Colm’s columns

Colm Rapple
Irish Mail on Sunday , July 11, 2010

There wasn’t a lot of good news for struggling home-buyers in the report of the Government’s expert group on mortgage arrears issued during the week. The proposals boil down to little more than imposing a model of best practice on lenders. They are going to be told to give borrowers every chance to pay before taking legal action. Not a big deal! That’s what lenders should already be doing, if only in their own self interest.

There is little in the proposals to hurt them.  They will be barred from imposing penalties on borrowers who are meeting new agreed repayment schedules. But few lenders are doing that in any case. The only other major imposition on lenders is that they charge no more than the average variable rate to borrowers who are availing of Mortgage Interest Supplement. That shouldn’t be a major problem for reputable lenders. The average variable rate is relatively high and all lenders will benefit from a proposal that the State provided Supplement should, in future, be paid directly into the borrowers mortgage account.

Apart from those proposals on penalties and the maximum interest rate payable by those getting Mortgage Interest Supplement, borrowers will gain little from the proposals. The small protections offer, won’t come free. In order to benefit, borrowers will have to comply with the lender’s resolution process supplying full financial details, income, expenditure, assets and liabilities and then accepting whatever solution the lender comes up with, subject only to appeal to the Financial Ombudsman.

Some borrowers will also lose significantly from the proposed changes in Mortgage Interest Supplement. There are a few pluses but they are well outweighed by the negatives. Married couples will be able to qualify in future even if one is still employed but subject to a means test which will include both incomes.

But borrowers are not to qualify for the Supplement for six months after they have suffered a drop in income and it will only be payable for a fixed period at the end of which the claimant will be considered for social housing.  Another negative is that the Supplement will not be payable if the lender has recourse to a guarantor, for instance a parent who guaranteed a child’s loan.

In essence, lenders have a lot to gain from these proposals. All they have to do is adopt the flexible approach to mortgage arrears that they should always have had. Flexibility in this context doesn’t include debt forgiveness or interest rate cuts. That may come but not yet. Later this year the Law Reform Commission is to recommend changes in bankruptcy and debt enforcement laws that may allow people to more easily walk away from debt but it could take years for the law to be changed.

In Britain there is provision for those in debt to enter individual voluntary arrangements with their creditors as an alternative to bankruptcy. This allows individuals to negotiate debt reductions and gain court protection. Up to 75% of an individual’s debts can be written off.

If that was available in Ireland, mortgage lenders might be inclined to do more than simply rearrange repayments while still charging interest on all outstanding balances. Farmers were able to secure major debt write-offs in the early 1980s when the initial EU bubble burst. Property developers are currently hoping to do likewise. But home buyers haven’t sufficient clout.

Many people who are not in financial difficulties and, even some who are, believe that that is as it should be. Why should those who gambled on the Celtic tiger be let off some of their debts because their gamble failed? The Financial Regulator, Matthew Elderfield, is against debt forgiveness for more practical reasons. He recently pointed out that the cost would have to be borne by the taxpayer or other borrowers. It would be impossible to limit the aid to deserving cases and it would only encourage people to renege on their loans.

The mortgage arrears group is now working on its final report which will propose measures for helping those who are beyond the help of short-term solutions such as a switch to an interest only loan, or an extension of the loan term. They will be taking various overseas models for their inspiration. In Scotland, for instance, there is a scheme whereby the home is taken over by a housing association or local authority and rented back to the occupier.

There is another scheme where the Government or the lender takes an ownership stake in the home. The money paid for the part-share is used to partly discharge the mortgage.

Some variations of both of those schemes are likely to be recommended here.  The ideal would be to establish a State property company comprising elements of the local authorities and the Office of Public Works that could manage such residential schemes and the large developments that NAMA is going to end up owning.

Colm Rapple
Irish Mail on Sunday, August 2, 2009

NAMA, the National Asset Management Agency, is set to become one of the largest lenders in the country with a loan book worth an estimated €90 billion. A large proportion of that debt will be owed by a relatively small number of developers and the new agency, with a staff of about 50, should be able to manage the loans.

But NAMA could also become the biggest property owner in the country. The management of that portfolio will have a major impact on our economic and social  progress for decades to come and NAMA’s focus is likely to be too narrow to ensure that all aspects of the public interest are taken into account. It’s primary role will be to maximise the financial return on those assets and that’s where its focus will lie.

It isn’t planning to become a major property management company in its own right. Instead it has plans to contract out that role. Already, we are told, a number of companies, including some large foreign PLCs have expressed an interest in doing the job.

And why wouldn’t they? It could be the business opportunity of a lifetime for such companies. But who will they be and how will they be picked? Will Irish companies be excluded? If not, will it be possible to ensure that developers who defaulted on their loans don’t resurrect themselves in a new guise?

But any property development company will be motivated simply by a desire to maximise profit.  In itself, there’s nothing wrong in that but if we learnt anything during the boom years, it is that the best interests of society and communities are seldom promoted by profit maximising property developers.

