# Why doesn’t NAMA provide home loans to house buyers?



## Brendan Burgess (29 Jul 2011)

The proposals by NAMA to provide price guarantees are crazy. They distort the property market to such an extent that it will make the current market value even more difficult to assess. They will create uncertainty which will keep people out of the market.  There will be extraordinary legal cases in 5 years over the valuations of property. I support the NAMA project in general, but I have been unable to think of anything positive to say about this. I haven’t seen any other commentator supporting the proposals apart from the Construction Industry Federation.  

  A better alternative would be for NAMA to lend money on normal market terms to borrowers to buy houses at market prices. 

  There are people out there with deposits who can’t get loans because of the capital positions of the banks. 

  NAMA has 40,000(?) homes to sell. 

  NAMA has €30 billion in loans to property developers

  If a NAMA client has 200 unsold homes worth €100k each – NAMA has a non-performing loan of €20m. If NAMA provides 200 mortgages at normal market terms, it will exchange a non-performing loan of €20m for 200 performing loans. If the borrowers provide a 10% deposit, then NAMA’s security has improved also. 

*Positive impacts on the market*
·         It makes money available for mortgages which would not have otherwise been available.
·         It reduces the oversupply of houses. 

*Negative impacts on the market *
  NAMA houses would be more attractive than non-NAMA houses which might lead to a price reduction for the non-NAMA houses. But as it’s bringing fresh money into the market, this negative impact would be limited.  And it’s no more negative that NAMA selling off its housing stock at firesale prices. 

  No-one could object if an overseas mortgage provider entered the market and made mortgages available only to designated properties. In effect, this is what NAMA would be doing.

*How would NAMA provide mortgages? *
  It could set up a subsidiary to do so. As it would not be taking deposits, it would not require a banking license. This would take a lot of time to set up from scratch. 

*NAMA could, in time, securitise or sell off the mortgage book *
  At some stage if the securitisation market improves, then NAMA may be able to sell off the mortgage book thus reducing the state’s overall borrowing.
  It could subcontract the administration to AIB or some other institution.

*But 30 year mortgages exceed NAMA’s lifecycle which is expected to be 10 years*
  So what if the home loan book of NAMA continues beyond ten years?  The ten year time frame  is designed to allow the orderly wind down of the bank’s bad loans. If they have been converted into a long-term performing loan book, then that would be ok.

Given that NAMA and AIB are owned by the state, it could be AIB providing the loans directly. 
The government gives AIB €1 billion to lend to NAMA properties 
AIB customers buy the properties from NAMA 
NAMA repays the €1b to the government or repays the loan notes.

In practice this would be the same thing, the government recycling loans from property developers to home owners. But there may be technical problems with this. NAMA bonds are a very cheap form of borrowing. If the loans are on AIB's books, AIB would have to make provisions against them and would need to set capital aside.  Could EBS be extracted from AIB to handle these loans?

*Presumably NAMA has considered this idea already
*Presumably in coming up with price guarantee proposals, they must have looked at lots of other proposals including this one. There might be some disadvantages which I am not thinking of.


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## Shawady (29 Jul 2011)

Brendan,
I thought at least some of the money that was given to the banks was for loans to small business and people looking for mortgages?
This is the what I find strange. NAMA, which is state owned, has thousands of houses on its books. We are told that some people are finding it difficult to get mortages from the banks, which are mainly state owned. And if the houses are sold, the state would benefit from VAT and Stamp duty.
Why isn't the government putting more pressure on the banks?


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## aristotle (29 Jul 2011)

So you want NAMA to effectively become a bank and deal with customers?


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## jpd (29 Jul 2011)

We already have 2 nationalised banks (I don't include Anglo) - we hardly need another


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## Brendan Burgess (29 Jul 2011)

We have a state institution which owns non-performing loans to property developers. 

It seems to me to make sense to switch these to performing loans to home owners. There would be no additional state money involved.


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## ontour (30 Jul 2011)

I am not convinced that creating 40,000 performing property loans is all that easy. The uncertainty about our economy and job security makes it more difficult than ever for financial institutions to identify customers that will perform in the long run. Are the banks really not lending because of lack of funds or a fear of making a bad loan book even worse?


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## Brendan Burgess (2 Aug 2011)

I agree that it is not easy. 

But the 40,000 loans would be a lot better than, say, 40 much larger loans which are definitely non-performing. 

Which would you prefer to have? 

200 loans of €100,000 each where the property is currently worth €120,000 and the borrowers currently have salaries from which to make payments on the loans?

Or 1 loan of €20m to a bust developer who is not making any repayments and will never have any income to make those payments? 

If house prices fall by 20%, your 200 loans are still in positive equity, but your one loan of €20m falls by another 20%.

Brendan


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## ontour (2 Aug 2011)

The only reason for NAMA to have to provide the loans would be because it is unlikely that there will be any banks in Ireland offering loans to people who can well afford the loan repayments, have a significant deposit and secure employment.

If this is the case, then a severe strangulation of credit over a sustained period of time will lead to further economic collapse and potentially another significant fall in property prices, rise in unemployment etc.  Basically if NAMA is the only one that will lend you the money - you probably shouldn't be buying at all.

