OPINION:OF PARTICULAR CONCERN is the lack of mortgage credit and ongoing asset deterioration in ghost estates. These are national issues, but solutions are largely being addressed by unconnected "siloed" teams in multiple banks, as well as by the National Asset Management Agency (Nama). An orderly workout process, avoiding further market destabilisation, requires coordination and consistency. Also, exiting foreign banks may, understandably, have a less demanding perspective on value recovery.
With regard to house prices, there is not one price floor but a range of possibilities depending particularly on the supply of credit. At one extreme, there is the floor given unlimited credit and, at the other, the floor given a 100 per cent cash market. In this regard, we are in a new era of credit rationing reminiscent of the mid 1980s. In 2006, gross lending was €40 billion plus. In 2011, it was €2.5 billion, with €1.1 billion going to first- time buyers (FTBs).
Regarding ghost estates, DoECLG statistics (2011) indicate roughly 33,000 completed or almost completed units. Given that Nama claims only 28 “category four” ghost estates out of a 10,000-unit portfolio, this does not appear to include all empty units. These multi-billion euro assets are continuing to deteriorate and eventually demolition may be the only option. To adhere to the DoECLG’s guidelines, this would involve recycling of each material type and could cost millions.
The housing market is not perfect – it has structural inefficiencies which cause it to over-correct in both directions. Thus, any intervention which makes the market more efficient is to be welcomed. First of all, mortgage credit can be materially augmented without raising any additional wholesale or deposit funding. The car industry, amongst many others, provides “vendor finance” – if you cannot pay the full price but can sustain monthly payments, you get your car now in exchange for a piece of paper stating what you owe, thus creating credit.
This is entirely feasible concept for the banks and Nama and, with the right structure, is open to any property holder, developer, receiver, buy-to-let investor etc. The mortgage loans created can be pooled and administered by a rated mortgage service provider for subsequent sale via the capital markets. For a bank, it allows impaired property loans to be substituted with performing mortgages, enhancing capital. For developers and others, it avoids the need for receivership. A 30,000-unit programme would generate about €4.5 billion, at an assumed €150,000 per unit, in additional FTB mortgage credit (and cash once the loan books are sold).
However, credit needs to be demanded as well as supplied, and a successful workout needs to quickly deploy a high volume of properties. Thus the issue of confidence also has to be addressed. In financial markets, the concept of optionality is used by investors when they want exposure to a rise in the value of an asset while also being protected from a fall in value.
The US Federal mortgage agencies brought this concept to housing finance with a product called a “purchase option agreement”. Essentially, this enabled individuals to lease a property with an option to purchase. It can also be structured to give the option-holder an exercise incentive, for example, a share in any increase in value, realisable only if they purchase.
Such a home ownership programme would enable thousands of FTBs to get affordable homes now without any initial financial risk, thus ensuring its success.
With regard to ghost estates, the priority now must be regeneration – indeed, regeneration improves recovery prospects in that completed properties are more saleable, and for retail values, relative to trade sales of incomplete sites. To enable this, creditors need to agree to be subordinated to the new money required to complete viable sites making it financially feasible. Housing units completed can then be worked out via the purchase option structure above.
A visible, confidence-inducing, coordinated national workout programme for empty new homes and incomplete estates is required. The earliest and highest value exit for Nama and the banks is disposal to the retail market using vendor-type finance and the subsequent sale of pooled, serviced mortgage loans. This is far easier, less costly and market disruptive, and more likely to enhance recovery values versus trying to sell the actual assets now for cash. This national home-ownership programme platform could be accessible to anyone selling or buying a property. It also offers a viable, orderly, ready-made exit strategy to the departing foreign lenders.
Oliver OShea is a former CFO of UK bank Abbey National (now Santander) and was senior banking analyst with Goodbody Stockbrokers. He also worked with international management consultants Accenture and BearingPoint
