-of-tranfer, the yield, and how yields might correct”. The writer goes on to say that “given the drop in land values, the oversupply of both residential and commercial property, and the downward trend in residential and commercial prices and rents” there is a serious doubt that these assumptions are any where near right. “Is this a case of blind faith? Time will tell.” […]
March 12, 2010 at 12:52 pm
[…] the recent discussions on whether the fundamental assumptions underpinning NAMA are at all realistic, it is debatable if […]
March 13, 2010 at 12:05 pm
Yesterday’s news that NAMA will hedge its bets and will go back to the banks if collateral does not stand up is an indication perhaps that realisation is seeping in that there is very little collateral there at all – and what there is is mainly property that is losing value by the day.
March 13, 2010 at 2:27 pm
The saturday Indo reports show firmer EU control than hitherto revealed.
Good news for taxpayers.
For God’s sake, people, please read up on Kondratieff! The worst is yet to come!