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National Asset Management Agency (NAMA) National Asset Management Agency (NAMA) and the Irish Housing Crisis Problems and Solutions By: Robert Curry, MBA Class of 2011 Contact Robert Curry Harvard Business School MBA Class of 2011 MBA Class
National Asset Management Agency (NAMA) National Asset Management Agency (NAMA)
and the Irish Housing Crisis Problems and Solutions By: Robert Curry, MBA Class of 2011
Robert Curry Harvard Business School MBA Class of 2011 MBA Class of 2011 Email: rcurry@mba2011.hbs.edu Tel: +1 860.538.1154
For the 12 years preceding the crash, the Irish economy experienced rapid expansion. Following the freeze-up of international banking markets in 2007/08, Irish banks no longer had the liquidity to fund operations The real estate market subsequently collapsed and had the liquidity to fund operations. The real estate market subsequently collapsed and the Irish government stepped in to create the National Asset Management Agency (NAMA) to relieve banks of their bad assets so that the banks could begin lending again. This was a necessary and unavoidable step. NAMA has faced much public criticism as it appears that banks and developers received a bailout not available to the general public. Several other countries including the US, Sweden, and Japan faced similar crises in the past. The countries which most successfully addressed these problems acted swiftly and with broad political support The countries which had less success were often slow to act broad political support. The countries which had less success were often slow to act. Learning from these past crises, local communities need to approach NAMA and property
These plans should be as specific as possible. plans should be as specific as possible. NAMA must accept and prepare for the owning and disposing of large amounts of real estate assets rather than just loans. In addition NAMA must address its poor public image and misinformation in the press. Seller financing should be used to jumpstart the market. The government must address antiquated bankruptcy laws. The government should also abolish the stamp duty on property and introduce an annual property tax. This should increase liquidity in the housing market. In addition, the government should create a debt e t t ing pl n fo indi id l homeo ne b ed on net
nd bilit to p The restructuring plan for individual homeowners based on net worth and ability to pay. The moratorium on foreclosures is only delaying the inevitable and creating further illiquidity.
– 1995-2000 GDP Grows 9.5% – 2000-2008 GDP Grows 5.5%
At peak new construction accounts for 12% of – At peak new construction accounts for 12% of GDP
– Banks have trouble financing operations Banks have trouble financing operations – Banks stop lending
2010 to Q3 only Source: 5
b k t bl t fi d il ti banks are not able to finance daily operations
g go into default Government steps in to recapitalize banks
– Essentially nationalizes 5 major banks
– deposits & bank bonds – deposits & bank bonds
established to deal with non-performing loans established to deal with non performing loans
– Will protect performing assets of bank – “bad bank” called National Asset Management Agency
legislation.
existence
Source: 27
———————— Number 34 of 2009 ———————— NATIONAL ASSET MANAGEMENT AGENCY ACT 2009 ———————— AN ACT— TO ADDRESS A SERIOUS THREAT TO THE ECONOMY AND TO THE SYSTEMIC STABILITY OF CREDIT INSTITUTIONS IN THE STATE GENERALLY BY PROVIDING, IN PARTICULAR, FOR THE ESTABLISHMENT OF A BODY TO BE KNOWN AS THE NATIONAL ASSET MANAGEMENT AGENCY FOR THE PURPOSES OF 10.—(1) NAMA’s purposes shall be to contribute to the achievement of the purposes specified in section 2 by— (a) the acquisition from participating institutions of such eligible bank assets as is appropriate, (b) dealing expeditiously with the assets acquired by it, and (c) protecting or otherwise enhancing the value of those assets in the interests of the State (c) protecting or otherwise enhancing the value of those assets, in the interests of the State. (2) So far as possible, NAMA shall, expeditiously and consistently with the achievement of the purposes specified in subsection (1), obtain the best achievable financial return for the State having regard to— (a) the cost to the Exchequer of acquiring bank assets and dealing with acquired bank assets, (b) NAMA’s cost of capital and other costs, and (c) any other factor which NAMA considers relevant to the achievement of its purposes. NAMA Mission Statement To manage acquired loans, efficiently, effectively and expeditiously and in the best interests of the State. NAMA aims to attain the best achievable financial return subject to acceptable financial risk. It will conduct its activities in a way which assists the property j p y p p y market to operate efficiently and in a way which achieves longer term sustainability while taking account of NAMA’s wider societal
Source: 11& 26
th t b k ti l di that banks can continue lending
– Assets transferred to NAMA are Real Estate backed loans – Assets transferred at a discount to NAMA Assets transferred at a discount to NAMA – By allowing banks to retain performing assets, banks will be free to make new loans banks will be free to make new loans – Ensures banks meet capital requirements
loans
Bank identifies NAMA determines the long term NAMA issues senior and loans that meet transfer standard the long term economic value of these loans senior and subordinated bonds to banks If l b NAMA assumes loan liability NAMA and debtor create business plan for loan* If plan cannot be agreed upon, NAMA takes over plan for loan asset
*NAMA di l k i h 100 l d b b k i k *NAMA directly works with 100 largest debtors, banks continue to work with other debtors.
