PLANS BY the National Asset Management Agency to start lending to home buyers and commercial property investors will include incentives to protect purchasers against future negative equity.
The aim of the measures is to kick-start the flagging property market. Nama insists that they are not intended to interfere artificially with the market.
Nama plans to launch a product for purchasers of residential properties in the autumn that will safeguard against the risk of negative equity, where the loan is higher than the value of the property.
Plans were outlined in speeches by Nama chairman Frank Daly in Cork and chief executive Brendan McDonagh in Dublin yesterday.
Concerns among potential buyers that prices could fall after their purchase was one of the “key impediments” to the sale of houses and apartments, said Mr Daly.
Prospective buyers feared they could find themselves in “negative equity for a long time”, he said.
The State agency is in preliminary discussions with Bank of Ireland and AIB to see if they would provide financial support to buyers of properties controlled by debtors in Nama or by receivers. It expects to have “a more detailed engagement” with the banks over the coming weeks.
The plan would involve a buyer paying a 10 per cent cash deposit and one of the banks lending a further 70 per cent of the value of the property.
If the property rose in value, then the buyer would draw down an additional loan – agreed at the time of the purchase – to cover the 20 per cent difference after several years.
If there was no recovery, Nama would write off the 20 per cent.
The proposal – which is known as “staple financing” – is one of several options being explored.
The agency acknowledges potential complications such as concerns about moral hazard, where reckless behaviour is rewarded by support measures, or the effect on the value of non-Nama properties for sale.
Financing the purchase of commercial property, such as office blocks and shopping centres which are making rental income, is seen as more straightforward.
For the purchase of these properties, Nama would take a cash deposit of between 25 and 30 per cent of the property’s value and swap the existing loan on the property to the buyer, to be repaid with interest over five to seven years.
If the market declines further, the buyer can walk away, losing only their initial cash investment.
Nama would not make any new loans but would, in effect, move an existing loan from a risky debtor by crediting a low-risk borrower.
Mr Daly said such deals were widely used globally. Nama would expect to engage with state-owned wealth funds, pension funds, insurance companies and private equity firms.