If there are good mortgage prospects and money to be made, lenders will provide mortgages in Ireland.


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## Brendan Burgess (2 Aug 2011)

> If there are good mortgage prospects and money to be made, lenders will provide mortgages in Ireland.


Not really. The Irish banks have to dramatically deleverage their balance sheets. EBS  are simply not providing new loans. 

AIB seems to be still open to lend in theory, but I gather that they are not lending in practice. Bank of Ireland is doing some lending.

Most people are reporting that it is very difficult to get money, even if they are a decent credit risk.

It will always be in NAMA's interest to exchange a very bad credit risk for many less bad credit risks. 

Brendan


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## ontour (2 Aug 2011)

Brendan Burgess said:


> Most people are reporting that it is very difficult to get money, even if they are a decent credit risk.



All the respondents to that thread were approved loans from NIB, PTSB or BOI.  It is a lot more difficult to get a mortgage now but is more prudence and process by the banks a bad thing?


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## Chris (3 Aug 2011)

Brendan Burgess said:


> *Negative impacts on the market *
> NAMA houses would be more attractive than non-NAMA houses which might lead to a price reduction for the non-NAMA houses. But as it’s bringing fresh money into the market, this negative impact would be limited.  And it’s no more negative that NAMA selling off its housing stock at firesale prices.



I actually think this is a positive point. Keeping house prices artificially propped up is a very negative thing for the market. People would be better served with a chance to buy a house at a significant discount, and it would finally bring the market to the bottom after almost 4 years. 
The recent property auctions in Dublin and Cork perfectly highlight that properties will sell very quickly if the price is right. The two distress auctions in Dublin sold almost all the properties, while the auction in Cork sold 2 pieces of land. Reduce the price enough and people will buy with a lot lower mortgages.


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## ontour (3 Aug 2011)

Chris said:


> People would be better served with a chance to buy a house at a significant discount, and it would finally bring the market to the bottom after almost 4 years.



Only people who do not own property would benefit from a further significant fall in prices as others would suffer increased negative equity and inability to sell / move.  It is very difficult to find any solution that addresses the needs of those who have heavily mortgaged homes and those looking to buy homes. 



Chris said:


> Reduce the price enough and people will buy with a lot lower mortgages.



Anecdotal evidence is that the auctions are supported by a lot of cash purchasers rather than home purchasers with regular mortgages.


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## DerKaiser (3 Aug 2011)

Chris said:


> I actually think this is a positive point. Keeping house prices artificially propped up is a very negative thing for the market. People would be better served with a chance to buy a house at a significant discount, and it would finally bring the market to the bottom after almost 4 years.
> The recent property auctions in Dublin and Cork perfectly highlight that properties will sell very quickly if the price is right. The two distress auctions in Dublin sold almost all the properties, while the auction in Cork sold 2 pieces of land. Reduce the price enough and people will buy with a lot lower mortgages.


 
I agree 100% that expensive housing is not a good thing for society.

As ontour points out, however, we are in a situation where "the cheaper the better" does not necessarily hold i.e. people are trapped by negative equity.

Also, do you not agree that the lack of a functioning banking system to provide mortgages to those of acceptable risk (in terms of repayment) is artificially dampening normal demand?

For what it's worth, I think NAMA should sell houses at a competitive price (no money back gimmicks) in exchange for either straight cash or a deposit and a long term regular repayment committment from the purchaser. 

If they ensure decent repayment capacity for those only paying a deposit upfront, they should theoretically be able to exchange these contracts for cash (securitise) if and when normal banking conditions resume (which they should unless the country is completely screwed!).


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## Chris (4 Aug 2011)

ontour said:


> Only people who do not own property would benefit from a further significant fall in prices as others would suffer increased negative equity and inability to sell / move.  It is very difficult to find any solution that addresses the needs of those who have heavily mortgaged homes and those looking to buy homes.





DerKaiser said:


> I agree 100% that expensive housing is not a good thing for society.
> 
> As ontour points out, however, we are in a situation where "the cheaper the better" does not necessarily hold i.e. people are trapped by negative equity.
> 
> ...


I agree with both of you that some people will lose out by a further reduction in house prices, but the reason these very people are in in trouble is because they paid too much for their properties. It simply doesn't make sense to potentially expose more people to overpaying for property, even with money back schemes. People that are watching their house prices turn negative from month to month would also be better served if the natural market bottom were achieved as quickly as possible. 
I also agree that the Irish banking system is not functioning, but from anecdotal reports from friends it seems like banks are giving out mortgages to those with realistic expectations. By realistic I mean people with 20% deposit plus savings for interior, looking for 3 times combined wages. Two people I know with this kind of mortgage request have been approved with no quibbles. On the other hand I had a bank manager tell me about some of the ridiculous expectations some people have that come in to see him; things like 8 times wages, 10% deposit that exactly matches a recent loan, etc.



ontour said:


> Anecdotal evidence is that the auctions are supported by a lot of cash purchasers rather than home purchasers with regular mortgages.


