Will the Nama mortgage work?


There aren’t enough cash buyers out there for all of Nama’s stock but is the agency’s plan to help buyers the best way to get the market moving?

GIVEN THE NUMBER of first-time buyers and families looking to trade up who are sitting on the sidelines, waiting for the property market to stabilise – or the banks to start lending again – a mortgage which protects against negative equity seems like a good idea. But how will the latest proposal from the National Asset Management Agency (Nama) work? Is it just another measure aimed at propping up a market which is in freefall, and should the Government really be intervening in the property market?

After all, it has intervened in the past with some pretty disastrous consequences for the entire country.

The negative equity dilemma has been talked about for some time, but last month, Brendan McDonagh, chief executive of Nama, gave a clear indication that the agency is working with both Bank of Ireland and AIB on delivering a product which would protect house purchasers from a future drop in house prices.

For McDonagh, one of the “key impediments” to the lack of activity in the property market is the fear that house prices will continue to fall further. Indeed the market is at a stalemate, with just €577 million lent out in the first quarter of this year – more than 50 per cent down on a similar period in 2010 and more than 93 per cent down on the peak in 2006.

April’s auction of properties in receivership was one of the few bursts of activity in the market. There was a huge level of interest in the first Allsop-Space property auction and those bidding on the 82 properties spilled on to the street in front of the Shelbourne Hotel at one point. A second auction takes place in the same venue on Thursday. However, it’s worth noting that an auction of distressed properties in Cork last month was a flop, with only two of the discounted lots sold under the hammer.

Fire sales apart, with so little activity, it is hard to gauge the true state of the property market, although indices such as that from the Central Statistics Office suggest that it is still declining. And, with interest rates set to rise, the employment market uncertain and the economy still in the doldrums, there is no reasonable expectation that prices will start to rise again in the future.

Against this background, it will be very difficult to get the market moving again. After all, it’s not the first time that new products have been launched in an effort to re-energise the property market. Remember Ray Grehan of Glenkerrin Homes’ interest-free loans at The Grange in Stillorgan? Or the rent-to-buy schemes that enabled prospective home buyers to rent their preferred property before committing to a purchase? And there have also been similar products to Nama’s proposal unleashed on the market.

In 2009, Ulster Bank launched the Secure Step mortgage which offered home buyers a guarantee on 15 per cent of the property price in five years, if prices continue to fall. The guarantee was offered by developers and so was restricted to certain housing developments, but it was withdrawn in April.

This time around however, Nama’s proposal has been welcomed by many as a way of getting the market moving again.

“The concept is good, it’s badly needed,” says Frank Conway, a director with Moneycoach.ie. “It’s someone in power saying that there is a need to address the funding issue.”

The aim of the scheme is clear. According to McDonagh, the main criteria is that it “generates sales of property controlled either by Nama debtors or by receivers, yet provides an incentive to purchasers to invest at current prices in the knowledge that there will be a mechanism in place which will offer them protection against the risk of negative equity in the future”.

While it is still being fine-tuned, it appears that the scheme will offer purchasers a protection against prices falling by up to 20 per cent over a number of years. As the seller, Nama will agree to sell for 80 per cent of the purchase price now, with the possibility of getting the full amount a few years later.

So if, for example, you intend buying a property worth €300,000, you will get a mortgage for €270,000 from either AIB or Bank of Ireland, and will contribute a down payment of €30,000 yourself. However, you will only draw down 80 per cent of the mortgage, ie, €216,000 – during the initial term. Once this period passes, if prices have stayed level, or even increased, you will then have to complete financing for the full amount from your bank.

If, on the other hand, prices continue to fall, and once the review period has passed your house is actually worth less than the amount you paid for it, then Nama will waive this amount.

The scheme is designed to enable Nama offload its properties, and so initially may be restricted to developments under Nama’s control, or of its receivers. This means that it would likely be available only for apartments, given the relative scarcity of houses built during the boom. Apartment complexes in Dublin which are in Nama include Elm Park in Blackrock and The Grange in Stillorgan.

However, according to a Nama spokesman, in principle Nama would look at widening the applicability of the scheme, and perhaps partnering up with other developers/banks.

For the would-be first-time buyer, who is standing on the sidelines of the property market but anxious to make a move and fed up with paying rent, the product has its appeal. After all, who wants to join the thousands of homeowners who are literally stuck in their homes because of negative equity?

Moreover, a significant volume of sales should help put some kind of a floor on the market and give a better indication of just where prices are at.

However, if it is restricted to certain properties it may be less attractive – increased demand for theses properties may artifically push up prices – and it also raises the question of whether someone would not be better off negotiating the discount upfront.

The other issue is whether the Government, through an agency such as Nama, should be doing anything to offer “incentives”, which may be seen to be propping up prices, in a market that not so long ago was a bubble.

Nama doesn’t have much of a choice. At the moment, access to credit is severely constrained, and while it may improve following the – hopefully final – imminent recapitalisation of the remaining banks, Nama still has considerable stock to offload if it is to fulfil its remit of being wound down in seven years.

As Conway points out, despite an increase in interest in buying property – and his firm is seeing a 30-40 per cent jump in applications this year – the funding situation has actually deteriorated. With the banks cherry picking only the best credit bet, first-time buyers, many of whom have been put on rolling contracts or are in uncertain employment, have been particularly badly hit.

So it’s a catch-22. If people can’t get funding – and there aren’t enough cash buyers out there for all of Nama’s stock — then Nama can’t offload its properties, so the only way to dispose of them is to help out on the funding side.

While Nama may end up getting less than it would like for the properties, at least it would get them off its books.

After all for Nama – and therefore the taxpayer – 80 per cent of something is better than 100 per cent of nothing.

Is it just another measure aimed at propping up a market which is in freefall, and should the Government really be intervening in the property market?