Nama is proposing a deferred payment scheme to protect property buyers against the risk of negative equity in an attempt to kick-start the property market.
The agency wants to introduce a scheme where Nama would waive 20 per cent of the purchase price on one of its 8,000 Irish residential properties after five years if the property were to fall further in value.
Customers will deal with the banks on the scheme and will have no engagement with Nama.
Chairman Frank Daly said the agency was in talks with the Minister for Finance and the Department of the Environment about the agency’s proposals.
“We are teasing this through. We want to analyse the full impact of it and we would hope to make an announcement early after the summer,” he said at the launch of the agency's 010 annual report.
The State loans agency, set up to take the most toxic assets out of the banking system, has loans on its books linked to 12,000 houses and apartments, a third of which are overseas.
Chief executive Brendan McDonagh suggested the scheme could apply to 5,000 houses and apartments and that if they were sold for €200,000 each, this could lead to sales that would raise €135 million for the exchequer through VAT receipts.
The most the State could lose on the scheme was €65 million – the difference between the amount raised in Vat from the property sales and the €200 million which would be waived in the event that the properties fell further in value over five years.
The idea is driven by the shortage of available mortgage finance at the banks and the reluctance of potential buyers to purchase amid concerns that property prices would decline further, according to the agency.
“This is where Nama is proposing to step in to ease the fears of negative equity that are still out there among potential purchases and which I can fully understand,” said Mr Daly.
“Our overarching principle is to get the residential property market moving again,” said Mr McDonagh.
He said that the scheme would not put State money at risk. “Effectively the taxpayer is already at risk in terms of having actually bought the assets off the banks in the first place,” he said. “We are trying to get some activity going in the market and get the property market moving at a sustainable level, getting tax receipts into the exchequer.”
Mr Daly said that he understood that home owners with loans outside Nama might be concerned about the effect on the value of their property and the agency interfering in the market.
“This has the potential to lift all boats. We are not getting into the market in a huge way,” he said. “What we are talking about is a very modest intervention with the objective of getting something moving there and if the market gets moving it will advantage them.”
How the scheme would work
Nama would try to sell a house or apartment linked to one of its loans by putting it on the market for €200,000, for example. The purchaser would have to have a €20,000 deposit and would then apply for a mortgage from one of the two “pillar” banks, Bank of Ireland or Allied Irish Banks.
To encourage the buyer to complete the sale and to ease fears about negative equity – where the loan is worth more than the value of the property – Nama would agree to defer the payment of 20 per cent of the value of the property – in this case, €40,000.
The bank then approves the buyer for a mortgage of €180,000 and the buyer makes the repayment on this loan. If after five years the property is still valued at €200,000 or more, then Nama will collect the outstanding €40,000 from the bank. The repayments do not change.
If the property has fallen in value to say €160,000 then Nama would waive the outstanding €40,000 from the purchase price agreed five years earlier. As a result, the home owner would be ahead on their repayments and avoids negative equity as the mortgage is based on €140,000 rather than the original €180,000.
As a result, the bank and the home owner reschedule the remaining repayments around a mortgage of €140,000.
“One of the big issues that we hear about every single day here from people contacting us is that they go to try to buy a house for €200,000. They believe they have 80 or 90 per cent mortgage approval from the institution,” said Mr McDonagh.
“They go through everything to try to buy the house and they go to the institution and the institution says that it is only worth €180,000 and they will only give them 80 per cent of 180,000.”
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