Saturday 23 September 2017

Pilot scheme venturing where banks fear to tread

The idea of NAMA as a mortgage funder will surely be controversial. But creative solutions are needed to reinvigorate the property market, the agency's chairman tells Emmet Oliver

In his manner of speaking, his dress and overall bearing, Frank Daly doesn't strike you immediately as a controversial man who seeks out trouble. Unflappable, yes; careful, yes. But controversial, most definitely not.

But in his choice of jobs Daly appears to willingly embrace controversy and even thrive on it.

That is the only conclusion one can reasonably draw from his career over the last decade -- head of the Revenue Commissioners, a director of Anglo Irish Bank, head of NAMA. The list goes on.

Daly even chaired a panel set up by the Government to review the finances of Catholic orders, a job that found him challenging the spending practices of certain congregations.

Against that background, the dislike many people -- particularly those in the construction sector -- have for NAMA is something he tries to understand, but doesn't seem particularly concerned about.

The 66-year-old is reported to be doing long hours at the agency, no doubt keeping up with self-confessed workaholic chief executive Brendan McDonagh.

Any shortcomings of the agency -- and there are many -- he puts down to two factors: the way some politicians oversold the agency originally, and also the scale of the challenge involved in buying €30bn worth of loans.

Ultimately though, the public (and quite a few economists) will judge the agency solely on whether or not it ends up recouping what it paid for the loans.

But making a profit means the property market will have to rise in value -- something there is no sign of yet.

This is what is worrying Daly as he speaks on the eve of NAMA publishing its first ever annual report. Inside its covers, NAMA will unveil a €1.3bn reduction in the value of its assets.

These writedowns in value (known as impairments) are related to the property market not yet bottoming out.

Until that happens, NAMA's long-term ambition of returning a €1bn profit to the exchequer is likely to be frustrated. Daly says something is needed to restore confidence to the property market -- and lending is the only answer, with NAMA providing some of the finance.

"Nobody is saying the property market needs to get back to the unsustainable levels of the last decade," he says. "But if we get a 10pc increase in property values over the lifetime of NAMA, that will enable us to get a good result, and we can recover everything we've paid out on behalf of the taxpayer, and it will also enable us to make a gain something in the order of €1bn.

"We have projected those figures last year in our business plan, and we have no reason at this stage to change that."

Daly says that, during 2010, NAMA realised the property market wasn't going to recover as quickly as had been predicted and as a result NAMA has been forced to slash the value of its assets.

The depressed property market has also made it hard to sell assets at the kind of prices NAMA needs to produce the elusive profit.

"I think it's a bit of a trait in us that if something goes wrong, we go to the other extreme," says Daly. "What's happened to the banks is they have become extremely prudent, and gone to the other end of the spectrum in regard to their lending. The slowness in the property market is certainly not helping us."

He adds that while NAMA's UK assets are doing well, the land portion of its Irish portfolio is "dire".

While €3.9bn of sales by NAMA have been approved, some €7.5bn of sales must happen by 2013, at least according to orders given to Ireland by the so-called troika -- the IMF, the EU and the ECB.

But how does NAMA sell assets -- houses and apartments -- when banks are doing so little mortgage lending and the lending they are doing requires hefty deposits of between 10 and 20pc, sometimes more?

The agency is now prepared to act as a co-lender for properties in its own portfolio with the so-called two pillar banks, plus Irish Life & Permanent (IL&P). Daly says initially a "couple of hundred" apartments will be funded this way, most likely in the Dublin area on a pilot basis.

Negative equity

Effectively NAMA will guarantee home buyers against negative equity. If the property goes down in value, NAMA will not seek its money back. If the property rises in value the borrower pays back the money in full. Daly says the idea is the best way to spark life back into the market.

Having signed up AIB, IL&P and Bank of Ireland as participants, he is now seeking interest from non-Irish banks, including KBC, NIB and Ulster Bank. "One of the key issues is that people are still afraid of buying a property and then finding out the following day they are in negative equity," says Daly. "I can understand that. Nobody wants to get into that space. We just want to do it on a reasonably modest scale, simply to restore or instill a little bit of confidence in the market."

The concept of NAMA as a lender is likely to be controversial, but Daly is quite bullish that something has to be done.

"The reality is that in the long run a restored property market, a modestly restored market, benefits everyone," he says.

"I know some people will be concerned that if somebody has a house for sale, they will be saying, my property is never going to shift now that Nama is assisting the shifting of these other properties. I can understand that, but what do we do? We can sit back and do nothing, or we can intervene in a modest way and hope that if that works it lifts all boats."

The move won't be permanent and if it doesn't work it will soon be dropped, Daly emphasises.

Final clearance from the departments of Finance and the Environment is awaited, with the first loans to be given in early autumn.

To the critics of the scheme, Daly has a simple message. "It behoves everyone to be as creative as possible," he says.

Developers are likely to favour the idea, but many of them are furious with NAMA's enforcement actions against them in recent weeks. In fact NAMA is not just putting developers' companies into receivership, but also pursuing guarantees for debts developers are personally standing over.

Daly is frank about this reality. If there is money there, the guarantees will be called in. Several high-profile developers are already in this category, including Ray Grehan, who is facing a battle to hang on to personal assets he owns.

But at a certain point NAMA will call off such pursuits -- it will follow the money and no further. "To be realistic, there will come a point where the effort will not be worth it. There is an outlay to this, there are legal fees. The energy, the effort -- you have to make a reasonable assessment of what is there, what is left in the pot; at some stage we will have to make that call, but we are not at that stage yet,'' is how he sums up the current position.

Developers, Daly emphasises, may not always agree with NAMA, but some of this is down to NAMA disrupting previously cosy relationships between the banks and borrowers.

"You have to remember where they (developers) are coming from. Their engagement with banks over recent years was pretty much a formality. You need €100m -- here is the cheque. We are more methodical about examining the business plans than the banks were and we make no apologies for that, because we want to get it right with these guys,'' he remarks.

He admits that most developers arrive at NAMA's Dublin headquarters with their accountants; lawyers come at a later stage. The meetings he describes as "business-like" and most visitors are co-operative and never face any enforcement action.

"Some say, 'Leave me alone for 20 years. I know this business, you don't.' Great, they know the business, but they're the ones who got themselves into trouble,'' he says.

Many have no quibbles with this message, and find NAMA's operations not transparent enough. Daly says this will soon be tackled, with notices on every single NAMA property seized and up for sale going onto its website.

But what NAMA will never do, he says, is reveal what is paid for certain loans or properties. "You wouldn't do it in poker, so why would you do it here?"

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