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If NAMA was a bank

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Whether we vote Yes or No on the fiscal treaty referendum, we’ll still have a shambles of a property market when it’s over. With the Central Bank recently publishing new data about the weakness in residential mortgages, its useful to look at one of the key drivers of the property market i.e. valuations.

Consider the Central Bank’s guidance to banks about valuations based on its own “lessons learned” review of the boom and bust:

There has been much discussion concerning the basis of valuation in a market with little or no demand. The view of the Central Bank is that a revised Red Book valuation is the most appropriate way to update the value of the security held by the Credit Institutions. In a falling property market, Credit Institutions should incorporate further downside movements in the valuation to inform the extent to which the actual value could fall. This is important information for loss forecasting and provisioning decisions.

So not to put too fine a point on it, even if a prospective lending bank has what appears to be a reputable valuation on the property, it should subtract some percentage — amount not specified from it. But wait — this process of adjusting a valuation before making a decision rings a bell: remember our old friend, NAMA’s “long-term economic value” adjustment to the loans it was taking over? Well, the numbers are now in from the Comptroller and Auditor-General’s recent NAMA report:

The level of uplift for long term economic value varied by type of property and the overall uplift was influenced by the relative proportion of each type of property in the overall portfolio. Figure 2.6 sets out the average uplift adjustments by property type for the first five tranches together with the relative proportion of the property in each category. Hotels had the highest average uplift of 9.6%, while development property that was more than 30% complete had the lowest average uplift of 7.2%.

So if a bank was considering a loan to finance the purchase of a hotel, the Central Bank wants it to lower the valuation, but if NAMA was considering taking over an existing loan based on the same valuation, it’s been adding 10 percent. Why would anyone bother with a new loan when it’s much easier to sit the existing ones and collect the NAMA premium? And why does NAMA get to be the one institution that can lend on the basis of upping the valuation, especially in light of the  evidence that it appears to get to sell with no valuation at all?

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One Response to “If NAMA was a bank”

  1. # Comment by A Humble Chestnut Roaster May 31st, 2012 20:05

    With further potential falls in residential property values in prospect – all else being equal on the macro front – due to additional taxes and charges levied on homes (capitalised to represent reductions in values), I think I’d sooner take my chances and go for a long swim in the NAMA Wine Lake.

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