But more people would be able to be cash purchasers or purchasers with very small mortgages if the prices were right.


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## NorfBank (4 Aug 2011)

Chris said:


> I also agree that the Irish banking system is not functioning, but from anecdotal reports from friends it seems like banks are giving out mortgages to those with realistic expectations.



Agreed.

You can still get up to 4/5 times earnings if your application is strong enough. Unfortunately most people are still living in la la land when it comes to mortgages as if it is their right to get one rather than having to qualify for one.

Yes, your income may be strong enough but when you've earned €40,000 for the last 5years and have €2000 in savings then you haven't a hope, a gift from your parents will not cut it. No, you cannot get a 100% mortgage, no you cannot add your outstanding loans to the mortgage, no you cannot borrow your deposit. 

Prove that you are a responsible saver over a certain period of time, pay off all other debt, keep your current accounts in good order and you have a decent chance of approval.

The banks are not arbitrarily declining applications, there is always a reason be it too much personal debt, children to support, poor credit, unstable employment or just irregular spending patterns.

As for NAMA lending - no, it will be another Home Choice Loans - an absolute fiasco. There is a reason you cannot qualify for a mortgage at one of the main lenders, address that and re apply. 

We have to accept that some people cannot get a mortgage.


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## Brendan Burgess (4 Aug 2011)

Hi Norfbank

That is a useful account from someone at the coalface. 

Would you say that there is no shortage of mortgage finance at the moment if people meet the criteria? The only limiting factor is the quality of the applicant?


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## Shawady (5 Aug 2011)

I had to get a smaller home-improvement mortgage last year. We are on a good tracker for our existing mortgage hence we wanted to keep the two seperate. We were never in arrears and are both in stable jobs so there was no problem getting the money from the bank.

They had however some strict criteria.
We had to get the house valued and our current mortgage plus the new home-improvement mortgage could not account for more than 70% the value of our home. They were very strict on this. It could not be 71%, it had to be a max 70%.
This meant we had a limited budget which is not a bad thing. In previous years there may have been the temptation to borrow huge sums of money.


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## Bronte (5 Aug 2011)

Nama, another mad property scheme.  Sell the houses to the highest bidder, put a proper reserve on them as did Allsop's and let's get to the bottom of this market once and for all.  

The fact the CFI is for it makes my blood run cold.  They who have overseen the creation of badly built, badly sized apartments and houses in many bad locations for cowboy builders with no proper homebond system.

If an Irish bank won't lend you the money, and there are reasonable priced houses now, then the simple facts are you cannot afford to buy.  When you have demonstrated that you have saved a decent deposit, and showed you can afford a mortgage, then and only then should you buy.  

You shouldn't buy because:

Nama is pretending there is a price drop built in, 
they are desparate to sell, 
don't know what to do with all the properties they have, 
have pressure from the government to sell, 
have no idea how to deal with the mess 
and are being adviced by the very same people who were involved in the first mad property ponzi/gambling scheme that Ireland had pre 2007.  

It's so crazy you couldn't make it up.  The actions of Nama make me think of that other gloraious state agency we now think has gone away FAS. But it hasn't you know.  I have the feeling Nama will haunt us for a very long time.  

What would I do, I'd fire Nama, and hire Allsops and let it ride once and for all and quit this messing around.


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## Gekko (5 Aug 2011)

NorfBank said:


> Yes, your income may be strong enough but when you've earned €40,000 for the last 5years and have €2000 in savings then you haven't a hope, a gift from your parents will not cut it


 
Surely in this scenario the borrower should just tell the bank that his or her deposit derives from savings (rather than from a gift from his or her parents)?

The banks should be compelled to examine future mortgage applications in the context of our economic crash.  Suitable candidates are being turned down for unreasonable reasons.  Someone can have black marks from a credit perspective and still be a good candidate - What about people who lost their job (say) 3 years ago, missed some payments but are now financially healthy?


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## Brendan Burgess (29 Sep 2011)

I am going to revisit this issue again, as I believe it's a far better scheme than the guarantee against price falls. In the meantime, I note that NAMA is proposing to lend money to purchasers of commercial property. 

This is from a press release issued by them just now



> *Agency’s First Staple Finance Offering Planned within weeks *
> Mr. McDonagh also confirmed that NAMA planned to offer  its first staple financing package for commercial property within the  next two weeks, a move aimed at testing the market for such  transactions.   Staple finance involves a buyer paying up to 25/30% of  the assets purchase price up-front with the remainder being paid to NAMA  over an agreed number of years.
> 
> Mr  McDonagh warned, however, that NAMA will attach stringent conditions to  any property purchaser who avails of NAMA staple financing. “We will  have to be satisfied as to their track record, reputation and capacity  to repay.  They will have to be in a position to inject equity capital  of 25-30% up front.  This will result in an immediate paydown of NAMA  debt and create a performing loan,” he stated.
> ...


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## Bronte (7 Oct 2011)

Which class of people in Ireland has the money to purchase large office blocks and shopping centers?  Would it preclude developers who are dealing with Nama?


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