Viva, O’Vegas | FT Alphaville

Viva, O’Vegas

As we wait for Ireland’s latest bank stress test results (due within half an hour at pixel time), a tidbit on methodology from the Irish Times:

BlackRock, the consultants hired by the Central Bank to verify the tests, have used mortgage losses in the US state of Nevada, one of the worst-hit in the subprime crisis, to assess Irish losses.

Actually, this is more than a tidbit.

We currently have a really bad feeling about precisely how residential mortgages will be broached in the stress tests. In particular, just what can be done if we do get a Nevadan-style situation in the Irish market.

Background: BlackRock are doing a bottom-up test of Irish banks, which looks like it involves loan-level examination of residential mortgage exposures, so we will be very interested to see what we get in the coming hours.

Now for background on Nevada. It is dire. Las Vegas house prices have fallen almost 60 per cent from peak (in 2006). From S&P’s rationale for its March 11 downgrade of the state’s GO bonds to AA- :

According to the S&P/Case-Shiller Home Price Index, home prices in the Las Vegas metropolitan statistical area (MSA; 72% of the state’s population resides in Clark County, where Las Vegas is located) have plummeted 58% as of December 2010 since peaking in April 2006.

Seventy per cent of Las Vegas homeowners are underwater on mortgages, the Economist adds, noting that there’s even been a vortex-type effect where, with so many homes foreclosed, other houses near to them fall in value, increasing negative equity. Oh dear.

Oh dear indeed — except, there is a bit of a debate on whether similar price declines have already occurred in Ireland. First, please do read these key facts on the Irish residential market via Nama Winelake (who also looked at Nevada’s market last year). They might help to put things in context.

Now here are some recent comments from the chairman of the Irish bad bank, Frank Daly. (The job of Nama is to work out commercial property assets sent to it, so comments on the residential end of the market are very interesting.) As Daly observed (H/T to Irish Economy):

On the residential sector the Central Bank is forecasting falls of 60% from peak (end 2006) to end 2012 under its adverse scenario or 55% under its baseline scenario – based we understand on the PTSB\ESRI index. At NAMA we are not surprised by this and it is not as alarming as one would first think. We do not believe that the PTSB\ESRI index currently showing close to 40% fall from peak is realistic and reflective of where the market is. NAMA’s base valuation date was November 2009 and at this date we were already taking account of on average 50% falls in residential property values from the peak.

So while the residential market may have some little more to fall and no one can be certain that an average fall of 60% from peak may not occur in residential house prices, we would believe that the bulk of this has happened already.

Is this a stress test, or a catching-up test?

Does it look like Irish house prices are at their trough?

Those are the questions we’d like answered.

Remember the whole point of fixing Irish banks now is, as Joe Lynam of the BBC puts it — ‘forbearance is nearing an end’. We believe that. Forbearance long ruled in Irish banking loan losses.

As for what comes after the stress tests — will recapitalisation be the end of it? Will Irish banks escape a fire sale of residential assets?

We’re about to find out. See you on the other side.

Related links:
A stress test mugged by reality – FT Alphaville
Ireland — a double-size banking catastrophe – FT Alphaville