Source: 26
10% 10% Base Scenario 10% positive scenario 10% negative scenario Estimated Book Value of EstimatedBookValueof loansacquired 81.0 ₭ 81.0 ₭ 81.0 ₭ ValueofBondsissuedto Banks 40 5 ₭ 40 5 ₭ 40 5 ₭ Banks 40.5 ₭ 40.5 ₭ 40.5 ₭ AmountNAMARecovers fromloans 44.7 ₭ 49.2 ₭ 40.2 ₭ NPV of NAMA Profit 1 0 ₭ 3 9 ₭ (0 8) ₭ NPVofNAMAProfit 1.0 ₭ 3.9 ₭ (0.8) ₭ ValueofBonds redeemedbybanks 40.5 ₭ 40.5 ₭ 38.5 ₭
NAMA makes a profit
– Makes banks share in downside risk Makes banks share in downside risk
Source: Compiled from 26
d bt debtors
– Represents the largest exposures by banks – Assumes that banks are inherently solvent and can handle losses from smaller borrowers can handle losses from smaller borrowers
acquired acquired
– Allows NAMA to leverage performing assets to maximizes repayment of non-performing loans
Buys loans at current market price + uplift
Source: 4
– 11,000 total loans from 850 debtors – Top 30 debtors represent €27B in loans p p – Next 145 debtors represent €30B in loans
Tranche1and2(purple)** AIB BOI ESB INBS Anglo Total BookValue 6.02 ₭ 3.75 ₭ 0.18 ₭ 1.26 ₭ 16.00 ₭ 27.21 ₭ TotalConsideration 3.30 ₭ 2.39 ₭ 0.11 ₭ 0.44 ₭ 6.73 ₭ 12.97 ₭ Discount(Tranche1&2) 45.2% 36.3% 38.1% 65.1% 57.9% 52.3%
* As of December 2010 ** Only tranche 1 and 2 data is available Source: 25
DiscountonallLoans 54.0% 42.0% 60.0% 64.0% 62.0% 58.0%
* Investment is any property intended as a rental . These are mainly commercial. Source: Compiled from 25
Source: Compiled from 25
l plans
– Debt restructuring – Restructuring of principle not an option
– Last resort – Receivership process has begun with some
to date
Minimize operating of assets (running hotels, letting apartments etc.)
Year %ofNAMA bonds paid off Year bondspaidoff 2013 25% 2015 40% 2015 40% 2017 80% 2018 95%
2019 100%
has repaid €250M in bonds
– Bond repayments ahead of schedule – Remaining cash used for NAMA operating g p g expenses and working capital loans (€730M to date )
Source: 26 & 4
“NAMA sells Ireland’s tallest building to Google”
and provided working capital for debtor to complete construction.
“Youth found dead in Nama building”
“Nama takes control of INBS-backed London property”
“Nama failing to look after historic buildings in its portfolio” Nama failing to look after historic buildings in its portfolio
Source: 24, 7, & 21
– Public perception that Property Developers and Banks caused the economic collapse
capital loans
– General mistrust:
“Daly claimed that he is aware of one particular UK property, which, apparently, Nama sold for a figure below its market rate to an associate of the original owner who in turn sold the property on at a profit ” market rate, to an associate of the original owner, who in turn, sold the property on at a profit.
“Some had claimed that NAMA – which now controls 83 hotels, having taken over the facilities as collateral for underperforming loans – had used its resources to make the hotel sector overtly competitive, resulting in private p g y p , g p hoteliers having to slash costs and massively reduce profits in order to stay in business.
