# NAMA to provide guarantees to home buyers against falls in house prices



## Shawady (28 Jul 2011)

NAMA are now going to be offering finance to people to help them buy homes. In this scheme they will also write off up to 20% of the mortgage if the house has devalued in five years time. 
I can't see why NAMA is offering loans and not the banks, considering most of them are owned by the taxpayer anyway.



http://www.rte.ie/news/2011/0728/nama-business.html


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## Brendan Burgess (28 Jul 2011)

> Under the scheme, a purchaser would seek a mortgage of €180,000 and  pay a deposit of €20,000 on a property linked to a NAMA loan for sale  for €200,000.
> NAMA then agrees to defer the payment of 20% of the current value of  the property, in this case €40,000. Should the property be worth  €200,000 or more after five years the buyer's repayments will continue  to cover the €40,000.
> If after five years the property has fallen in value - to, for  example, €160,000 - NAMA waives the outstanding €40,000 from the 2011  purchase price. The purchaser will then have to pay back just €140,000  of the original €180,000 loan.
> The scheme will be launched on a pilot basis this autumn, and should apply to 12,000 individual residential units.



The banks will be providing the loans, not NAMA. 

I see a lot of benefits in this to NAMA. They will get to sell some of their properties. 

But what if a non NAMA developer wants to sell a house for €200k. No one will buy that house as NAMA is giving a guarantee that the price won't fall by more than 20%. 

If Ulster Bank or KBC did this with one of their developers, I would have no criticism of it. But I don't think it's right for NAMA to use taxpayers' money to do it.

It's a bit like the hotels. Perfectly good hotels are being ruined because they can't compete with hotels in NAMA and other hotels with big tax breaks. 

Brendan


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## onq (28 Jul 2011)

Shawady said:


> In this scheme they will also write off up to 20% of the mortgage *if the house has devalued in five years time*.



What's that about? A safety net, or unfair trading when compared to the private sector?

ONQ.


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## shnaek (28 Jul 2011)

onq said:


> What's that about? A safety net, or unfair trading when compared to the private sector?
> 
> ONQ.


It's about government interference in the smooth running of the economy once again. It will result in a worse situation that if they hadn't interfered in the first place. Hotels are a perfect case in point.


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## Complainer (28 Jul 2011)

Will this measure put a false floor under property prices, and keep them artificially high? Is this the 2nd boom on the way now?


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## Carmel (28 Jul 2011)

*NAMA proposal*

I am wondering if this scheme will be available to investors, surely it should only be for owner occupiers?


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## Purple (28 Jul 2011)

Complainer said:


> Will this measure put a false floor under property prices, and keep them artificially high? Is this the 2nd boom on the way now?



The government has but a false floor under rental prices with rent allowances etc so I suppose this is just more of the same.

It's all a bad idea though.


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## Brendan Burgess (28 Jul 2011)

Carmel said:


> I am wondering if this scheme will be available to investors, surely it should only be for owner occupiers?



Why?  

The objective is to get developers to repay loans to NAMA by selling their properties. It does not matter to NAMA if they are bought by property developers.

Brendan


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## Brendan Burgess (28 Jul 2011)

Simon Carswell has a good piece on it [broken link removed]



> Customers will deal with the banks on the scheme and will have no engagement with Nama.
> Chairman  Frank Daly said the agency was in talks with the Minister for Finance  and the Department of the Environment about the agency’s proposals.
> “We  are teasing this through. We want to analyse the full impact of it and  we would hope to make an announcement early after the summer,” he said



I think it needs a lot of teasing through. I presume that the non-Nama developers and their banks will make submissions against this.


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## Sunny (28 Jul 2011)

It's a good idea for taxpayers but not so good for existing property owners and non-nama developers.


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## Brendan Burgess (28 Jul 2011)

But is it fair for the state to give a price guarantee to some property owners and not to others? 

I think that there would have to be some contribution to the buyer to the cost of the guarantee or some limit on the guarantee. 

House price 200k
deposit       20k
Loan          180k 

As I understand it,  the borrower will take out a normal mortgage of €180k and make the appropriate repayments. 

If, in 5 years time, the property has fallen in value by 20%, then the mortgage will be reduced by the reduction in the value of the property i.e. €40k

This is too generous by far. The buyer is taking no risk. 

If there has to be a scheme, then the buyer should take the risk for the first 10% of the house price fall i.e. they would lose the value of their deposit. NAMA could then take the next 10%. So it would be loss sharing. The buyer is still taking risk but cushioned against the second tier of that risk. 

