The Real NAMA 2.0 : Mortgage Defaults

[HanleyS]

Not only have I not been repeatedly shown, I have not been shown once to misunderstand anything of property business or economics, that's just wishful thinking on your part. You take someone disagreeing with you to mean they are automatically wrong, this is not the only possibility, you might consider the alternative.

Perhaps you might be the Galileo of the modern age and the established disciplines of economics and business are wrong. Fair play to you for struggling on against the grain. Costs are a floor on prices and costs can only go upwards. Maybe you can disprove Netown's laws while you're at it.

Speaking of being wrong, where did you get the idea that you cannot switch from variable to fixed, you can do that at any time and there is no charge when doing this. Going in the reverse direction before your fixed term has run its course is where there might be a problem.

I'm willing to admit when I make a mistake, which I have on the switching cost from variable to fixed. The cost of switching from variable to fixed is actually in the interest rates on offer. Again this would be burdensome for a struggling household and requires a healthy LTV ratio which many do not have.

[Hal]

Perhaps you might be the Galileo of the modern age and the established disciplines of economics and business are wrong. Fair play to you for struggling on against the grain. Costs are a floor on prices and costs can only go upwards. Maybe you can disprove Netown's laws while you're at it.

I've never said costs can only go upwards, you've just introduced that in an effort to prove a statement you made but otherwise can't prove. Enough said on that I think.

[HanleyS]

I've never said costs can only go upwards, you've just introduced that in an effort to prove a statement you made but otherwise can't prove. Enough said on that I think.

You said that build costs are a floor on prices and that they will not go down.

[HanleyS]

QUESTIONER: And I have one more question on this, please, and it's got to do with the Agency and for the bad loans. I was wondering if you could just explain a little bit more why you think that it's more appropriate that all loans or process of assets should be covered by this agency?
MR. MODY: The principle here is that it is important that bank be able to return to healthy functionality. And the challenge therefore is that there should come a point where they're able to deal with some bad loans from their ongoing operations and profits.
But given the size of the bad loans that are projected at this point, the authorities are doing the right thing by removing the loans related to property development. Our suggestion comes as a consequence of our growth projections which implied that as the economy continues to contract in 2009 and 2010, more categories of loans could become nonperforming. And if they are large enough, then they could weigh down the ability of banks to function more normally.
And while we are not saying that this will necessarily happen, it seems to us that there is no harm in having the flexibility to also treat those other loans in the same way as property development loans are to be treated under the currently-proposed NAMA process.

Transcript of a Conference Call on Ireland

[Libero]

Not only have I not been repeatedly shown, I have not been shown once to misunderstand anything of property business or economics, that's just wishful thinking on your part.

Well, you're not as bad as Frank Fahy, we'll give you that.

But then, for an apparent hired hand, you're not as good as Alan Ahearne. He has some relevant qualifications that shine through and the guts to put his name to his opinions and his voice on the air. All you have is an arsenal of pub-talk putdowns and smartarse comments and rhetorical flourishes, like swords at a gunfight.

If you had more sense (as in knowledge and political judgment), you'd be advising your party against a scheme - NAMA - that will leave it destroyed when it dawns of ordinary people that once NAMA holds onto secured property (for the long term value, like), it won't be able to enforce personal guarantees because it won't be able to quantify how much is owed... Try painting that as "not a bailout".

[Dios]

I'd have to ask where you're getting that figure from?

Eh back of the envelope calculations I did a while back on the basis of some media release. It does sound about right at this time however.

The discussion regarding LTV and mortgage risk has been done to death here before:
http://www.politics.ie/economy/35022...k-ireland.html
http://www.politics.ie/economy/29341...hs-2008-a.html

Risk Assessment has two dimensions:
1) Likelihood of risk event.
2) Impact of risk event.

LTV is a measure of the impact of the risk event. Unemployment, underemployment and wage deflation are all measures of likelihood of risk event.

The LTV ratio expresses the amount of a first mortgage lien as a percentage of the total appraised value of real property. For instance, if a borrower wants €130,000 to purchase a house worth €150,000, the LTV ratio is €130,000/€150,000 or 87%.

That is it, end of story, it doesn't take into account chances of being employed or underemployed or whatever. It does not or should not, unless the banks are feeling suicidal, mean that payments on a mortgage increase, or have further implications for the steady ongoing payment of the mortgage. The only implication is that if the mortgage holder gets into trouble, they won't be able to hand the keys back to the bank as compensation in full.

That leads to another reason why I think the mortgage books are a good bet, Ireland's draconian bankruptcy legislation. This is one country you don't want to be a bankrupt in.

Is there any evidence to suggest that the recession is concentrated among the lower paid?

It seems a logical conclusion, minimum wage jobs will go first, immigrant jobs, that sort of thing - those who do not have mortgages.

Landlords are having to sharply reduce rental prices to attract tenants and thereby sharply reducing their own incomes.

Would that not make them less likely to default than a normal household though, since they are using the house to subsidise the mortgage in addition to their own incomes.

What most people also miss is there is a very high correlation between LTV and probability of default.

Why, you haven't given any justification or support for this statement at all. People with a high Loan To Value are no more prone to default than anyone else, all it means is if they do default, they have less options.

I think these mortgages have quite a lot of value, much more than NAMA intends to pump in, and should be used to protect the deposits and establish a new bank.

[Hal]

You said that build costs are a floor on prices and that they will not go down.

No, I did not say they will not go down. I said they will not go down as far as you said they would. I believe if they go down at all it will not be by very much, they are more likely to stay at their present level for some years to come and so come down in relative but not actual terms.

[Hal]

Well, you're not as bad as Frank Fahy, we'll give you that.

But then, for an apparent hired hand, you're not as good as Alan Ahearne. He has some relevant qualifications that shine through and the guts to put his name to his opinions and his voice on the air. All you have is an arsenal of pub-talk putdowns and smartarse comments and rhetorical flourishes, like swords at a gunfight.

If you had more sense (as in knowledge and political judgment), you'd be advising your party against a scheme - NAMA - that will leave it destroyed when it dawns of ordinary people that once NAMA holds onto secured property (for the long term value, like), it won't be able to enforce personal guarantees because it won't be able to quantify how much is owed... Try painting that as "not a bailout".

Next time you try a put down, try to show where it's justified rather than just blather, there's a good man.

I nearly said goon man there, a slip or what?

[HarshBuzz]

No, I did not say they will not go down. I said they will not go down as far as you said they would. I believe if they go down at all it will not be by very much, they are more likely to stay at their present level for some years to come and so come down in relative but not actual terms.

are you taking deflation into account here? (it appears not)

[Dios]

With between €120 billion and €140 billion in outstanding retail mortgages, with a current impairment rate of just over 2%, and a likely final impairment rate of around 10% (reading the tea leaves based on Ireland's draconian bankruptcy laws among other things), would it not be a good idea to sell these loans on and use the funds to protect the approximately €35 billion in depositors' funds, moving them to a new bank or banks, before winding down the rest of the loans and outstanding assets/liabilities in a controlled but aggressive manner?

I wouldn't be in favour of cutting off the bondholders completely mind you, just look after our own first and get the economy moving again.

Why are we bending over backwards to dig out private companies when they are sitting on enormous assets already?

The figures are all rough approximations as I understand them, if anyone has more precise numbers its wide open to correction.