Source: 22 & 23
d bt debtors
– Government has stopped all foreclosures for the time being, but no long-term plan
worked in banking sector before collapse E S
Opaqueness of NAMA leads to a General misunderstanding of how NAMA works and why it is necessary why it is necessary
– Pushing actions on NAMA outside of best interest
Further Macro Economic declines
– Further significant deterioration in real estate prices could prevent NAMA from making a profit prices could prevent NAMA from making a profit
– People expect more from NAMA then other banks
residential loans that NAMA owns
NAMA t t t ff d t h dl ll – NAMA not set-up or staffed to handle small individual defaults
– Poor construction quality – Unfinished services
completion completion
– Built in areas of low demand
a ed estates t
Bankrupt builders
Legend g
Number of Vacant Units
h h h
in estates with at least two units. This does not include standalone houses not part of a development. not part of a development.
completed units. Its does not take into account dwellings under construction.
Source: 1
Legend
% of complete units vacant
h h h f
units that are vacant in an estate.
include units under construction include units under construction.
Source: 1
Legend
Units under Construction
h h h b f
that are under construction. These are units for which ground has already been broken. been broken.
units is at a standstill.
Source: 1
Legend
% of incomplete units
h h h f
units that are incomplete in an estate.
Source: 1
– Many estates have nothing to do with NAMA Many estates have nothing to do with NAMA
– Very week economy yet strong currency y y y g y
– Single family home repossessions
G l h f l b l
term plan
– Hoping for the sector to improve is not a strategy
dd l l f l d
Tax structure incentives holding land – Tax structure incentives holding land
– Focus on punishment rather than rehabilitation Focus on punishment rather than rehabilitation
– 12 years to get out of bankruptcy
– 276 people jailed for debts in 2008 S t d t di ti i h b t th h t d th – System does not distinguish between those who cannot and those who choose not to repay debts
4 B k t i i 2007 8 i 2008 – 4 Bankruptcies in 2007; 8 in 2008
Discharge of debts is still largely voluntary on the part of lender – Discharge of debts is still largely voluntary on the part of lender
Source: 20
US Sweden Japan Ireland External Factors ExternalFactors PreCrisis:Consolidated BankingSector X X TroubledBanksPreserved Few Some Some PoliticalandPublicSupport X X Some Interest Rates Moderate High Low Moderate InterestRates Moderate High Low Moderate Actions SwiftandTimelyAction X X X Consolidatebanks X X X X d RequiredManagement Change X Major Social Policy MajorSocialPolicy Incorporated X
$924B in assets $924B in assets
– Equivalent to 1 failure every other day for 15 years! – $168M in assets to be liquidated or resolved every day! $168M in assets to be liquidated or resolved every day!
conservator and receiver of assets Triple Mandate: conservator and receiver of assets. Triple Mandate:
– Conservator: “take control of failing institution to preserve assets and protect depositors” – Receiver: Take control of bank assets (loans) and dispose of them to maximize value Social: Preserve affordable housing held by receiverships – Social: Preserve affordable housing held by receiverships
Source: 10 p6.
– Limited assets passed on to acquirer Limited assets passed on to acquirer – Change in policy from previous failures – Asset and liability sales generally separate
– Securitized loans to speed up sales – Broke assets into small pieces to increase competition bidder participation and flexibility
goals
– By Dec. 31, 1995 over 100,000 affordable housing units sold y , , g
– Transparent process – Partnered with local and national private firms for auctions, etc.
