Should NAMA help people to buy houses from developers?

[Brendan Burgess]

There is another thread on this, but I thought it would be useful to do an Opinion piece on it.


Summary
NAMA should make finance available to people who can’t get finance to buy homes from NAMA developers but on normal mortgage terms. It should not provide price guarantees or non-recourse loans.

This should be the first step. If this is not enough to get the unsold properties moving, then NAMA could consider more dramatic measures.

Detail

Say 100 builders have a stock of 10,000 empty houses worth €100,000 each

Builders owe €1 billion to NAMA. These loans are not performing because the builders are not earning anything.

10,000 people want to buy these houses but can’t get finance because the banks are not lending

NAMA lends these 10,000 people €100,000 each.

They use this money to buy the houses from the developers who repay their loans to NAMA.

NAMA now has 10,000 performing loans instead of 100 non performing loans.

10,000 people have houses

10,000 houses are occupied and are being maintained.

Ghost estates are now more fully occupied.

What price should NAMA builders sell the houses at?

I say that they are worth €100,000 each for the purpose of the example.

But if people can’t get loans, they are not worth €100,00 each.

However, if people can get loans, they may be worth more.

The builders or receivers probably need to discount the houses.


Does this distort the market?

The effects of interventions of this type are very difficult to predict.

If people can get money to buy “NAMA” houses but can’t get it to buy non-NAMA houses, then the price of non-NAMA houses would fall in comparison to NAMA houses. Good for NAMA but bad for the rest of the market.

The oversupply of houses would be reduced by 10,000 which is a good thing for the market in general.

If NAMA is replacing loans to developers with loans to PAYE workers, then it is not diverting money from the non-NAMA houses. It’s simply adding to the money available to buy houses which is good for a market which is deprived of cash.

If NAMA simply makes finance available on normal terms, then that would not distort the market.

If NAMA gives favourable terms, e.g. 100% mortgages, non-recourse loans or price guarantees, it would distort the market. It would also put the taxpayer at risk.

Will this be enough to get buyers back into the market?
Making money available should boost the market to some extent.

Those who are scared that prices will continue to fall further won’t be tempted back in.

If it doesn’t have a significant effect, NAMA could consider non-recourse mortgages.

Other issues
NAMA wouldn’t lend the money directly to house buyers. They would have to do it through one of the existing lending vehicles. The EBS could be a good vehicle for this.

NAMA doesn’t want to make 30 year finance available, but it probably has to.

 

[z107]

Government interference got us into the mess we are in. (Tax incentives to buy property, guaranteeing the banks, NAMA, bailing out banks etc, etc...)

At this stage, free market capitalism should be allowed to take over. Let the banks fail. Let new banks be created and allow property to be sold at the price determined by an open, free market.

Tinkering will just make our problems worse.

 

[Brendan Burgess]

Given that it is government policy not to let the banks fail and given that we have NAMA, the question is should NAMA help people buy houses from developers?

 

[Chris]

Government interference got us into the mess we are in. (Tax incentives to buy property, guaranteeing the banks, NAMA, bailing out banks etc, etc...)

At this stage, free market capitalism should be allowed to take over. Let the banks fail. Let new banks be created and allow property to be sold at the price determined by an open, free market.

Tinkering will just make our problems worse.

I could not agree more. I just don't understand how a government created problem can be solved by more government intervention. It is a perfect example of Einstein's definition of insanity: "Doing the same thing over and over again and expecting different results."

Given that it is government policy not to let the banks fail and given that we have NAMA, the question is should NAMA help people buy houses from developers?

The majority of people that are unable to get mortgages probably shouldn't get one. Using NAMA to provide mortgages to these people is akin to encouraging sub-prime lending. Providing these loans will also artificially increase the demand and therefore price of NAMA properties. People would be better served if these properties were put on the market at whatever price attracts most demand, i.e. the market clearing price, allowing them to pick up a property at a cheap price rather than with a higher mortgage.

 

[Gekko]

The majority of people that are unable to get mortgages probably shouldn't get one.

That's not true.

I know people who've been refused mortgages for ludicrous reasons.

One guy in particular comfortably satisfied the income and debt criteria. He was turned down because he bets on each of golf's Majors. The bank saw the money going out of his account during the Masters and told him that the credit control department couldn't sanction the mortgage as a result. We're talking about four relatively small bets every year.

 

[z107]

Given that it is government policy not to let the banks fail and given that we have NAMA, the question is should NAMA help people buy houses from developers?

Absolutely not.

1. It's yet more government interference.
2. There is bound to be corruption.
3. Such a scheme sounds like we're yet again kicking the can down the road.

 

[Chris]

That's not true.

I know people who've been refused mortgages for ludicrous reasons.

One guy in particular comfortably satisfied the income and debt criteria. He was turned down because he bets on each of golf's Majors. The bank saw the money going out of his account during the Masters and told him that the credit control department couldn't sanction the mortgage as a result. We're talking about four relatively small bets every year.

