Thursday, September 17, 2009

NAMA: we all live in negative equity

Two things caught my eye this week, the obvious, the second of which was NAMA, and the valuations of the loans involved (and most interestingly, the proportion of bank loans to which weach institution contributes). The interesting thing for me is that indeed, what we were told appears to have been almost true in some cases - construction WAS the economy. But nobody seems to have pointed out the obvious in the case of PTSB, and even to some extent AIB and others - for the more "mainstream" banks, development loans were NOT and are not the bulk of their lending. Indeed, PTSB is not involved with NAMA at present - interesting considering that the entire basis of PTSB was largely based on residential lending - was there a policy of not engaging in the commercial side of this business? Rather interesting, if this is the case. PTSB I would guess would still have a large portfolio of delinquent residential loans, none of which will come under NAMA as it stands, and would surely be hit, sooner or later, by a large swathe of mortgage back payments, as they did offer 100% mortgages at a rate of 5 times the (single) applicants incomes, and more. You have to wonder what business strategy PTSB is taking on this area as its been a deafening silence from the government and banking industry, except for a "deal" which disables lenders from pursuing delinquent residential borrowers for as much as a year (how this pans out for the banks will be interesting).

Anyway, the obvious is now clear - the "haircut" which NAMA promised is about 30% of the book value of the loans. What isn't obvious, and this brings me to my other interesting case of the week, which is the ongoing saga with Liam O Carroll's Zoe group of companies and their repeated efforts to place the company in Examinership rather than the windup which their main creditor, the non-NAMA/State Guarantee protected ACC bank, would prefer. It brings back really to earth the whole NAMA saga and how good it really is for the banks. Ok it effectively does give them money for "old rope" of developer loans to companies not unlike Zoe who effectively may also be on the verge of bankruptcy, so does that effectively mean that the Irish government and so the taxpayer, has just bought a load of bankrupt companies and valueless property-based assets? The question isn't clear.

Now it was my original impression that NAMA was effectively a kind of state-backed debt collector who would take the toxic loans off the balance sheets of the bank, in reward for a slightly reduced value (which is effectively what a lot of debt management companies do in the end, "selling on" non-performing loans at a loss). But what happens if there is nothing there to collect? As is the case in Zoe - why the courts can tolerate an effectively bankrupt company crawling through appeal after appeal where clearly there is nobody going to pay for it is deeply questionable to start with. And you've got to wonder if the other big foreign players in the Irish market - RBS, Danske Bank and others - are watching carefully.

The flip side of this is assets outside of the Irish Republic which are also sagging in value but heavily leveraged. The other day a series of questions were asked in Stormont as to how NAMA will impact the construction industry in Northern Ireland. Its a pity, indeed, that the NI ministers did not take action 10 years ago to prevent the massive overvaluation of property and land to creep accross the border, not only massively overvaluing land-based assets but adding hugely to the cost of living and doing business in Northern Ireland also. This today still isn't really fully recognised as the key reason why Ireland is, remains and will continue to be uncompetitive on the global stage.

The reason it isn't recognised, I suspect, is because of the process of "averaging" that goes on in the CSO and other bodies which assess such things. My Godparents paid about 50 pounds a month for their mortgage. My parents around 500 pounds a month, and later, its euro equivalent. My ex was paying as much as 1000 euros a month on a fixed rate, an eye-watering 40% of monthly after tax income. But when Mr CSO comes along, the "average" that would result from combining all 3 of these loans would be a mere 566 euros a month. And thats the figure that will end up in the likes of the FT and the Economist.

The obscene rents are a different situation, because the lack of rent controls, market normalization and the plain shanty-town standards of the residential private rented sectors (causing frequent moves) not to mention naked greed of residential landlords show a much more realistic market assessment of what people are actually paying out in rents nationwide. Again the low market demand (with the inevitable subsidy of rent allowance to welfare recipients) in many rural areas will be matched by higher market levels and pure market terms in high demand urban regions. Here you do see the "real world" rents paid by real people (though you rarely see real world impacts and to what extent the rented sector is a reflection of choice or compulsion for middle to lower income earners who may be completely priced out of the property market or locked out of borrowing due to personal circumstances). Its also not fully obvious how this disproportionately hits younger people, and how the rented tenancy population is creeping higher as more 30 and 40 somethings find themselves locked out of the hopes of ever owning their own homes.

