Thursday, May 14, 2009

Getting the Property Market Moving

The banks are the effective owners of many unsold residential developments, with the related loans to developers forming part of the impaired loan portfolios which are to be taken over by NAMA.

Many of these properties are in desirable locations but cannot currently be sold, even with significant reductions in the asking prices. This is because of the natural caution of potential buyers, who don’t want to risk buying in a falling market without any guarantee that we are at, or near, the bottom.

Is there a potential solution which would serve the interests of buyers, banks and the taxpayer (via NAMA)?

If a bank was to provide mortgages on a “non-recourse” basis for specified properties, it would mean that the bank can only rely on the property itself as security for the mortgage.

The benefit to buyers is the assurance that they can limit their risk, as they can return the keys and walk away in the event of a negative equity situation arising.

The benefit to the bank is that it can transfer a non-performing property development loan, or at least a portion of it, into a new mortgage loan. Even if the mortgage borrower subsequently hands back the keys of the property, the bank is actually no worse off than its current position.

The benefit to the taxpayer (via NAMA) is that any progress the banks can make in reducing the balances outstanding in their commercial and development property loan portfolios will result in a smaller balance to be transferred to NAMA. There will be a consequent reduction in the longer-term risk that the taxpayer will be stuck with any residual shortfall.

Clearly there are many details to be argued over, but some variant of the above solution might just help to get the property market moving again.

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