# Briefing: The NAMA  house price guarantee scheme



## Brendan Burgess (29 Sep 2011)

_It seems that NAMA is going ahead with this, so I thought it would be worth doing a summary of all the arguments. I have tried to be as balanced as possible, but as I am strongly opposed to the proposal, I may not have done it justice, and so I welcome any comments or alternative views. This briefing is much informed by 
__this thread
_
*The proposal from the buyer’s point of view * 
Property price|                                       €200,000
Deposit|                                                              €20,000
Deferred consideration|                       €40,000 (20%)
Mortgage|                                                          €140,000

While the buyer's initial mortgage is €140,000, they will make repayments based on a mortgage of €180,000.  So if the buyer can't afford the repayments on a mortgage of €180,000, they won't qualify for this scheme. 

 After 5 years, if prices don’t fall or rise, then the lender pays the €40,000 deferred consideration to NAMA and the borrower now has a mortgage of €180,000 (less any capital they have repaid in the meantime) 

If prices fall by more than 20%, the €40,000 deferred consideration is cancelled. 

If prices fall by say 15%, NAMA forgoes 10% or €30,000 and the balance of €10,000 is paid by the bank to NAMA. 


*How many properties will be included?*
At the initial announcement, NAMA said that it would cover 5,000 properties 

5,000 properties at €200,000 |                                         €1 billion
VAT received by government |                                          €135 m (13.5%) 
Potential risk to the government of a 20% fall in value|:          €200 m
Less VAT receipts|                                                                                                     €135m
Total net risk|                                                                                                                          €65m 

(Note - this is NAMA's calculation. I don't agree with it as the state is on the hook anyway, for the decline in house prices of the NAMA stock.If they were providing this guarantee to sales by an unconnected developer, then this calculation would be correct)

On 28 September 2011 , [broken link removed] the Chief Executive has said that it would be trialled with 750 properties in 2011 and 2012 

*NAMA’s justification for the scheme * 
There is no activity in the housing market for two reasons
o   Buyers expect prices to fall further 
o   There is a lack of mortgage finance 
This greatly mitigates the first problem for buyers 
It also mitigates the second problem as lenders will have their potential risk of a negative equity loan greatly reduced. 

*The advantages from NAMA’s point of view * 
It limits its exposure to a 20% fall 
It converts 5,000 properties into cash 
It says it will boost the property market for everyone. 
These houses are deteriorating as they are left unoccupied. 
The government will get €135m in VAT receipts 

*Criticisms of the proposal * 
A state funded agency is grossly interfering in the market 
It provides an artificial floor to prices and just means it will take the market longer to find the bottom. This delays the eventual economic recovery as well. 
Potential purchasers could not possibly work out the correct price of a property. 
It makes it impossible to find the correct price in the market 
It creates market uncertainty. If NAMA does this for 750 houses initially, potential purchasers of other NAMA property will hold off purchasing in the expectation that the scheme will be extended.
Taxpayers’ money is being used to favour NAMA sellers to the disadvantage of all other sellers – why would anyone buy a property in the open market when they can buy a NAMA property with a 20% price guarantee? 
It creates a very odd situation in that falling house prices would suit the buyers of NAMA homes. After 5 years, they would have a lower mortgage if prices fall. 
There are many criticisms of this scheme but worst of all, is that there may be other serious effects which are unknowable at this stage. 

*Professor Gregory Connor’s analysis of the scheme on irisheconomy.ie*
This is a very systematic critical analysis of the scheme. It’s well worth reading in full



> Note that while Nama records that it has sold the property under such a scheme for €100,00, the true market-clearing cash price (taking account of the bull spread) is actually €87,231.  This could lead to distortions and potential deceptions in the housing market.
> Suppose Nama is trying to sell two identical properties, flats 3B and 3G in the same development. First Nama sells Flat 3G under the scheme for a stated price of €100,000.  Then, Nama’s real estate agent tells a potential cash-purchaser of Flat 3B that an identical flat was recently purchased for €100,000, not mentioning or downplaying that the other flat purchaser utilized the mortgage enhancement scheme. If the cash buyer does not adjust carefully for this, they could be tricked into overpaying.




*Response to these criticisms * 
NAMA’s objective is to get the maximum return for the taxpayer.
It is only 750 houses so it won’t affect the overall market 
The alternative for NAMA could be to have a fire-sale and reduce the prices by 20%. This would wreck the market for all other sellers. 

*Who has criticised it? * 
The OECD economist Christopher Andre said "Trying to revive the market by providing incentives to buyers could     prove counter-productive"
Willie Penrose – The Minister with responsibility for Housing Policy 
Virtually all commentators and economists 

*Who has supported it? * 
It’s very hard to find anyone supporting this. 
The Construction Industry Federation

*Has NAMA published any economic analysis of these proposals? * 
Don’t know. 

*Does NAMA need the government permission to do this? * 
Legally, it doesn’t. But it is in consultation with the Department of Finance about it. It’s likely that if the Minister for Finance objects to it, it won’t go ahead. 