As the scheme is proposed, why wouldn't an investor just buy up lots of property? They would get rent in the meantime. They would get the benefit of any increase in value over the next 5 years. And their losses would be funded by NAMA. 

Makes no sense.


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## onq (28 Jul 2011)

Brendan Burgess said:


> Why?
> 
> The objective is to get developers to repay loans to NAMA by selling their properties. It does not matter to NAMA if they are bought by property developers.
> 
> Brendan



I recently gave a long account of why the economy overheated from the '90's to the Noughties
One of the problems was that ordinary house buyers were competing against developers and investors.

This didn't just "put a floor under" the house price market, it helped shoot it through the roof. 
This created a panic amongst prospective home owners that they could never own their own home unless they bought NOW!
And the rest is the sad history of our property bubble...

Whether it matters to NAMA or not is not the issue.
The implications for the ordinary home owner and the recovering economy are the issue.
We could be seriously at risk of repeating the same ridiculous errors of the past fifteen years again.

Fine for the few gamblers who have money left to burn and want to take a punt on a rising market (again)...
Not so fine for ordinary prospective home owners or people wanting to sell their homes to clear their debts (no 20% drop-guarantee).

The fear is that this could turn out to be another unwise piece of market interference by a government.
The possible benefits include -

(i) the overall improvement of the market once its kick-started by this measure and
(ii) the consequential lowering of the NAMA burden on the tax-payer if it does take off again.

But its a heck of a risk to take with an economy where the money in circulation is still reducing and the market contracting - to hoover it back into property?!

ONQ.


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## Sunny (28 Jul 2011)

That's why I think it will be limited to owner occupiers. It's a generous break but the potential cost to the taxpayer is probably less than what the cost would be with a firesale of assets. I have no real idea though. Impossible to do the sums without the figures. I am sceptical of the whole thing but it is worth considering. 

The idea of splitting the risk is probably the right idea.


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## onq (28 Jul 2011)

Brendan Burgess said:


> As the scheme is proposed, why wouldn't an investor just buy up lots of property? They would get rent in the meantime. They would get the benefit of any increase in value over the next 5 years. And their losses would be funded by NAMA.
> 
> Makes no sense.



<nods>

Here we're in total agreement.

I take it from reading your previous comment you were thinking it through.
Then I read this after I replied and see you arrived where I landed earlier.

The implication is that the investor buying spree will push prices for the available houses up beyond the reach of most home buyers - again!
But see the possible benefits I noted above.

For the record, I think we need to do something to get things moving again.
This, plus a commercial lending bank, would be two things that could do this for us.

ONQ.


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## Brendan Burgess (28 Jul 2011)

onq said:


> For the record, I think we need to do something to get things moving again.
> This, plus a commercial lending bank, would be two things that could do this for us.
> 
> ONQ.



As a wise man once said, and not very long ago...


> The fear is that this could turn out to be another unwise piece of market interference by a government.



It is extraordinary how people are opposed to government interference in principle, but have loads of suggestions for how the government should actually intervene...


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## Shawady (29 Jul 2011)

It seems like a strange scheme in that it would be in an owner's interest for the value of the property to fall over the next 5 years. 
We will have to wait the details but am I right in saying that if someone buys a house for 200k and it falls by 20% in five years time, their mortgage will be reduced by 40k. What happens then in 5 years time, if the house value then rises over the next 5-10 years back up to 200k?
In this case the long term value of the house has remained steady but the homeowner has had 40k written offf their mortgage by the taxpayer.


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## tvman (29 Jul 2011)

Brendan Burgess said:


> This is too generous by far. The buyer is taking no risk.
> 
> 
> 
> Makes no sense.



If current trends continue (CSO down 2.1% in June), and assuming that there's no "option premium" built into the price, the property would have fallen through the 20% level within a year and the buyer would be in negative equity by the end of 2012.

If buyers pay a premium because of the protection they could be in negative equity even faster.


There plenty of risk in this.


Steve


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## Brendan Burgess (29 Jul 2011)

tvman

You are correct, of course.

There is still real risk in this for the buyer. If prices fall more than 20%. 

But the risk is reduced for the buyer.


