Is NAMA for Defaulted loans only?

Kiniska

I'm confused, If NAMA is taking away the toxic loans from the banks, then I assume they are loans that have been defaulted on by the borrower, but this isn't clear? I would assume that if there is over 9 Billion in unpaid interest then the original borrowers shouldn't have any claim to any of these toxic loans. I know if I fell behind in my mortgage by 10% of those proportions it would no longer be my house. So assuming these developers that had these toxic loans bought the properties with at least 10% down (although I couldn't get any loan for my house with less than 20% down) and then NAMA buys these properties off of the banks for an additional 30% discount.
For example if land was purchased for €1,000,000 and the developer paid 10% down, then the outstanding balance is €900,000 and if NAMA gets an additional 30% discount on that property with the banks taking a loss of €270,000 then NAMA should be paying €630,000 for the property. Now that property might only be worth €300,000 now, but in 10 years time it will probably be worth more than the €300,000, but not necessarly ore than the cost of €630,000. This isn't a great deal, but it could work (with all the risk on the tax payer), I also think it should be more of a 50% discount and that's not including what has already been paid. What I'm unsure about is what happens to the developers and what are their responsibilities, are they required to anti up whatever they have first, in the future will they have any claim if the propoerty appreciates against loans that should been defaulted??

Am I missing something???

Bozacke

Can someone confirm this?? What happens to the Developers who haven't paid their loans on time, does NAMA give them a free ride or do they loose their original investment, however small it may have been? If so, then does the 30% discount include the original down-payment by the developer??

ifconfig

Kiniska wrote: »

I'm confused, If NAMA is taking away the toxic loans from the banks, then I assume they are loans that have been defaulted on by the borrower, but this isn't clear? ...
Am I missing something???

Kinska :

The banks rolled up a lot of unpaid interest with these loans because it has been argued that they (the banks) would have been insolvent (i.e would have fallen behind on their capital base requirements) if they allowed the developers to become insolvent. The banks are in effect (I say are because NAMA isn't yet passed legislation) held captive by the risk of having to completely write down these loans on their books.

I think the appropriate proverb in this case is

"“If you owe a bank thousands, you have a problem; owe a bank millions, the bank has a problem”

(the modern equivalent of this can be revised by a factor of 100, if not on both sides at least on the side of the big borrower)

Much of what you say would make sense if letting the banks fail was not a constraint. Politically a decision has been taken that the banks cannot fail. Also another decision (by FF/Green) has been taken to avoid nationalisation of the banks at all costs. So the loan purchases and discounts to the banks have been tweaked to achieve that objective.

I am not surprised that you find the whole idea counterintuitive because morally nearly everything you say IMO is correct. The problem is that once it has been determined by the politicians that the banks are too large to fail then comparisons to how you would have been treated if you behaved as irresponsibly and didn't pay your loan interest, etc just break down.

A huge debate still rages , though, as to whether nationalization or good-bank alternatives might have been a fairer and more effective way of doing this but that's another days discussion.

As for the developers and their deposits (or equity) and what happens if they default when their loans are overseen by NAMA. They will legally be held as accountable for defaulting on their loans as they would have been if their loans remained to be owned by the banks. Deposits would be lost just the same as if your loan was forclosed. It's more complicated than that , of course because, anecdotally many developers didn't use cash for their security or deposit. They used other assets or shares or suchlike (cross-collateralization) to secure their original loans with the banks.

ifconfig

Bozacke wrote: »

Can someone confirm this?? What happens to the Developers who haven't paid their loans on time, does NAMA give them a free ride or do they loose their original investment, however small it may have been? If so, then does the 30% discount include the original down-payment by the developer??

The 30% discount is of no relevance to the relationship between the banks and the developers or (post-NAMA) between NAMA and developer.

Actually it will turn out, alas to be more like 20% to AIB and BOI based on their press releases and the conclusion that Anglo will get a disproportionate haircut.

This haircut figure is only of relevance to the discount on the original book value of the loans being bought over by NAMA. It also determines how much of the original loan value the Banks will have to writedown as unachieved amounts on the original loans in their accounts. It leaves the banks with a hole in their balance sheets - one a fair deal less than was originally mooted, by the way.

The developer is still bound by the original terms of the loan so NAMA has the right to chase them as if the loan had never changed hands. In this sense, NAMA isn't to be seen as a bailout for developers. There will be a fund of 5m + some discretionary amount for NAMA to cherrypick particular uncompleted projects and to engage creditworthy developers to assist in their completion. I suppose, in this sense this is a not too insignificant stimulus to the ailing construction industry.

Kiniska

Thanks to all the clarification! But it's still very confusing and counter-intuitive.

"They will legally be held as accountable for defaulting on their loans as they would have been if their loans remained to be owned by the banks." But since the banks don't seem to be holding the developers accountable for defaulting on their loans, then NAMA may also let them fly. To me these are the questions Cowen and the boys should be answering.

I understand why NAMA seems to be the best alternative, but I'd only agree with it if all are held accountable for defaulting on their loans and more than just the deposits and the property seized from defaulted developers, but any other collateral, although we know most have played the game well and moved all assets into other names. Also the haircuts shouldn't be only 20%, but at least 50%.

Slozer

Who is going to pay for NAMA chasing these defaulters, court battles etc?

SkepticOne

Kiniska wrote: »

"They will legally be held as accountable for defaulting on their loans as they would have been if their loans remained to be owned by the banks." But since the banks don't seem to be holding the developers accountable for defaulting on their loans, then NAMA may also let them fly. To me these are the questions Cowen and the boys should be answering.

Cowen would tell you (once he has figured out that that is what you want to hear) that NAMA is going to get tough with the developers. However I think you are correct that the same reasoning that the banks used to avoid going after developers will be used by NAMA. To persue a developer would mean to have all the developers assets forced on to the market thereby putting a price not only on the developers own land but that of other developers.