*Alternative 1 - NAMA should simply reduce the prices in a fire-sale and let the market find its bottom as soon as possible*

*Alternative 2 – the price guarantee should only come into effect if the property is sold.*
The price guarantee should only come into effect if the house is sold. So the borrower pays the full price for the house and makes repayments based on the full price. If they sell after 5 years and the price has fallen, NAMA would make up the shortfall. (This has its own drawbacks as well).

*Alternative 3  - If the losses are shared, so too should be the profits.*
The property is sold as normal with a 90% mortgage. The borrower repays it as normal.
If the property is later sold and the most appropriate property index has fallen by 10%, NAMA pays the 10% to the bank. If the index rises when the property is sold, NAMA gets the increase up to 20%

*Alternative 4 The buyer bears the first 10% of any price fall * 
NAMA pays nothing if the price falls by up to 10%. NAMA pays the shortfall if the price falls by more than 10%. In other words, make the buyer take some of the risk. 

*Alternative 5 – NAMA sells the house at a 20% discount and takes more if prices rise.*
NAMA should sell the house at a 20% discount to the present market price ie. €160k. After 5 years, the house would be revalued and if it is then worth more than the price the buyer paid for it, then the buyer pays the additional price. 
This is a good idea but very difficult to operate in practice. It would depend on subjective valuations.. It would be in the buyer’s interest to run down the property to reduce the value. If the buyer builds an extension, this would increase the value.
Of course, NAMA could sell the house at a 20% discount now. If house prices generally don’t fall over the next five years, then NAMA would claim back the discount. This is just another way of looking at the current proposal. 

*Alternative 6  NAMA should provide loans to people who can’t otherwise get mortgages*
It’s not a good idea for a state body to interfere in the market. However, as the market is disrupted anyway due to the lack of credit, it would be appropriate for NAMA to step in and provide this credit. NAMA would not be borrowing any more money – it would be simply recycling loans from developers to home owners. It would be converting non-performing loans to performing loans.


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## Paddyman (29 Sep 2011)

It seems a very hairy proposal to me.

Thank you for the briefing. It helps greatly to clarify the issues.


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## Chris (29 Sep 2011)

Great summary and reasonably balanced, but I understand that it is a difficult task to make a balanced post on a bad idea.

One question I would have:


> The proposal from the buyer’s point of view
> Property price| €200,000
> Deposit| €20,000
> Deferred consideration| €40,000 (20%)
> Mortgage| €140,000


Does the lender take out a €180,000 mortgage, with €40,000 held in escrow, and repayments made on the full amount? If not then what happens if after 5 years the house price is the same and the buyer cannot afford a €180,000 mortgage compared to a €140,000 mortgage.



> Response to these criticisms
> NAMA’s objective is to get the maximum return for the taxpayer.
> *It is only 750 houses so it won’t affect the overall market*
> ...





> The advantages from NAMA’s point of view
> It limits its exposure to a 20% fall
> It converts 5,000 properties into cash
> *It says it will boost the property market for everyone.*
> ...


Now either it affects the market or it doesn't, the proponents can't have it both ways

An additional negative:
There is a severe shortage of credit to productive businesses of varying sizes. If more money is lent out to buy houses with artificially increased prices, then there will be less money to lend to businesses to expand and create jobs.


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## Brendan Burgess (30 Sep 2011)

I have updated the post with the following: 



> While the buyer's initial  mortgage is €140,000, they will make repayments based on a mortgage of  €180,000.  So if the buyer can't afford the repayments on a mortgage of  €180,000, they won't qualify for this scheme.



After 5 years, if the mortgage is increased to €180k, then they should be able to make the repayments. Of course, they will have had the benefit of 5 years repayments based on €180k but on a €140k mortgage, so they will have paid down some capital. 

Good point about the contradiction. I think their point is that the initial test of 750 houses won't affect the market. The 5,000 certainly would.


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## Brendan Burgess (30 Sep 2011)

> An additional negative:
> There is a severe shortage of credit to productive businesses of varying  sizes. If more money is lent out to buy houses with artificially  increased prices, then there will be less money to lend to businesses to  expand and create jobs.



But  could this not be said about any loans from any banks? If the banks lend to people to buy houses on normal terms, it's reducing the loans available for businesses. If KBC lends money in the UK, it's reducing the lending available in Ireland.


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## Chris (3 Oct 2011)

Brendan Burgess said:


> But  could this not be said about any loans from any banks? If the banks lend to people to buy houses on normal terms, it's reducing the loans available for businesses. If KBC lends money in the UK, it's reducing the lending available in Ireland.



Yes it would, but my point was that what would happen here is that more money would be tied up in properties than otherwise would be, as there is an artificial floor on the price of the properties. Using your example of €40,000, and assuming that house prices continue to fall then 750 properties would tie up €30,000,000 that could have been allocated elsewhere.


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## Bronte (7 Oct 2011)

As it's one of your points above are we allowed to discuss house prices for the Nama discussion?


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