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## Brendan Burgess (29 Jul 2011)

Shawady said:


> It seems like a strange scheme in that it would be in an owner's interest for the value of the property to fall over the next 5 years.
> We will have to wait the details but am I right in saying that if someone buys a house for 200k and it falls by 20% in five years time, their mortgage will be reduced by 40k. What happens then in 5 years time, if the house value then rises over the next 5-10 years back up to 200k?
> In this case the long term value of the house has remained steady but the homeowner has had 40k written offf their mortgage by the taxpayer.



Excellent point.  Whatever scheme is come up with, the buyer should shoulder the first 20% of the risk. So NAMA could provide a guarantee, that prices won't fall more than 20%. 

I am not saying that they should provide this. But it would be better than guaranteeing the first 20%.


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## tvman (29 Jul 2011)

Brendan Burgess said:


> tvman
> 
> You are correct, of course.
> 
> ...



That is true - in my opinion anything that facilitates price discovery is welcome


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## Complainer (29 Jul 2011)

How will the valuations be decided? Will these be based on the same 'experts' who signed off on all those crazy valuations in the boom years?


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## Purple (29 Jul 2011)

The government should not directly interfere in the housing market or any other specific market. That should be a guiding principle written large in every government department as every time they do they screw things up.


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## Shawady (29 Jul 2011)

Good point, Complainer. There are many things a homeowner can do to increase the value of their home eg. new kitchen, attic conversion etc. The way I see it, there will be no incentive for people to see their home value increase.

If NAMA think house prices may fall, why not apply the discount at this end? In the example they give, if they have a house at 200k, apply the 20% discount now and sell it for 160K.
Ok, this will result in a loss for NAMA but is it really going to make a profit?
At least in this case the bottom can be reached quickly and normal market forces can resume.


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## Brendan Burgess (29 Jul 2011)

If this crazy scheme goes ahead, they should apply an index to the price paid to determine the value of the house. This would leave the owner free to improve it as they see fit. It would also save all the hassle about valuations.


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## T McGibney (29 Jul 2011)

onq said:


> I recently gave a long account of why the economy overheated from the '90's to the Noughties
> One of the problems was that ordinary house buyers were competing against developers and investors.
> 
> This didn't just "put a floor under" the house price market, it helped shoot it through the roof.
> ...



This theory was widespread in the media at the time (usually in the context of landlord-bashing) but it had no basis in reality. 

What drove the panic in the first instance was a severe shortage of rental accommodation. 

This caused rents to rocket to the point where some landlords were making obscene profits, which in turn led to higher and higher house prices. 

Peter Bacon then drove new investors out of the market, and owner-occupiers piled in. As this happened, many tenants found themselves in a dilemma, not knowing whether they should continue to expose themselves to rocketing rents, or alternatively buy overpriced properties that many of them neither wanted, needed nor could afford. As we now know, unsustainable numbers of those tenants chose the latter option, encouraged by government, banks, property industry and media that they couldn't lose. The minority who continued renting were dismissed as losers and cranks.

The 'property ladder' mania continued and eventually became a sort of national religion. Needless to say, it ended in tears and penury for many people.

None of this would have happened, had there been a proper attempt in the 1990s to address the shortage of rental accommodation.


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## Purple (29 Jul 2011)

Excellent post T McGibney.


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## Brendan Burgess (29 Jul 2011)

While these posts about what happened are indeed interesting,  please limit this thread to the NAMA proposal.


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## onekeano (29 Jul 2011)

is there a link to the site with the properties for sale? On RTE last night they seemed to show a website with NAMAs name on it but I can see it on nama.ie?

Roy


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## DB74 (29 Jul 2011)

Any write-off (if there has to be one, I'm not in favour) should only occur when the property is actually sold and not just on a willy-nilly valuation at the whim of an estate agent whose toast was burnt that morning.


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## Brendan Burgess (29 Jul 2011)

DB74 said:


> Any write-off (if there has to be one, I'm not in favour) should only occur when the property is actually sold and not just on a willy-nilly valuation at the whim of an estate agent whose toast was burnt that morning.



That's a good idea. Nama will only pay the deficit where the house has been sold and subject to a limit of 20% of the original price.


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## DB74 (29 Jul 2011)

The % that is "rebated" by NAMA should be a flat percentage of the deficit. This would encourage the seller to get the best available price.


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## Shawady (29 Jul 2011)

An alternative could be for NAMA to apply the 20% now on at least some of the property.
According to the report selling the residential units would be worth 135 million to the government in VAT. The max loss they would make if they had to defer the 20% is 200 million. So at worst a 65 million loss.