Knowing one guy does not make the statement untrue. I met my local bank's branch manager a few months ago, and he told me about the amount of people coming in for loans and mortgages as if the credit crisis hadn't happened. He told me of one guy getting into a rage because he was refused a mortgage of €350k on one salary of €45k with credit card, credit union and car loan debt of €40k.

A friend of mine recently got a mortgage for 3 times his salary based on a 75% mortgage, and he said the mortgage adviser was almost kissing his feet. The reason people are being refused mortgages is because they are expecting unrealistic deals based on what used to be common practice and are not proving themselves to be of high credit worthiness.

As for your friend, look at it from the bank's perspective. If they have the choice between two identical applicants, but one of them places the odd bet, who do you think they will classify as a higher risk. All they can see is his online gambling, but they have no idea what other bets he places. But I take your point, credit is a lot stricter than it was, and it may seem unfair, but that does not mean that the now strict credit criteria are wrong.

 

[Howitzer]

I could not agree more. I just don't understand how a government created problem can be solved by more government intervention. It is a perfect example of Einstein's definition of insanity: "Doing the same thing over and over again and expecting different results."

Affordable Housing Scheme = fail
Home Choice Loans = fail

NAMA finance = fail.

 

[One]

I don't know how or why people can say that a government created problem can not be solved by government intervention. That is a broad and incorrect generalization.

I don't know the answer to the original question but I do think it is a real good question and it certainly merits discussion, even at parliamentary level and with people in the construction industry as well.

 

[jpd]

Surely, the problem is that the builders owe NAMA 1Bn = 10,000 * 100,000 but the properties are now only worth 50,000 each or 60,000 maybe so why would anyone in their rigth minds borrow 100,000 (off NAMA or any other bank) to buy them?

 

[jpd]

Further question is where would NAMA get the money to lend to the house buyers?

 

[FioBi]

I agree that at the moment NAMA is stuck with large loans that are not being repaid as developers are not selling anything and therefore from NAMA's point of view yes it would be beneficial to spread the risk out amount a 10000 borrowers rather than 100 developers. I never understood why the banks did not pursue this policy in the first place before NAMA came to town.

From the borrowers point of view it I think that non-recourse loans at market rates would entice people to start looking at property again as at least they can walk away from it if anything goes wrong. The loans should be given via existing institutions with NAMAs backing and allow the institutions to purchase the loan book at a future date.
Borrowers should have to provide 10% - 15% deposits and be able to borrow at normal market rates.

At the moment there is no market so anything that gets things moving and hitting bottom is to be welcomed as no matter now far down the bottom is no one is going to start any confidence in the economy unless property bottoms out and start ever so slowly to rise again. It would be so much better for people paying mortgages to see a slight reduction in negative equity rather than on a monthly basis seeing the situation getting continually worse.

 

[Chris]

I don't know how or why people can say that a government created problem can not be solved by government intervention. That is a broad and incorrect generalization.

Government intervention caused the problem by distorting the market. Now the solution is to further distort the market with further government intervention? It is a perfect example of Einstein's definition of insanity.

At the moment there is no market so anything that gets things moving and hitting bottom is to be welcomed as no matter now far down the bottom is no one is going to start any confidence in the economy unless property bottoms out and start ever so slowly to rise again. It would be so much better for people paying mortgages to see a slight reduction in negative equity rather than on a monthly basis seeing the situation getting continually worse.

You are absolutely right that things won't improve until the market hits bottom, and all markets find their bottom eventually. But putting an artificial bottom into the market by artificially increasing demand is no the answer. People would be much better served if they could pick up NAMA properties through liquidation sales with no reserves.
There was an auction in Dublin a few months ago where reserves were extremely low, and out of 84 properties only 2 were not sold. A similar auction in Cork where reserves were quite high resulted in 2 out of 63 properties being sold. This perfectly demonstrates that properties are not selling because the prices are simply too high.

 

[Purple]

I am against the idea for the reasons that Chris has outlined. I would add that until the debate about debt forgiveness has been concluded, hopefully with the conclusion that’s it’s a stupid idea for the state to have a policy on this issue, then there’s no way a state body should be giving out loans to people that state owned banks have declined.

On a general note it’s about time that people realised that low property prices are a good thing. The lower they go the better. The last thing an economy needs it capital being invested in non-wealth generating assets. As long as the property market remains flat the cost of doing business stays low and investment is attracted to sectors that create wealth and generate export income.

 

[amgd28]

I'd agree broadly with purple here. Interestingly though, I read a blog yesterday from a solicitor that a recent experience suggests that NAMA are effectively preventing a young couple from buying a home by having an unrealistic pricing position on it.
Link is here:
(Note I have dealt with the solicitor in question for many years so if that's a conflict, consider it declared - thought it was pertinent to this thread though)