NAMA considering providing home loans or guarantees against price falls

[Brendan Burgess]

Let's leave NAMA out of this for the moment and consider if Ulster Bank should be doing something like this.

They have a developer who has 100 houses worth €200k each and they have given a loan of €20m to that developer. The developer can't pay it because he can't sell the houses. Ulster Bank currently carries all the risk of a future house price fall. If the houses fall by 20%, their security falls by 20%.

There are people who want to buy houses but can't get the finance. So let's say UB restricts its new mortgage lending to people who buy houses in this development. Let's say that they give 100 borrowers 90% mortgages at standard variable rates - but no guarantees or anything like that.

Ulster Bank will now have reduced their risk considerably. Most of the borrowers will be able to repay their mortgages even if house prices fall further.

So Ulster Bank should be doing something like this. They have limited funds available for mortgage lending and should be providing them only to people who are buying houses from their development clients.

Should they go further and take some of the risk themselves? For example, should they offer 100% non-recourse loans. They would still be carrying the property price risk, but they would now have 100 performing loans instead of 1 non-performing loan. They might offer a 90% non-recourse loan. So the borrower takes on the first 10% of any price fall.

Update: Ulster Bank were actually doing this last year.

http://namawinelake.wordpress.com/2...l-safeguard-against-future-property-declines/

 

[Brendan Burgess]

It would be ok for Ulster Bank to do this as it would not really interfere with the market too much.

If it's ok for Ulster Bank to do it, does that mean that it's ok for NAMA to do it? It would be in NAMA's interest to do something like this. Many of its non-performing loans to property developers would be replaced by loans to individuals who have salaries out of which to service their loans.

But I think it would destroy the market for everyone else.

If I am a first time buyer and I have a choice of buying a new home with a non-recourse loan from NAMA or buying a second hand home with a full recourse loan from Bank of Ireland, I will be willing to pay a lot less for the second hand home.

The non-NAMA banks would have to do something similar for their developer clients as their houses would be more unsellable.

If AIB and Bank of Ireland limit their mortgage lending to first time buyers of NAMA properties, their existing struggling mortgage holders who are trying to sell will be unable to sell and so will get into further difficulty.

Say that I have an unsustainable mortgage with AIB. I have AIB's agreement to sell my home. Should they give me a certificate to say that they will look favourably on giving a mortgage to someone who wants to buy my home? In other words, they should try to convert my non-performing loan to a performing loan to some other borrower.

 

[Purple]

But I think it would destroy the market for everyone else.

The market is destroyed anyway. We need to find the bottom as fast as we can, even if that's based on a fire sale.

 

[JoeB]

Well, the banks are not property developers.

My pouint is that if Ulster bank were to happily take the hits on the losses then why ever lend to developers? If development makes a profit then the developer makes it.. if the development makes a loss then the bank takes the hit.

If that was the choice for the bank I'd either start building the houses directly as a bank, and cut out the middleman developer, OR.. I'd stop lending to developers if the bank only makes its money if the development is sucessful.


So for the banks, or NAMA to do somwthing like the above would be an acknowledgement that they give 'non recourse' loans to developers... developers can simply walk away from failed developments.


The problem is the bank not having sufficient security for the failed developer loans. Did banks lend 100% for new developments? or 110%?

If so they can hardly complain now. They should only have lent 70%, or whatever, and also ensured that the developer had available saved cash, and wasn't simply borrowing to the hilt elsewhere.

 

[amh]

And so it came to pass