Tuesday 20 August 2019

Daniel McConnell: Nama's failure could lead us into 'lost decade'

Angry at the drop in your house price and the continued recession? You can always blame Nama, says Daniel McConnell

In April 2009, the National Asset Management Agency (Nama) was created to deal with the impact of the worst banking crisis in the history of this State.



Announced by the then Finance Minister, the late Brian Lenihan, Nama's purpose was two-fold.

Firstly, to rid the busted banks of their toxic development loans and recapitalise them so they could lend again. Secondly, to restore a functioning property market.

"Nama will ensure that credit flows again to viable businesses and households by cleansing the balance sheets of Irish banks. This is essential for economic recovery and the generation of employment. It will ensure that we avoid the Japanese outcome of zombie banks that are just ticking over and not making a vibrant contribution to economic growth," he said.

Its own mission statement said: "Nama will conduct its activities in a way which assists the property market to operate efficiently and in a way which achieves longer- term sustainability."

The recession in Ireland, primarily caused by reckless Irish banks, is now into its fifth year, one of the longest anywhere in postwar Europe.

Three years on from Nama's conception, there still is no bank lending and the property market remains in freefall (latest CSO figures show there have been 53 consecutive monthly drops in house prices and the rate of decline in house values increased in the last quarter).

Nama has fundamentally failed to live up to its core objectives, and this failure has not only prolonged Ireland's worst recession, but risks turning it into a depression.

Worse, because of the continued stagnation of the Irish economy, Nama's projected "profit" targets now increasingly look unattainable.

But why and where has Nama failed?

Many, if not all of the key initial assumptions upon which Nama was founded, have turned out to be inaccurate.

• Far from the modest growth predicted in 2009, domestic Irish economic growth or GNP (the best measure of real activity in Ireland) has fallen sharply, with demand fundamentally depressed.

• The initial writedowns on bank loans taken in by Nama were to be no more than 30 per cent. Ultimately they turned out to be 58 per cent.

• A perceived banking liquidity problem turned out to be a core solvency issue.

• Since 2009, the international economic environment has deteriorated significantly, amid IMF talk of a "lost decade" and lingering concern over the viability of the euro.

• That uncertainty grew significantly because of the ongoing failure of the Irish banks to extend meaningful lines of credit to businesses or homeowners.

• Both commercial and domestic house prices have continued to fall sharply, and are now down 30 per cent since Nama's Loan Acquisition Value date in November 2009.

• Consumer confidence remains at record lows and personal debt levels are spiralling out of control. (More than 146,000 Irish residential mortgages, or one in five, are now either in arrears or have been restructured, and two-thirds of mortgages are in negative equity).

Since all of the initial assumptions pertaining to Nama no longer apply, a total reassessment of its objectives and modus operandi is now urgently needed.

Nama is a unique and controversial entity sitting on 35,000 properties.

In one of the world's smallest countries, it operates the world's largest property portfolio totalling €30.5bn of loans previously worth in excess of €72bn. It is axiomatic that Nama's potential to help or hinder Ireland's chances of recovery are enormous.

The acceleration in the decline in house prices now means that they are falling about 1 per cent a month.

All the time the negative equity crisis is deepening -- it is causing more and more mortgage defaults and suppressing consumer demand.

Therefore, how Nama behaves will determine what happens to property prices, and is critical to Ireland's chances of recovery.

For three years a credit famine has engulfed Ireland.

In 2006, the level of mortgage lending into the Irish economy was €40bn. Last year it was €2bn, just 5 per cent of the 2006 level.

While the 2006 level of lending was unsustainable, the 2011 figure was also unsustainable. Unsustainably low.

Another way of looking at it is how the construction industry accounted for 21.8 per cent of the entire economy in 2006, while it accounted for just 5.6 per cent last year.

In a functioning economy, that figure needs to be up around 12 per cent.

Ireland faces unprecedented challenges.

Yet, despite the loss of most of our sovereignty, there is one major element of our own affairs which we retain control of and which can rescue the country -- Nama.

But that rescue can only happen if key changes to its current policies are made.

Moreover, it is incumbent on those in government and running Nama to drastically alter its game plan given the very changed economic reality we find ourselves in.

In the original legislation, Nama was required to get the "best achievable price" when disposing of assets it controls. This has since been superseded by a rather self-serving intention of "making a profit".

