# How risky is NAMA as currently proposed?



## Brendan Burgess (4 Sep 2009)

*Guesstimate of original value of underlying assets *
  The loans were not all issued at the top of the market. 
  Most of them were probably issued over the 4 years up to mid 2007
  The average loan to value was around 75% (some lower, some higher) 
  Some would have had other security and guarantees as well 
  So say a loan was issued in 2003 for €75m on a property worth €100m then.
  The property increased in value up to the peak of the property market to say €150m. 
  The interest on the loan was probably rolled up to around €100m
  The interest is still being rolled up to around €120m
  If  the property has fallen from its peak by 50%, it’s worth €75m
  So the loan will need to be written down by around 35%


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## Brendan Burgess (4 Sep 2009)

*Re: Estimates of the risk*

Pat McArdle of Ulster Bank has a [broken link removed]in today's Irish Times saying that NAMA is not as risky as some would have us believe. 

He gives the following estimates. I have laid out his figures differently as his layout was confusing

Original Value of projects:  €115 billion
Book value of bank loans: €85 billion
Current value of assets: €50 billion
Government will pay: €60 billion 

Reduction in value of loans:  €35 billion 

If the government pays €60 billion for loans worth €50 billion, then the loss will be spread as follows:

Bank bad debts: €25 billion
Government subsidy: €10 billion


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## Attica (5 Sep 2009)

Does anyone know how many of these loans were based on double or treble or quadruple of the asset base? If solicitors involved were complicit in fraud and if developers got loans on the same day from different banks for the same property? if the 25% deposits paid were worthless shares or simply loans from other institutions? I very much doubt if Brian Lenihan knows the answers to these as he seemed to know *nothing* about the 68m offered to Liam Carroll by the taxpayers' bank.


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## Brendan Burgess (5 Sep 2009)

There were a few solicitors involved in fraud on a few investment properties.

But there have been no suggestions of widespread fraud in the much larger loans with which NAMA will be dealing. 

Brendan


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## z109 (6 Sep 2009)

To say that the average loan to value is 75% is to assume that there is 30 bn of equity in the loans, that is, 30 bn of money that has been invested. I believe this to be a risky assumption:
- I don't believe for a minute that 30 bn of hard, unencumbered cash was used
- I don't see that other assets that have been put up as equity (shares, other property) have retained their value. In particular, if Irish banks are like any other banks in the world, they will accept the equity in other mortgaged buildings as equity for new loans. This is, after all, how one builds a leveraged property empire (whether it be ex-council flats, shopping centres, or office space).
- I don't think many of the personal guarantees are worth anything (when spread around the amounts that are being guaranteed).
Further, I see no evidence for this assertion - random sampling of loan books with published anonymised results.

On the income side, it is asserted that the loans in question are producing an income of 1.6bn (Alan Ahearne's recent article) and that the NAMA bonds will cost 900 mn (60bn*1.5%). Again, the evidence for this is scant. Is this real income in cash? Or notional income in rolled-up payments? How much of it is rent? And what direction are rent levels heading? 

The assumption with interest rates is that as rates rise (so increasing the cost of NAMA bonds) rates on the loans will rise. Will that not increase the default rate on those loans? Particularly if rent is declining?

NAMA is proposed as a solution to limited credit in the market. It is asserted that viable businesses and consumers cannot get credit. I don't see any evidence for this (note the emphasis on viable!), but anyway, let's take it at face value. Will NAMA fix this problem? With developer loans and land off their books, will the banks have an interest in giving risky loans for houses they think will decline in value? For businesses that they think might go bust (through the normal recessionary mechanism of declining employment and wages)? When the banks were playing both sides of the trade (financing developers and financing those who wanted to buy off them) it was in the interest of the banks to make credit available. Post-NAMA it will no longer be so. Why should they lend money to Irish consumers rather than continuing to shrink their balance sheets, pay off the government preference shares and give dividends to their shareholders?


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