Lenihan said paying excess values, would not be countenanced by Government and would not pass muster with the EU Commission whose approval for the valuation process will have to be obtained.
He said at the outset it is important to remember that, based on information supplied by the financial institutions, the borrower typically provided about 25% of the purchase price for the underlying asset and borrowed the other 75%. Thus, in the event of repossession, prices have to fall by more than 25% from the peak of the market before the bank makes any loss at all. Lenihan said we are all aware that prices have fallen more than that but the first 25% loss will be the borrowers and this is being lost in the commentary by some contributors to the NAMA debate.
The valuation process will operate as follows:
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1. Independent valuers will value the security for the loan -- and the security may often be more than the property purchased. Valuation will be in accordance with recognised red book valuation standards, European valuation standards, or International valuation standards, as appropriate.
2. Following the valuation of the security, and in line with the Commission’s guidance, NAMA will adjust the value to reflect the fact that the market for this security is currently illiquid but will not remain so. This recognises that these assets are at crisis values and that the fundamental long term value having regard to cash flows and longer time horizons is appropriate.
3. The adjustment will be based on a detailed assessment of market indicators such as the Department of the Environment Housing Statistics Bulletins as well as broader macroeconomic statistics from sources such as the CSO and the Central Bank. It will also have regard to data in relation to property yields and capital value movements in the past.
4. This property valuation information as adjusted will then form the basis for the calculation of the loan value.
5. The loan will be valued based on current mark to market pricing to establish the loans current market value.
6. The loan will then be priced by reference to NAMA’s cost of capital to calculate its long term economic value. The overall value will be adjusted by reference to adjustment factors and expert reports set out in sections 58, 59 and 63 of the draft bill.
However, it is very likely that part or the whole of the deposit paid in respect of many loans, was financed by another loan.
SEE: Loan-to-value discussion on the Irish Economy Blog for more information.
ECB Opinion on NAMA - - issued Monday.
“Some institutions may need capital after they have transferred loans to NAMA,” Lenihan said but he ruled out a blanket nationalisation of the country's banks.