According to a Department of Finance directive, Nama will not sell any of its assets below what it paid the banks, known as the Loan Acquisition Value (LAV).

Selling at below the LAV is contrary to Nama's more recent stated objective of making a profit.

These two objectives are contradictory and the conflict between the interests of the State and the interests of Nama arises.

Nama said that where it has sold property at less than acquisition value, it was done on a case by case basis, and the numbers are believed to be very small.

Crucially, by not selling at the open market value, even at a loss, Nama is dragging out the establishment of a floor in the property market, thus prolonging the recession by up to two years.

By doing this it is contravening its original legal requirement to "act expeditiously".

Indeed it was Michael Noonan in 2010, then Fine Gael finance spokesman, who best described Nama's impact. "Nama has destroyed the property market. The minister should call the people from Nama into his office and tell them to put €2bn or €3bn of property on the market at fire sale prices. These may be sold too cheaply but at least that would establish a floor in the property market and people would start again. Currently, everybody is watching prices continually falling and nobody will get into the market. They believe prices will fall further and are waiting for the bottom," Noonan told the Dail.

Nama responded by saying it will "not engage in fire sales nor will it hoard assets on a speculative basis, as neither approach would get the best price for the taxpayer".

As leading Nobel Prize-winning economist Joseph Stiglitz put it, "Nama's structure and objectives create negative value, destroying incentives that can hurt... the economy".

More worryingly, for Nama to meet its stated targets it has to realise about €20bn of Irish assets over the next eight years. That's €2.5bn a year in a dead market. It is farcical.

Also, there is now increasing doubt over the accuracy of Nama boss Brendan McDonagh's pronouncement that the property market has fallen 57 per cent from its peak.

His figure is at variance with the most up to date figures from the CSO. Since November 2009, when Nama's key valuation was made on the entire loan book, Nama says house prices have dropped by 14 per cent. The CSO says the drop since 2009 has been 30 per cent.

The website Namawinelake.com has asked: "Why would Nama be saying today that property only declined by 14 per cent since November 2009 when mortgage-transaction prices have fallen 30 per cent? Might Nama be trying to minimise the impairment costs it takes in its accounts in 2011, possibly to avoid a further injection of capital from the State?"

But there is also a mounting level of legal actions before the courts which have severely damaged Nama's intended objectives. Defeat to Paddy McKillen is said to have cost €7m in legal fees but it also lost the ability to assume control of his loans. Then 10 days ago, the High Court found against Nama in its quest to place Treasury Holdings into receivership.

And for all the loud boasting about its billions of sales, Nama had only booked €2.7bn to the end of September 2011, according to Michael Noonan. Nama has made a profit of only €132m on these sales, from better quality assets in markets where prices have improved since 2009.

It has emerged that €55m has been extended to 41 developers in "overheads" including their salaries. That's €1.3m per developer, far in excess of the average €70,000-€100,000 figure stated previously or the €200,000 salaries paid to two developers.

So what should be done now?

Firstly, Nama in the short run must sell assets at open market value, abandoning its position that it only sells at the 2009 price it paid. Establish a floor in the market, as Noonan said 16 months ago.

Secondly, in a moribund mortgage market, Nama can play a pivotal role in facilitating capital investment through a range of schemes aimed at investors, who could take control of much of Nama's asset portfolio (this idea is different to Nama's daft idea to underwrite loans in individual cases).

These two elements combined would revitalise the market.

Thirdly, it must also remember that it is an asset management agency and not a debt collector as its creator Dr Peter Bacon has repeatedly said. This means it needs to be far more flexible in its business plan and focus on more medium and longer-term targets as opposed to short term, narrowly focused ones.

Fourthly, given that Nama's monthly turnover is greater than the annual budgets of eight government departments, the time has come to consider having a minister solely responsible for Nama.

Ultimately Ireland cannot afford for Nama to fail, which it clearly is at the moment.

As things stand, based on the further decline of property values, it can at best recoup between €24bn and €26bn, which would realise a loss of between €4bn and €6bn to the taxpayer.

That cannot be allowed to happen and there is still time to change things.

The greatest success for Nama would be a restoration of some normalised property market and normalised credit lines, which would return the devastated domestic economy to growth, thus creating jobs.

It must also abandon its current course of being a debt collection agency, which it was never meant to be.

If it fails to do so, Ireland's lost decade which the IMF has warned about, will undoubtedly become a reality.

Sunday Independent

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