Stephen Kinsella: No. The National Asset Management Agency, NAMA, is designed to remove the ‘impaired loans’ generated by excessive lending to the construction industry. NAMA will exchange bonds, backed by the taxpayer, for these impaired loans. The ECB will exchange the bonds for cash, injecting liquidity into the banking system and, so the story goes, getting banks lending again.
I don’t believe that NAMA in its current form will get banks lending again. Even if NAMA’s critics are 100% wrong, and NAMA succeeds brilliantly, bankers know that another set of ‘impaired loans’ are on the way, and so banks won’t lend into the `real’ economy — to businesses and households — at reasonable rates of interest, because they expect that householders will begin to default en masse. NAMA will fail in its primary objective of ‘getting the banks lending again’.
When interest rates go up, as the European economy recovers, many households now barely making their monthly mortgage repayment will find themselves having to restructure their mortgages, or default entirely. What’s going to happen when thousands of homeowners throw their keys back over the bankers’ desks?
Banks, through the courts, have a set of processes for dealing with the painful processes of individual mortgage defaults. There is no process for dealing with hundreds, and perhaps thousands, of mortgage defaults in a short space of time. Banks will be left with large swathes of bad debt, and will come looking for taxpayer assistance again if they can’t raise funds on the interbank market to cover their losses. We will be back to square one, needing a NAMA 2.
Like banks, individual households are highly leveraged, meaning the ratio of their debt to their equity (for most people, their home) is large. The recent Law Commission report puts the ratio of household debt to disposable income at 176%. Just for this reason alone, the probability of large-scale household default is very high. There are other reasons to be concerned about household debt however.
First, the current level of mortgage repayment is low, because of historically low ECB interest rates. Mortgage repayments must, as I’ve mentioned, rise as the EU economy improves in the coming eighteen months and the ECB increases interest rates.
Second, the Central Bank forecasts unemployment to rise to 14%, and perhaps above 14%, in 2010. More and more households will therefore be unable to meet their mortgage payments.
Third, a recent study by David Duffy of the ESRI puts the number of homes in negative equity at 196,000 homes, implying the pool of potential defaulters is large.
To get a very rough sense of the scale of the problem, multiply the 196,000 homes in negative equity by the average mortgage price of a home today, around €235,260. We have €46,110,960,000 of potential bad debts for banks, just from this pool alone. 46 billion euros. If even 15 or 20% of those homes, and only those homes, default, we have another banking crisis, because banks won’t have the capital to absorb so much bad personal debt at once.
Will there be a NAMA 2 for personal and household debt? Can banks and the government devise a formula to forgive part of the principal for homeowners, and absorb the losses partially through a combination of blanket restructuring, debt-equity swops, swift personal bankruptcy processes, and refinancing? I don’t think the combination of financial and regulatory innovation under political pressure is beyond our leaders, but it does seem like a lot to ask for, considering the NAMA 1 money will be well and truly spent in 18 months’ time, and Ireland’s national debt may be as high as 120% of its national output.