Source: 10 p13-28
– Placed loans into pools based on geography asset type quality and Placed loans into pools based on geography, asset type, quality, and maturity – Used private contractors for all selling phases
– RTC provided seller financing. – Sealed Bids
A ti – Auctions
– Took away negative perception of auction; Drove up prices
Source: 10 p28-39 & 28
l (b k l ) loans (book value)
p disposing of the asset as quickly as possible Allowed the RTC to remove itself from the
management of the assets while maximizing long-term value for taxpayer
All types of assets included
– General Partner, often a collection agency
Source: 10 p40-42
f il h ld family homes sold
Property had to be used for public good – Property had to be used for public good
M th 1000 t d t d
– Cost of this program unknown, est. at $135M
the program the program
Source: 10 p36-37
sector increased credit sector increased credit availability and drove up real estate prices up real estate prices
housing prices housing prices
( 00%) d b l k (500%) caused by link to ECU basket
– Once krona floated, substantial depreciation
Source: 29
– Government guaranteed all deposits
– Determined long term condition of all banks – Determined long term condition of all banks – Hammock Approach
support
support but is viable in the long support but is viable in the long term
Source: 31
t bli h d it i established criteria
– Market value not “panic sale value”
p y y
up to deal with loans up to deal with loans
– Repackage loans and sell – Foreclose on and sell property – Maximize value
Source: 15 & 16
Supports banks and d it ( b k Separate entity from bank that assumes depositors (eg. bank guarantees) bank that assumes bank loans (can be public or private) Solves structural Converts loans to t ( l d Solves structural problems with banks (eg. forces mergers) assets (real and financial) and sells them them
Source: 16
Ireland
– Some action is better than no action Some action is better than no action
Currency deflation to cushion the real value of loss
– Be careful: If too large can cause even bigger problems Be careful: If too large can cause even bigger problems
k – Quick macroeconomic recovery
sector increased credit sector increased credit availability and drove up real estate prices up real estate prices
l d i up land prices
– High transfer tax – Low property tax
economic stagnation
– Near 0% interest rates
Source: 12
the banks with public funds p
– Politically impossible: Proposal abandoned
I f t t di ti l i t d
y y p
– Banks would not write down the value of loans
– Similar to Sweden
Source: 12 & 13
holding onto property g p p y
– “Its cheep to carry, the value will come back soon!!” soon!!
ill willpower
Lack of immediate direct action
Source: 13
– Financial and physical
– Clearly layout financing requirement to NAMA y y g q
eyesores eyesores.
p g p undeveloped land
– Hope (for debtors) is not a strategy
fl d h ll f h f
NAMA than a business plan that ultimately fails
Work with local real estate firms to figure out – Work with local real estate firms to figure out best method of disposing of each property
– Provide guarantee for bank issued financing (or seller finance) seller finance)
– Take equity share in sales properties (RTC)
– Increase public relations and explain why you are – Increase public relations and explain why you are the good guys. C t i t t bli – Create a consistent public message
Don t confuse bank and real assets in Public Relations
Live up to public expectations
“NAMA is an asset management agency, not a “toxic” or “bad” bank.” – NAMA Business Plan, 30 June 2010 “Now I have said that NAMA will acquire bank debts rather than the underlying secured assets…”- Peter Stewart speech to N.I. Econ. Conf.
– Live up to public expectations
Source: 26 & 30
– Accept the fact that NAMA will have to own and briefly manage significant amounts of property
in this ready to mobilize
– Recognize that many properties are in rural locations where demand may NEVER come back
half-built estates into more viable locations
– For more difficult properties, partner with local communities to establish best use – Offer local community/ county council right of first refusal (at market price) for public use ( p ) p
home, hospital, etc.
– Recognize that not every property will recover your investment; Donate low value property to d f l community or NGO on condition of a plan
– Provide below market financing for community based projects
iti punitive
– The debtor doesn’t want to be bankrupt either – More money is recovered in reformative systems
US Chapter 7 and 11
mo tgages mortgages
– Post crash, houses should serve as enough collateral
Look to UK, Individual Voluntary Arrangement (IVA)
Source: 20
h hi St D t changes ownership: Stamp Duty
– First €125,000: nil – Next €875,000: 7% – Balance: 9% Balance: 9% – First time home owners and small owner
– Additional 13.5% VAT on Commercial home sales
Source: 32 & 33
l t t l real estate sales
– Introduce annual property tax (Rates) to make up lost revenue
– Encourages liquidity in property market
Exempt owner occupied homes
– Removes popular resistance to plan
l f ll tili d t t nearly fully utilized estates
harming residents harming residents
May be seen as favoritism by population – May be seen as favoritism by population
l t l long term plan
g g g reflect individuals ability to pay and LTEV Index to individuals net worth and income
y p
– Dangerous, unsightly
Tax introduction could harm economy
John Driscoll, International Centre
Keaveney Harvard Business School for Local and Regional Development Keaveney, Queens University Belfast p Barry Wides, Barry Wides, Office of the Comptroller of the Currency Stefan Ingves, Riksbank Göran Lind, Riksbank Currency David Proctor, NAMA Jonathan Fiechter, IMF
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