UAE banks favour talks over home foreclosures

Wednesday, 9 November 2011 11:23 AM

Banks are offering breaks to homeowners in a bid to avoid foreclosure proceedings

UAE banks are moving to restructure mortgages for defaulting homeowners rather than repossessing in a bid to cut their losses on bad property assets, experts have said.

Dubai introduced a repossession law in 2008, in the wake of a property collapse that saw house prices slump 60 percent from their peak. But few banks have pursued foreclosure proceedings to recover properties, preferring instead to renegotiate payments terms with owners and avoid writing down further provisions, said lawyer Mazen Boustany.

“The courts are the last resort. Everybody wants to avoid going to court,” said Boustany, head of banking and finance at law firm Habib Al Mulla & Co.

Options include payment breaks or reductions to monthly installments of home loans.

“Banks are accommodating and agree to rescheduling [of mortgages] and only go to court if they have no other avenue,” he said.

Barclays Bank in May became the first lender to sell a first repossessed property at an auction held by the Dubai Land Department. The lender was also the first to repossess a home in January 2010, clearing the way for lenders holding about $16bn of homes loans to attempt to recover their losses.

The property, a villa in The Springs, had a reserve price of AED1.2m ($326,700) and sold for AED1.22m ($332,145). But the sale failed to prompt the expected flood of repossessed homes onto an already strained housing market.

Mortgage advisory firm Independent Finance said banks remained reluctant to repossess and auction off properties, in part because of the lengthy foreclosure process and the still sliding value of real estate in Dubai.

A number of lenders were also holding back properties in the hope of a recovery in prices, which would allow a more profitable sale on the open market, said general manager Sami Wani.

“We have witnessed price rises in Springs, Meadows, Arabian Ranches, Green Community, The Villa Project, Cedar Villas, Downtown and JBR. These rises are varying from 3 to 7 percent,” he told Arabian Business.

“The banks have decided to hold back properties for some more time and dispose of them profitably in the open market. This is better than going down the repossession route, which is very time consuming and expensive.”

A lack of clarity over foreclosure proceedings may also deter banks from attempting to offload properties, said Jean-Luc Desbois, managing director of Dubai mortgage brokers HomeMatters.

“Banks would rather avoid foreclosure, as the laws and processes are still unclear. Restructuring loans to assist clients in financial difficulty is the preferred option for all banks.”

Property prices in Dubai soared after the city opened its real estate sector to foreign investors in 2002, granting them freehold ownership rights at many developments.

From start-2007 to mid-2008, prices rallied almost 80 percent, Morgan Stanley estimates showed, with billions of dollars worth of new projects launched by local developers.

But home prices in Dubai, the Gulf property market that had the biggest reversal because of the financial crisis, fell more than 60 percent in the wake of the global credit crunch.

House prices in Dubai showed signs of recovery in the third quarter, with slight rises in prime projects such as Palm Jumeirah and Arabian Ranches, Jones Lang LaSalle said in September.

But analysts remain concerned that the estimated 33,000 new homes scheduled to hit Dubai’s market by end-2012 could cause fresh declines in rental and sale prices – a situation that could worsen if a high number of repossessed homes are released to market.

Andrew Goodwin, director of real estate consultancy DTZ, said the auctioning of repossessed homes could further knock market confidence by revealing the true picture of the industry’s price decline.

“Traditionally mortgage repossessions are liquidated in auctions and while there have been a few, there is a concern that this is inherently a transparent process and could unsettle the market and have a knock on effect to the remaining lenders,” said Goodwin.

“This is no different from what we see in more mature international markets, such as the UK, where banks are working with clients to hold assets until the market can sustain a sale. I do not see anything sinister in this, it’s a practical approach.”

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Posted by: Red Snappa Thursday, 10 November 2011 6:39 PM[UAE] - Ireland

Banks need income and interest rates have been way out of line with the rest of the world for long enough.