Why not sell a porportion of the houses at knock down prices to test the water?

Frank Daly gave an example of someone going to the bank to get a mortgage on a house valued at 200k but the bank only value it at 180k so they person will not get the full mortgage.
Maybe the bank's valuation is more accurate?


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## onq (29 Jul 2011)

Brendan Burgess said:


> As a wise man once said, and not very long ago...
> 
> 
> It is extraordinary how people are opposed to government interference in principle, but have loads of suggestions for how the government should actually intervene...





I suppose we are damned if we do and damned if we don't but this points to a measured approach.

Doing nothing is what we have done for the past two years and it has resulted in a contracting economy.

ONQ.


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## Jim2007 (29 Jul 2011)

Complainer said:


> Will this measure put a false floor under property prices, and keep them artificially high? Is this the 2nd boom on the way now?



Yes, I have concerns too, it sounds like the ideal opportunity for people to become over extended once again!

Jim.


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## Duke of Marmalade (30 Jul 2011)

It depends on how you tell it. Is this a sale for 200K with 40K downside protection or is it a sale for 160K with NAMA getting 40K of the upside? I guess the latter would be seen as more palatable by many, even though it is the same thing.

The fact is NAMA has an oversupply of housing stock which if it wants to cash in would have to be at firesale prices. So I can see a logic which says "sell them at firesale prices (i.e. at current market prices) but retain an interest in any upside from those prices". 

I don't see this as a taxpayer subsidy, this is a market based solution to the current position that NAMA finds itself in. Of course it should be available to any buyers, any talk of a restriction to owner occupiers makes the proposition look like some socially motivated taxpayer subsidy, which it is not. We are not suffering from a glut of people seeking homes to live in, we are suffering from holding a portfolio of houses which we can't sell. It should be open to everyone, so what if people accumulate portfolios of 5 or 6 of them?

I agree with all the practical objections that have been raised such as relying on subjective valuations and issues around home improvements. A "profit sharing" approach would seem to be a route to address some of these practical matters.


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## ontour (30 Jul 2011)

There are a couple of big assumptions in the proposal that are hard to reconcile.  The assumption that anyone knows the 'market value' of the NAMA properties is a stretch.  Set the prices too high and the government has conned the purchaser, set it too low and they conned the taxpayer.  Of course we only know the answer to the market value in hindsight.



I think that the lending should be from the private sector or the state controlled banks.  NAMA should provide a schedule of releasing properties on to the market.  NAMA should provide a comprehensive property pack with each property including legal investigation of title and a surveyor  / engineer analysis of the property.  Potential purchaser could submit a bid in a tender format.  This would give the purchaser the ability to work with the lenders on a proposed bid.  For example the potential buyer goes to the bank and proposes to buy a NAMA property, borrowing 70% from the bank.  The bank can see that they have the funds to pay the difference, assess the property, assess the ability to pay and back the potential purchasers proposal.  On the last date, the best proposal for the property gets it.

The Alsopp Space auctions have shown how to determine the market value of Irish property but the auction format does not suit many purchasers.


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## Brendan Burgess (3 Aug 2011)

Duke of Marmalade said:


> It depends on how you tell it. Is this a sale for 200K with 40K downside protection or is it a sale for 160K with NAMA getting 40K of the upside? I guess the latter would be seen as more palatable by many, even though it is the same thing.
> ...
> 
> A "profit sharing" approach would seem to be a route to address some of these practical matters.



This is a very interesting idea which has potential. 

NAMA sells a house today for €100k. 
The buyer borrows the money or pays cash or whatever.
The price is adjusted after 5 years by the house price index. 
So if the house price index falls by 20%, NAMA pays €20k back to the buyer or directly to the lender to reduce the mortgage.

If the house price index rises by 20%, the buyer pays €20k to NAMA. 

The practical problem is how would NAMA get the 20%? The buyer might be able to afford the 100k now, but they might not be able to afford the additional €20k after 5 years. NAMA could take a second mortgage with interest accumulating at a rate = ECB + 2%. 

It would be complicated in practice, but in principle, it would be equitable. 

People could buy the house now knowing that they would be protected against house price falls. They get to own their own home. They get to decorate it or improve it as they see fit. 

The mortgage lender would be happier in that they have a protection for 5 years against negative equity. 