We now have a golden opportunity to have a large property portfolio managed by a central planning and property management agency, that could maximise not only the financial returns but also the social returns of future developments.

The bones of such an agency already exist in the Office of Public Works. It’s current tasks include property maintenance, property management, architectural and engineering services, heritage services, project management and procurement services. Between it and the housing sections of the Department of the Environment and the larger local authorities there must be enough expertise to provide NAMA with all of the property management and development services that it will need.

Of course, NAMA would still have to call the shots. But using a State agency to manage this potentially massive property folio in the interests of the Irish people is obviously a far better option that passing it over to private property developers, whether Irish or foreign. There is a strong case for such an agency actually buying some of the land that will be coming onto the market for future housing and infrastructural use.

Such a land bank could form part of the National Pension Reserve Fund and be financed as such. It would form a major bulwark against a repeat of the house price bubble.

Initially, of course, NAMA won’t be acquiring properties. It will be buying what are effectively IOUs. There is currently an estimated €90 billion owed to the banks by property developers on the security of land and property that is now worth considerably less than that. The banks hold the IOUs but they are no longer worth their face value. They’ll be bought by NAMA at a discount that will be decided on a loan by loan basis.

We don’t know how much the discount will be but NAMA might get the €90 billion worth of IOUs for, say, €65 billion. It will continue to pursue the developers for the full €90 billion and, where loan repayments are in default, it will have the power to acquire the assets, land and property, that was initially put up as security for the loans.

Undoubtedly that power will have to be exercised on a relatively large proportion of the outstanding loans and NAMA will end up with a substantial portfolio of land, and developments both fully and partially completed. It’s full potential will only be realised if the full portfolio is viewed, not as discrete elements, but rather in its totality within the context of a long-term, national property development strategy.

That will require more than what is currently proposed for NAMA.

Colm Rapple
Irish Mail on Sunday, July 26, 2009

The State coffers may be depleted but this isn’t the time to be selling off the “family silver”.  Such sales are mooted in the McCarthy report but they are not seen as an alternative to the spending cuts that have grabbed most of the headlines. Unfortunately some politicians may view it differently and promote asset sales as an easy option which, in the short-term, would help to lessen the need to take on powerful pressure groups.

But it would be an exercise in short-termism.

Two large State companies are mentioned in the McCarthy report as possible privatisation candidates, Bord na Mona and Coillte. To describe either as “family silver” is misleading since both are valuable wealth and welfare producing assets that, in the current climate, would only fetch bargain basement prices.

They are not just simply non-producing ornaments.

Bord na Mona made a profit of €23.8 million last year – up €1.3 million on the previous year. It paid over €12 million in dividends to the State. It owns a land bank about the size of County Louth and it provides almost 2,000 good jobs, mostly in areas of the country where there is little alternative employment.

The current chief executive’s predecessor pushed hard for its privatisation. Goldman sacs had identified potential investors and no doubt there are still predators ready to pick up a bargain.

But we don’t want a repeat of Eircom. It may well have been sold near the top of the market but we lost out as the development of the telecommunications network was dictated by short-term profits rather than the national or regional interests.

Coillte is the largest single landowner in the State. Profits last year were down sharply to €9.2 million, mainly as a result of the slowdown in the construction sector. But that figure greatly understates the best benefits accruing from the company. Many of them are intangible but it is possible to put a firm figure on one of them, the carbon that its forests take out of the atmosphere each year.

It’s estimated that our forests are currently taking in about 6.2 million tonnes of CO2 each year. Half of that is released again as a result of timber harvesting and deforestation. The other 3.6 million tonnes is sequestered in our “forestry sink” most of which is owned by Coillte.

Only about 2 million tonnes of that is actually included in the Kyoto protocol calculations and that in currently saving us having to buy about €29 million worth of carbon credits. That’s assuming a price of €14.50 a tonne at which credits are currently selling. But they were fetching almost twice that a year ago and the price is bound to rise again as the world economy recovers.
So our forests are worth a lot more in real money terms than Coillte’s profits indicate. Could we trust private owners to manage this valuable carbon sink in our best interests? The answer is clearly, no. Private owners would, quite rightly, be interested only in the bottom line of the profit and loss account.

Coillte provides many other less tangible environmental benefits the management of which are obviously best kept in public rather than private control. It owns about a million acres of land, equivalent to two reasonably sized counties or almost 7% of the country’s landmass.

The bulk of that is commercial forestry and managed as such.  But Coillte has a broader remit. It puts it like this “Our purpose is to enrich lives locally, nationally and globally through the innovative and sustainable management of our natural resources”.

That could amount to just so much waffle in the mission statement of a private company.  There is a better chance of imposing the reality of that statement on a public company.

Land and forestry is best managed for the long term, something that’s better suited to a public rather than a profit maximising private company.

Far from selling, the Government should be thinking of buying at this time. Landowners pushed the cost of past infrastructural projects sky high with their exorbitant demands. So why not store up some savings for the future by identifying and buying, or retaining in NAMA, the land that’s going to be needed for future projects.