Newspapers today are reporting that banks may be pressuring Irish developers to sell their UK assets to write down the loans that are bound for NAMA. This is an interesting development. As UK market has shown some signs of revival (although these signs are tenuous at best), prime properties with less recent vintage can be sold off to generate cash to pay down some loans. Now, the problem for Nama is that of selection bias.
On one side of this equation, developers willing to do this will be disposing of the more liquid and better properties, depleting their own risk-weighted assets base.
They will be using cash to pay down the loans that are marginally at the boundary of being transferred to Nama. Why? Elementary, Watson!
Suppose Nama imposes a discount of 30% on your loans. You have two loans. One is recoverable at 80%, another at 0%. You have a choice – pay down one loan and let the other go Nama. If you take loan A with 80% recovery, you get 70cents on the euro from Nama. If you hold it to maturity you get 80 cents. If you take loan B with 0% recovery, you get 70 cents on the loan from Nama and zilch from the market. Guess which loan will be repaid and which will be heading for Nama?
In the mean time, naïve and inexperienced in collection and recovery business Nama is still sticking to 30% average discount claims, thus further incentivising this adverse selection process against itself. NAMA chief executive Brendan McDonagh few days ago repeated this much.
So the end game here is that, if the banks are successful, even poorer quality loans will be transferred to Nama, while Nama’s CEO is running around town committing himself to valuations before any valuations are even done.