The National Asset Management Agency (Nama) has lowered further the price it expects to pay for risky property loans and said that two-thirds of the first tranche of loans are not "cashflow producing".
The discount on the first tranche is now seen closer to 50 per cent after the agency said the assets of nationalised Anglo Irish Bank are worth less than anticipated, Nama chief executive Brendan McDonagh told the Oireachtas Committee on Finance and Public Service today.
This could potentially affect the capital-raising plans of five participating banks and the burden on the Exchequer.
The Government said last month that banks would need up to €32 billion in extra capital between them to cover losses on discounted loan sales to Nama and still meet new regulatory requirements.
Nama, which was set up last year to rid banks' balance sheets of the legacy of excessive lending that took place during a decade-long property bubble, then said the average discount on a first tranche of loans would be 47 per cent.
That figure was much more than the 30 per cent average initially estimated by the Government last year for all loans to be acquired.
“The experience of actually examining the individual loans has taught us to be very cautious about what we'd expect in future tranches,” McDonagh told deputies.
“The information banks were indicating in terms of tranche one didn't turn out to be the reality when we examined each loan,” he added.
Based on the first transfers, Nama expects to pay a total €43 billion for all loans, compared with the €54 billion estimated last year.
Anglo Irish, the only participant yet to transfer any of its loans, is contributing assets nominally worth €10 billion in the first tranche, representing the bulk of the €16 billion the five lenders are selling.
The other four – AIB, Bank of Ireland, EBS Building Society and Irish Nationwide Building Society - have already transferred their first assets.
Mr McDonagh said the Anglo Irish transfers would happen within 10 days.
Nama plans to buy a second tranche of loans from the banks late in the second quarter of 2010 and it may have completed the transfer of all of the loans from three of the five participating institutions by the third quarter of 2010, Mr McDonagh said.
It also emerged that Nama has found up to 100 per cent speculative lending on agricultural land was “approved at all levels within the banks” and that only one-third of loans due to transfer to it are generating interest repayments.
Mr McDonagh told the committee the agency was working on a revised business plan and hoped to have this completed by June.
The original estimate was that 40 per cent of the loans being transferred to Nama would generate interest repayments.
He went on to say that Nama may knock down some vacant homes. The agency “may well be faced with the very difficult decision of perhaps knocking down certain developments,” Mr McDonagh said.
“We can all see land and half-built developments which should never have been contemplated," Mr McDonagh said. "It is hard for anyone with an objective view to see how they made sense even at the top of an overheated property market.”
Nama is planning to buy property loans with a nominal value of €80 billion as part of the Government’s plan to remove the most toxic loans from the balance sheets of Irish banks.
If borrowers don't repay their loans, the agency can seize the underlying asset.
Most of the homes that may be knocked are outside Dublin. During the housing boom, there was a “mindless scramble to funnel lending into one sector at considerable pace and of a reckless abandonment of basic principles of credit risk and prudent lending,” he said.
The agency aims to transfer all loans by the end of the year, and no later than February 2011, Mr McDonagh said.
The discount on the first tranche of loans with a nominal value of €16 billion is expected to be about 50 per cent, Mr McDonagh said.
Additional reporting: Reuters/Bloomberg