However, if I was the banks I would start offering my low rate, FOR TWO YEARS, mortgage applicants the pick of my repossessed stock at an extended preferential mortgage rate term, to sell them off at a better price. Throw in the title registration fees, no agency fees and a nice little package results.

The only people that are going to buy in volumes sufficient to elevate the transaction levels to an extent that will give the property market a heartbeat, are the investors looking to make a pile in capital appreciation in say 2017/18 and they will want the whole 30 per cent discount on current asking prices up front.

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Posted by: Big Ben Thursday, 10 November 2011 6:24 PM[UAE] - Canada

simply put, the banks have too much to loose if they don't try to find a deal with investors. On top of the big loss, they would have to pay service charges, empower, Dewa, etc... for those homes. It is better to keep the cost on the others. The problem, this is again too little to late. People learned the lesson and will prefer to loose the money paid and get out, rather than keep digging in their pockets for something which is not worth it anymore.

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Posted by: Birdie Thursday, 10 November 2011 2:36 PM[UAE] - Global

On the contrary, the banks are convinced that the market has bottomed out . Hence, they are falling over each other to lend up to 80% of current market value at rates as low as 3.99% p.a.

Moreover, with rental income adequate to cover mortgage installments in most cases, large scale defaults are now consigned to history.

And as far as those so called 'experts' and 'analysts' are concerned, it is obvious their comments are motivated by their own book. After all it is in their interest to suppress the market while their investors to build up large positions, to be sold at a handsome profit later.

Posted by: Telcoguy Thursday, 10 November 2011 6:24 PM[UAE] - UAE

This has to be one of the most hilarious comments i have seen in a long time.
For sure we are not talking to the same money people here.

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Posted by: Red Snappa Thursday, 10 November 2011 9:28 AM[UAE] - Ireland

The logic is simple, the banks are now convinced that there really is another 30% to fall on property prices, therefore logically they would have to auction their repossessions at that reserve to get interest from hard nosed investors.

So renegotiating a mortgage at the original sale price has got to be so much better than auctioning repossessions off. No unpleasant write down of the asset on the lender's balance sheet, see! Doesn't stop investors looking for the extra 30% in the long run, especially as this healthy flow of corroborative data keeps emerging from a wide cross-section of investment banks, real estate advisories and audit/management consultancies.

Every other day there's an announcement of the handover of another development before the end of the year, final payments of course.

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Posted by: Birdie Wednesday, 9 November 2011 6:18 PM[UAE] - Global

This is a subtle way of scaremongering! raising the spectre of foreclosure sales to deter buyers.

AB is doing a great disservice to its readers by misleading them with such unsubstantiated stories and in the process losing its credibility.

The fact is that mortgage defaults were last year's story. Distress sales are long gone and only strong hands are now holding property and they will sell only when the price right.

And forget about those 33,000 units before 2012 end. That is a myth created by those hoping to buy at lower levels. Not more than 10,000 units will be added and that includes commercial property; compared to a demand of about 15,000 residential units- assuming a 5% increase in population.

Posted by: Telcoguy Wednesday, 9 November 2011 8:07 PM[UAE] - UAE

Or, more likely, the banks are not keen on getting plenty of assets they may not dispose of and prefer to get some cash-flow (as some cash-flow is better than no cash flow and you can always repossess later on)
Additionally an increase in the number of mortgage delinquencies would force banks to review (i.e. increase) their (very likely overly optimistic) provisions, something that would dent their equity cushion.
And any property repossessed will not be sold in the current market conditions because it would also force to revalue the collateral that is backing the mortgages.
And because of the laws in the UAE, people may be more willing to walk away (well, actually to fly away) from an underwater property.
You can see this game playing in Spain, all but the last point. Bank and real estate situations are fairly similar. But we are a little bit ahead on the game. We have already run out of birdies there :)
Bu back to your post, who is interested in scaremongering?

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