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

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

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.

Click to expand...

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

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.

Click to expand...

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

ONQ.

onq said:

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

ONQ.

Click to expand...

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.

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

NAMA proposal

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

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?

Click to expand...

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.

Carmel said:

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

Click to expand...

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

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

Click to expand...

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

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

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.

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

Click to expand...

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.

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.

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.

Click to expand...

<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.

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.

Click to expand...

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.

Click to expand...

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

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.

Brendan Burgess said:

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



Makes no sense.

Click to expand...

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

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.

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.

Click to expand...

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%.

Brendan Burgess said:

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.

Click to expand...

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