ANALYSIS:Poor standards of documentation and woefully inadequate stress-testing of loans were widespread, writes SIMON CARSWELL, Finance Correspondent

IRISH BANKERS must cower when Brendan McDonagh, the chief executive of the National Asset Management Agency, delivers awkward truths about the dodgy practices that brought the sector to its knees following years of frenetic property lending.

He told an Oireachtas committee yesterday that the agency’s loan-by-loan review of the 10 biggest developers “revealed a troubling picture of poor loan documentation, of assets not properly legally secured and of inadequate stress-testing of borrowers and loans”.

This was “all born of a mindless scramble to funnel lending into one sector at considerable pace and of a reckless abandonment of basic principles of credit risk and prudent lending”, he said.

The poor lending practices – coupled with lower valuations on half-built estates and properties backing the loans – are the reason why Nama has applied a discount of 47 per cent on the first €16 billion of loans, far higher than the 30 per cent first expected. But this may still rise further once Anglo’s first loans are moved.

All but Anglo’s loans in the first tranche have moved to Nama since the transfers began on March 29th. The agency has had conversations – described as “interesting” and “confessional” in nature – with some of the 10 biggest borrowers since then.

McDonagh said Nama would be taking a hard and realistic view on the borrowers, saying it had “scarce” finance available – €5 billion – to complete projects and to secure a return. The borrowers should not “hope that tomorrow is going to be sunny again”, he said, referring to the heady days of access to cheap credit when banks were “chasing the dragon” to secure business from the biggest developers.

Anglo’s first loans of €10 billion, accounting for the largest part of the first tranche, will transfer over the next 10 days. The second tranche will start moving across early next month and be completed by the end of June, Nama said.

The pace of transfers will increase as smaller and less complex ones are moved in the second half of this year ahead of all €81 billion in loans being transferred by the end of the year, before the European Commission’s deadline for all transfers next February.

Nama expects transfers from three of the five participating institutions to be completed by the third quarter of the year.

The agency will give the top 10 borrowers a month (from when Anglo transfers its first loans) to respond with business plans showing how they plan to deal with their debts and properties.

Nama will assess the plans over the summer and begin enforcement actions against any bankrupt developers by September – or “take them out of the equation” before then if they’re not co-operating.

“We are not going to hang about,” he told the Oireachtas Joint Committee on Finance and the Public Service.

Asked about the “troubling picture” emerging at the banks, the Nama chief outlined shoddy practices across the institutions.

The banks were lending so quickly that they had to rely on solicitors’ undertakings to ensure loan charges were registered.

Charges were registered too late with banks taking second charges or weaker security when they should have been first.

Banks failed to record the full amounts owing, with documents covering only part of the loans.

McDonagh said that loans were not standard mortgages or the title documents incorrectly described properties. A joint loan to two individuals may only have had one name on the loan documents, he said. “You would have thought that these are just basic things when they were issuing large loans,” he added.

Nama found that in some cases institutions provided loans worth up to 100 per cent of the value of agricultural land purchased for speculative future development.

“I don’t think anyone would call it good banking practice,” he said, adding that this type of lending had been “approved at all levels”.

Lenders had also taken “a very benign view” when it came to stress-testing their loan books.

More worrying is that just one-third of the first loans are generating cashflow through interest payments. This is lower than the 40 per cent estimated by Nama last October. “That clearly has an impact on the income of Nama,” said Mr McDonagh.

This could put pressure on the agency’s break-even position based on Nama’s draft business plan, though the situation is improved since Nama is likely to end up paying considerably less for all €81 billion loans if the discount is higher than expected.