Brendan


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## DerKaiser (3 Aug 2011)

Or how about we look at what matters i.e. the affordability of mortgage repayments.  A scheme whereby you can walk away from the deal if a deterioration in your personal finances mean you can no longer afford the repayments or perhaps a scheme or a scheme guaranteeing interest rate hikes don't render your payments unaffordable would be more sensible.

I don't like this idea that you are somehow better off if the market value of a house you have no intention of moving on from goes up.  

If someone continues to have the means to make their repayments and if the level of the repayments doesn't increase where's the problem?  Capital losses they are unlikely to ever realise?  

It surely makes far more sense to focus on agreeing an affordable scheduling of repayments and only make exceptions where the persons personal finances change significantly.

Our problems arose in the first place from people viewing homes as some sort of volatile investment they should take a punt on.


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## DerKaiser (3 Aug 2011)

DB74 said:


> Any write-off (if there has to be one, I'm not in favour) should only occur when the property is actually sold and not just on a willy-nilly valuation at the whim of an estate agent whose toast was burnt that morning.



1) Should only apply on sale

i.e. you are no worse off if you never intended to sell

2) Should not apply for someone simply moving house 

i.e.  you shouldn't be able to simply switch to a more valuable house for the same mortgage and deposit simply because general prices have fallen


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## DerKaiser (3 Aug 2011)

How about NAMA go as guarantor for the option to convert to a non-recourse mortgage where an individual is out of work for over a year?

This way they'll take a hit only if 
1) Markets fall
2) The individual loses their job
3) The individual can't keep up the repayments

To reiterate, the message we should be sending out is that fluctuations in the market value of your house only actually matter if you can't repay the mortgage


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## andycole (28 Sep 2011)

*Nama hopes negative equity plan will kick-start sales*

HOW DO you encourage people to buy a home at a time when the price of property is continuing to fall? The National Asset Management Agency (Nama) believes it may have part of the answer.


"It will work like this.

*_ A property in Nama is for sale at €200,000 in 2011. A couple approaches a bank with a €20,000 deposit, seeking a €180,000 mortgage. The couple are however worried that the value of property may fall, leaving them in negative equity._

_* Nama will defer 20 per cent of the property's current value, €40,000 in this case. The payment of this amount will only be due to Nama if the value of the property is maintained or increased over the next five years_

_* All dealings by the couple are with the bank - they do not deal with Nama at any stage. The bank approves the €180,000 mortgage, the purchase is completed and repayments begin."_

Link to Story in today's Irish Times: [broken link removed]


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## andycole (28 Sep 2011)

Interestingly it seems NAMA and the Department of the Environment do not agree with this approach/initiative. Further reading of this article shows that Minister for Housing Willie Penrose believe that it runs counter to the housing policy which states that such initiatives were part of the problem here in Ireland that has led to the artifical housing bubble which we are all currently experiencing. 

Question - where can I locate the Housing Policy? It is published and available online?


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## bugler (28 Sep 2011)

My initial reaction is that this is an effort to offload the dregs of what NAMA has in stock before it's too late and no one will touch it. There are actually two articles in the IT today on this. This is the second, which outlined discord over the plan from the government: [broken link removed]

I sincerely hope this turns out to be as successful as the Home Choice Loan scheme.


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## Brendan Burgess (28 Sep 2011)

Beidh me ag caint faoin ábhar seo ar Nuacht RTE ar 17.40 agus arís ar Nuacht TG4 ar 19.00 anocht.

Brendán


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## Complainer (28 Sep 2011)

andycole said:


> Interestingly it seems NAMA and the Department of the Environment do not agree with this approach/initiative. Further reading of this article shows that Minister for Housing Willie Penrose believe that it runs counter to the housing policy which states that such initiatives were part of the problem here in Ireland that has led to the artifical housing bubble which we are all currently experiencing.
> 
> Question - where can I locate the Housing Policy? It is published and available online?


http://www.environ.ie/en/DevelopmentHousing/Housing/HousingPolicy/


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## georwahin (30 May 2012)

I heard that there are a range of house types available suitable for first time  buyers and owner occupiers and NAMA insists the initiative may be rolled  out to further properties in due course.


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## Bronte (13 Jun 2012)

Did all these properties sell, quite soon after it's launch it was hailed as a big success but if I understood it correctly a lot of people didn't apply for a mortgage?


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## Bronte (10 Aug 2012)

Sorry to bump this but does anyone know did the properties sell and what percentage of them used this new type of laon?


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