The National Asset Management Agency (NAMA), the Irish State toxic property loans agency, confirmed in a business plan on Tuesday that the percentage of loans which are generating interest is only at 25% compared with an expected 40% level. The agency said estimated profit/loss scenarios range from a profit of €3.9bn to a loss of €0.8bn.

The plan published on Tuesday updates and revises the interim business plan published in October of last year which was prepared on the basis of information supplied at that time by the five financial institutions (Anglo Irish Bank, AIB, Bank of Ireland, EBS and Irish Nationwide) and in advance of the detailed examination of any of the key loans by the agency.

The latest plan says that the original draft plan of last October, included projections of a Net Present Value (NPV) gain (profit)  of €4.8bn arising from NAMA’s activities over its expected 10-year lifespan and its acquisition of  €81bn in property loans from the banks: "This was based on information available from the institutions in October 2009. In the interim, it has become clear that some important underlying assumptions provided by institutions were, in many cases, overly positive e.g. loan-to-value (LTV) ratios and the proportion of income-producing loans. In the case of the latter, the draft Plan assumption was that 40% of acquired loans would be income-producing; however, the level of debtor impairment evident from the first tranche loan transfers suggests that 25% may be a more reasonable estimate. Similarly, the actual LTV ratios that have become evident during the Tranche 1 due diligence process have been higher than those indicated by institutions last autumn."

In the revised plan, NAMA has produced a number of NPV scenarios based on a range of assumptions about the level of recoveries that NAMA can achieve from its assets, both the loan assets it will initially acquire and any underlying property and other assets it will acquire on foreclosure. On the assumption that NAMA recovers the long-term economic value of its acquired assets, the projected NPV outcome is a profit of €1.0bn - - quite a change from €4.8bn. Over a ten year period, the likelihood of a loss is as high as the potential for a profit.

It was clear that the period from the initial announcement of NAMA in April 2009 to October of that year that the Department of Finance (DoF) had not insisted on hard facts from the banks.

However, an LTV of 75% was used to spin the official line.

This was my comment on the Irish Economy blog on an Irish Times article of Sept 05, 2009, by Minister Brian Lenihan's economic adviser, Alan Ahearne of NUI Galway:

AA: “First, the estimated average loan-to-value ratio of 75% will have to be verified by examining each loan individually, as required by EU Commission guidelines.”

"Alan Ahearne represents the Dept of Finance in the article but it’s unclear how much he knows about the loan situation.
 
There is anecdotal evidence that many residential mortgages were topped up with other loans.  
 
It’s likely that the same applied with commercial lending.  
 
It is assumed the the average loan-to-value ratio of 75% based on the original value of the deal but it may be based on a more recent value.  
 
It’s hard to believe that 25% of the value of big deals in the period 2004-2007, was paid in cash - - in particular in respect of Anglo Irish deals.  
 
Security is on both domestic and local property.  
 
It is likely that many transactions involved complex tax shelters and other vehicles - - not a bog standard €75m loan on a €100m purchase deal.

 

What does AA know about such deals?

The DoF have had a 6-month lead time to check the facts.

Given AA’s public statements, there should be more clarity on the loans in advance of the Dáil debate and vote i.e. before Sept 16th.

AA should state that he is satisfied that the 75% average applies to most of the loans on the basis of the original purchase price/stamp duty basis price and includes top up loans.

Simply, as a representative of the Minister for Finance, it’s his duty to provide clarity on this issue.
 
How confident can he be regarding the risk that the same security was not used for multiple loans?

Keep in mind, that many of the later deals were ego driven as the top developers competed for prime sites.

If they were paying 25% of the site costs in cash, were the banks providing 100% of the development costs?"

NAMA said on Tuesday that it examined two variations on this central scenario; one in which NAMA recovers the long-term economic value of assets plus 10% and one in which it recovers the long-term economic value minus 10%. The respective NPV outcomes are a profit of €3.9bn and a loss of €0.8bn.

The plan anticipates that the average discount applied to the full portfolio of loans acquired will be 50%, reflecting the discount paid on the loans acquired in Tranche I. Final discounts are of course applied loan by loan and will only be determined as individual loans are transferred.

NAMA anticipates spending approximately €1.6bn on services over its lifetime to support its activities. This figure is €1.0bn less than had been forecast previously, "partly due to the competitive and thorough public procurement process applied by the agency."
However, it still maintains the Victorian era tradition of secrecy on public commercial contracts.

Frank Daly, chairman of the board of NAMA, said on Tuesday that the plan provided a robust framework for the challenges ahead: “We have enormous challenges in the months and years ahead but this Plan gives us a realistic expectation that we can manage this extraordinary project effectively and return a profit to the taxpayer. That -- together with the rigorous pursuit of all outstanding loans - - is our key objective.”

 Daly added that the plan confirms that the financial institutions had not disclosed or had been unaware of the extent of the financial crisis afflicting their borrowers: “To say the least we are extremely disappointed and disturbed to find that, only months after being led to believe that 40% of loans were income producing, the real figure is actually 25%. We are equally taken aback to learn that the banks were not even using the full range of legal options available to them in order to secure income in respect of troubled loans. The banks displayed a remarkable generosity towards their borrowers. NAMA has no intention of maintaining that approach. We will pursue all avenues to ensure the fullest possible repayment of all outstanding monies from relevant borrowers and we will work towards increasing the income stream for NAMA as soon as possible as part of the Debtor Business Plan review process.”

Brendan McDonagh the chief executive, said that NAMA is now operational and it had been an enormous challenge to bring NAMA to this point from a start-up operation at the beginning of 2010: “The economic environment continues to be challenging and this will have a significant bearing on NAMA’s ability to deliver on its targets but I am confident in the ability of the strong team at NAMA to protect taxpayers’ interests.”

As of the end of June 2010, however, NAMA has recruited 45 staff, is in the process of recruiting a further 33 and aims to achieve its full complement of just over 90 by the end of the year.

The agency made a loss of €7m in its first two months of operation, according to its first set of quarterly accounts for the period to March 31st, published yesterday.

NAMA to date has acquired €15.3bn of the total €81bn in property loans to be transferred.

McDonagh, said he didn’t believe that the level of non-performing loans would fall below the 25% and he provided a figure of 33% to an Oireachtas committee in April as this excluded the loans of the 10 biggest borrowers at Anglo Irish Bank where non-performing loans were higher.

Karl Whelan, professor of economics at UCD commented: "...why it should be difficult for a government to find out how many people are repaying the NAMA-bound loans beats me (a point that applies doubly when the bank in case has been nationalised bank.) Less palatable is the idea that we are finding new nasty surprises about loans after we have already paid for them."

The Minister for Finance noted that NAMA remains on schedule to achieve the transfer of all loans by February next year. Brian Lenihan said: “While it is still too early to be definitive about the final discount to be applied to the transferring loans, the business plan confirms that NAMA expects to pay about €40 billion for loans with a book value of €81 billion. This would represent a discount of 50% which is consistent with my statement of the 30^th of March last.”