A ‘Nama’ solution for buy-to-let mortgages must be explored

A solution could be found that resolves the arrears crisis while also providing houses at affordable rents for thousands of families, writes Michael Byrne            

As the mortgage crisis intensifies and the threat of widespread evictions grows, many commentators highlight the importance of the family home in any attempt to resolve arrears.

Such concerns have been less forthcoming when it comes to buy-to-let mortgages (BTLs), presumably because they are investments rather than the principal family residence. What this neglects is that BTLs are still family homes. They are the family homes of the tenants who rent them.

In considering how to deal with the BTL crisis, we should be equally concerned with the right to housing.

There is a clear need for some form of action here. Over 20% of BTLs are in arrears of more than 90 days. As many landlords struggle to meet their mortgage payments, rents are continually pushed up, adding more fuel to the furnace of housing unaffordability. Moreover, some landlords, overwhelmed by a seemingly hopeless situation, have stopped meeting their obligation to take care of their property.

Advocates such as Threshold have also warned that when banks repossess rented housing units and appoint statutory receivers, tenants can also suffer, as receivers are not set up to manage housing and their status under the Residential Tenancies Act, which regulates the sector, is unclear. They may move to evict the tenant, raising issues for security of tenure. All in all, the BTL crisis is contributing to the wider chaos in the private rented sector.

But this is not just a problem for tenants — with more than 29,000 BTLs in arrears it is a problem that banks cannot ignore forever. In June 2014, Trinity economist and Irish Examiner business columnist Brian Lucey advocated a solution to the negative economic implications of this — “some form of Nama” for the BTL sector.

Exploring its potential for addressing tenants’ needs and supporting affordable housing, the scenario I want to propose would work something like this.

Nama (or a Nama-like agency) would acquire non-performing BTL loans from the banks. They could be independently valued on the basis of the market value of their underlying collateral (i.e. there would be a ‘haircut’). In exchange, Nama would issue government guaranteed bonds, just as it did for the loans it acquired back in 2010.

The next task would be to see how to fix the problem in the interest of the tenant. A number of options exist here, but the most pragmatic would be that Nama would effectively repossess the house (subject it to ‘enforcement action’) and appoint a local authority or approved housing body to act as landlord. The tenant would pay a ‘social rent’ (say 30% of income).

Alternatively, the house could be sold to a third party on the basis of a contract stipulating that the house would be rented under an affordable rent for a fixed period, for example 20 years. Income from rent or from any sales is then used to pay off the bonds.

There are lots of positives to this scheme. First, the tenant remains in their home and is protected.

Second, it creates up to 29,000 affordable rented houses in a market which desperately needs more affordability. Third, the mortgage holder’s debt problem is resolved. Fourth, the initiative is essentially revenue-neutral, in that it requires no significant upfront spending by the State. But it might also be ‘off-balance sheet’, just as the €32bn Nama bonds originally issued were not considered as government debt (although qualifying as off-balance sheet under the Eurostat rules would be a key challenge). Lastly, much of the infrastructure for this is already in place.

There a number of caveats, however. For example, only tenanted buildings should be acquired, or at least buildings in areas with demonstrable demand for housing, to avoid the acquisition of unrentable properties.

The idea of a Nama-like agency managing houses in a manner that protects affordability is far from novel. Many of us think of Nama as a quintessential ‘Irish solution to an Irish problem’, but in reality it’s a form of asset management company, one of the most common ways in which governments across the world respond to systemic banking crises. Indeed, it borrows many features from the Resolution Trust Corporation, established in the wake of a banking and property crisis in the US in the early 1990s. Unlike Nama, the RTC was given an explicit housing mandate. ‘Maintain and support affordable housing’ was one of the three objectives the US government set for it. All told, the RTC delivered well over 100,000 units of affordable housing.

What about the economic feasibility of a ‘Nama for tenants’? According to the Central Bank figures analysed by Lucey, the loan-to-value of BTLs is, around 125%. If the outstanding value of BTLs is €11bn, the post-haircut amount Nama would pay under this proposal would be around €8.8bn. For the banks, this would mean a loss across the sector of about €2.2bn. This is hardly a huge amount of money, and losses on BTLs have already been factored in by the market and to an extent made up for via government recapitalisation.

From Nama’s point of view, this leaves it with €8.8bn to recoup via rent and sales to pay back the bonds. Let’s assume that the average property has two tenants and that the average tenant is earning €1,500 a month. With both tenants paying a social rent of 30% of income, it would take about 25 years to pay off the bonds, and that is without taking into account interest payments.

However, the bonds would not only be met by rental income, but also by phased sales (under contracts designed to protect affordability) and tenants incomes are likely to increase over time, leaving substantial scope to pay down bonds within a reasonable timescale.

Much more work is needed to develop a ‘Nama for tenants’, as proposed here, and the devil is no doubt in the detail. Nevertheless, it seems to me the key point — using Nama or a similar agency as a revenue and debt neutral vehicle to resolve defaulting BTLs while supporting affordable rented accommodation — is surely worth debating.

Michael Byrne is an Irish Research Council post-doctoral fellow at the National Institute for Regional and Spatial Analysis, Maynooth University.