I've noticed in my local area, traditionally a very impoverished area mostly housing rent subsidized tenants and low earners paying extortionate rents for very poor quality small units that there has been a quiet sea change of late. Until a few months ago it was virtually impossible to park a car on the terraces around me, due to most of the parking being permanently occupied by unmoving cars owned by non-working rent subsidized tenants in the "shanty-town" terraces in the centre of the terrace.

With some of the shanty-town units starting to become increasingly occupied with African ex-asylum seekers who appear to have a particular fetish for motor propelled vehicles it had become almost impossible to find a parking space. Then suddenly, over the last 3 or 4 months, either the owners were selling the cars or moving away. There were a couple of people who moved due to a particularly high level of car theft and vandalism targetted at the kind of less secure, pre-standard immobilisers and anti-theft systems you find as standard in most post 1999 vehicles. (One poor man had a car stolen 5 times - and returned to him 5 times!!) Its becoming obvious that with higher contributions to rent subsidies and lower upper thresholds on rent, that RA tenants seem no longer able to afford the semi-luxurious (if still squalid) lifestyles they once might have almost been able to enjoy. They appear to be selling the cars, moving to cheaper locations or just not buying them in the first place. (There always was a serious question in any case as to how somebody with a sole income of social welfare could have had sufficient disposable income to buy and run a car - but actually if you have a bit of prior savings and don't use it much, you probably can run a banger for very little).

Now its possible for me to arrive home at 10.30pm on a weekday night after choir and STILL find a parking space. Coming home after 6.30pm isn't the nightmare it once was - often there are 3 or 4 spaces staring me in the face. The double yellow lines opposite the terraces are now almost always clear, and not just because of some very aggressive targeting of them by the parking wardens some months back (though I suspect this might have "driven away" many RA tenants who I can't imagine affording the 80 euro declamp fee too easily). I suspect also, fewer residents of surrounding areas are using our terrace as a free car park, having noticed the high proportion of break ins, thefts and burn outs (bonfire night last week brought the misfortune of 2 more burn outs on the terrace around the corner). Now I do pay my 10 euro per year (and the accompanying nightmare of collecting no less than 8 pieces of documentation due to heavy handed discrimination against tenants by Cork city council) to have a H-zone permit which enables me to park around Sydney Park, and as far away as Patricks Hill as well as lower Wellington Rd, but I really don't need to use it (which is rather fortunate as vehicle crime is the same in the whole locality).

So I'm noticing the obvious - a big squeeze on rents caused by lower government subsidies, falling incomes and personal indebtidness. I was quite shocked recently to apply for a fixed-rate monthly payment mobile phone and get rejected by 3 Ireland. (Its some years now since I missed any loan repayments and I owe less than a third of what I earn in total, most of it on a car). There is a real squeeze on borrowing, especially borrowing from people like myself who a year or two ago didn't find it hard to find somebody willing to lend to them for reasonable amounts. Apparently a large problem in the residential market is no longer a shortage of buyers, but a shortage of lenders willing to lend enough to borrowers who can well afford to pay (subject to still having a job of course).

This is the big problem with NAMA. Its just assumed that a large injection of cash into the banking system will not simply be absorbed as profit, rewards to shareholders, awful directors and as future investment income, and passed on to the consumer and business owner in Ireland as new cash for lending. There is zero obligation indeed on the banks to do anything with this extra injection other than do exactly what they like with it. And in the absence of that, I can hardly see a far more risk averse Irish banking system suddenly starting to repeat the foolhardy risks of the past, especially with unemployment and business shutdowns sky rocketing.

On the other hand, how realistic is it that NAMA will realise the repayments of borrowers such as Zoe Developments, who are clearly bankrupt? And if they do get aggressive and heavy handed and try to force such borrowers to pay back, this can surely have the unintended consequence of the borrowers cynically passing the cost back to the business tenant, already sequeezed by high costs and extorionate rents. Already this year, there are many anecdotes of commercial landlords doubling already obscene rents to business customers, no doubt expecting them to subsidise the losses of shutdowns and vacancies. This is simply unsustainable and will only hasten the inevitable day when Berlin has no choice but to take over the running of a bankrupt Irish economy.

The emperors have no clothes, and it seems now that we have now locked in the inevitable consequences of 12 years of massive spectulator excess - high rents, high property prices, high costs - and the inevitable is the end of Ireland Inc as a viable commercial centre and I agree with David McWilliams assertion that we have just created Japan's zombie cousin in the Eurozone - if the Eurozone will keep us, of course.

No comments: