Saudi Arabia is studying draft regulations that could see the creation of a real estate refinancing company similar to US firm Fannie Mae, according to proposals published by the central bank this week.
The regulations are part of long-awaited government efforts to develop a housing mortgage sector in the conservative kingdom where the restrictions of Islamic sharia law have made it difficult to secure lending against property.
The world's top oil exporter faces a housing shortage, particularly among lower and middle-income people, as land prices rise rapidly. In July, the government passed laws to regulate mortgage and lease lending.
The regulations proposed this week fleshed out the laws, principally by saying the government may establish Saudi Real Estate Refinancing Corp to develop a secondary market in home mortgages.
A secondary mortgage market allows lenders to spread risk and tap new sources of funds. Fannie Mae was established by the US government in the 1930s to finance such a market.
The new corporation, with a minimum registered capital of SAR2bn (US$535m), would have to stay majority state-owned but real estate financing companies would be allowed to acquire stakes up to a combined total of 30 percent.
The corporation might also offer shares to the public. It could provide the secondary mortgage market with access to both local and foreign financing instruments, the draft said.
Local financial firm Arqaam Capital has said the introduction of a legal framework for mortgages will see the amount of lending to purchase housing in Saudi Arabia eventually double to 12 percent of gross domestic product. The country's GDP is about US$650bn.
However, the full framework is some way from being established. Implementing regulations on how defaults will be handled, a big concern for lenders who fear sharia courts and Saudi police will not evict people who fail to pay loans, have not yet been published.
Some lenders already offer mortgage-like products, but the lack of a clear legal framework has restricted the market to comparatively wealthy Saudis in high-paying jobs, whose payments can be deducted by the bank from their salaries.
"The problem was how do you get that person to repay if they cannot be kicked out of their house," said Nicholas Diacos of The Law Firm of Saleh al-Hejailan.
"In terms of making competitively priced financing in this market, it was a nightmare because the financiers were pricing the risk into their finance."
While lower-income borrowers can rely on a government housing fund, the lack of a range of financing options has contributed to the home shortage because developers tend to focus on the top end of the market where profit is higher.
Mortgage-related regulations released so far suggest an increasing reliance on structures compliant with sharia law, said a Gulf lawyer who follows Saudi Arabia closely.
He said Saudi economic reforms typically involved a long process in which layers of additional reforms were added to any groundbreaking law, as happened with capital markets legislation in the past decade.
"It is a continuum. There is a lot more that will need to be fleshed out over the course of the next 12 months and beyond as people put these structures into place. It is not a panacea but I do think it is a good start," he said of the mortgage rules.