Court ruling could clear way for other lenders to take action when borrowers don't pay.
Barclays, Britain's second largest bank, has won the first foreclosure orders in Dubai, clearing the way for lenders holding about $16bn of Dubai home loans to take action when borrowers don’t pay.
Barclays said in an e-mailed reply to questions from newswire Bloomberg that it won the foreclosure orders, without providing details of the cases.
The ruling shows that Dubai’s market is “evolving and is poised to come at par with other mature markets of the world,” the bank said.
Both lenders and developers in the UAE have tried to stem rising defaults through out-of-court settlements with distressed customers after falling prices left buyers with mortgages worth more than their properties.
That has helped minimise the amount of bad debt on their balance sheets and kept repossessed houses off a market that’s already suffering from too much supply.
Provisions for bad loans in the UAE surged 68 percent by to 32 billion dirhams ($8.7 billion) as of November, compared with a year earlier.
Islamic lender Tamweel, the emirate’s biggest mortgage bank, has several of its own foreclosure claims pending and estimates about 3 percent of its mortgages are in default.
“Banks will be more aggressive in pursuing legal action if they see the process is efficient,” said Antoine Yacoub, a banking analyst at Moody’s Investors Service Inc. “They were trying to avoid the courts and restructure most of their loans, but once they see a precedent has been set, they will be encouraged to push more cases through.”
The successful foreclosures by Barclays may open the floodgates in Dubai’s property market, which went from the world’s best in 2008 to the worst after credit dried up and speculators who had fueled price increases left the market, according to Deutsche Bank.
Moody’s estimated in September that 12 percent of the 27,000 residential mortgages in the sheikdom would default within 12 to 18 months.
Banks and developers until now have avoided the process of reclaiming homes through the courts, barred by tradition and an arcane legal process that few understood.
The Barclays and Tamweel cases may change that, because they show that a 2008 mortgage law - setting out rules for default, foreclosure and repossession - is working.
The law requires lenders to give homeowners 30-day notice of their intent to pursue a foreclosure, said Jody Waugh, a partner at law firm Al Tamimi & Co. in Dubai.
Courts then review the case and can issue a debt judgment that turns the property over to Dubai’s Land Department for auction. Waugh estimates the process may take two to four months.
Before the mortgage law was passed, lenders and builders could resort to the courts to enforce contracts, though they didn’t have the right to foreclose.
Tamweel’s pending cases, filed almost two months ago, involve homes abandoned by owners who left Dubai at the onset of the global financial crisis, CEO Wasim Saifi said.
Tamweel’s default rate has been “hovering between 2.5 percent and 4 percent for the past six months,” he said.
As alternatives to foreclosures, lenders in Dubai have extended payment periods and developers allowed customers with several properties to return some of them.
UK-based Standard Chartered and HSBC Holdings top the list of foreign banks providing mortgages in the UAE, according to Deepak Tolani, senior research associate at Al Mal Capital.
“While it is not Standard Chartered’s preferred approach, foreclosure is a legitimate course of action should a borrower not meet their obligations,” the bank said in a statement.
HSBC declined to comment on the issue when contacted by Bloomberg, while Islamic mortgage lender Amlak Finance didn’t respond to e-mailed questions.
Banks are unlikely to head to the courts to foreclose on properties en masse because of concerns that large numbers of repossessed properties on the market will drive prices lower, said Saud Masud, a Dubai-based real estate analyst at UBS.
While auctioning a few properties “will be easy,” hundreds or even thousands of foreclosure sales may draw buyers away from new and secondhand properties, Masud said.
The UAE’s central bank in October proposed reducing the time it takes for a loan to be classified as non-performing by half to 90 days. Banks “most probably” will be asked to comply during the first quarter of this year, said Sofia El Boury, a banking analyst at Shuaa Capital PSC.
So far, no properties have been auctioned, according to Mohammed Sultan Thani, assistant director general at the Dubai Land Department. Requests may start pouring in this year as banks give up on other alternatives, he said.
“Amicable solutions are hard to reach when a buyer lost his job,” or when a property is worth less than the amount owed on it, Thani said.
Barclays said the court’s decisions will renew lenders’ faith in Dubai’s legal system, “which could result in bigger lending mandates specifically for mortgage business.”
Judging by the first cases, the process seems to be working, Al Tamimi’s Waugh said. “Like anything, there are a few teething problems that are being resolved, but the fact that we have obtained judgments so quickly is positive.”
Are you in a battle with the banks to keep your home? Let us know by leaving a comment.
"Banks are unlikely to head to the courts to foreclose on properties en masse because of concerns that large numbers of repossessed properties on the market will drive prices lower, said Saud Masud, a Dubai-based real estate analyst at UBS." This is wishful thinking. You cannot buck the market. Capitalism works because the players act on self-interest and the incentive for some banks to break rank and sell will be too great. If the logic this chap argues were true, prices would not have crashed 50% last year; no one would have panic sold, because it would have driven prices lower. I have noticed rents appear to be down around 10% in the last month. Dubai World probably shook confidence of many. No doubt we'll see more 'the party is just starting' articles over the next few weeks. Remember to add some salt if you want to stay solvent!
I believe this could open the floodgates to allow banks to start to recoup some of the money that is owed to them, the auctions will show the real value of property here which is not going to be popular.
A legal route to collect monies owed is one that will be jumped upon by the foreign banks...and then for sure by the local banks. You only have to look at the USA and Europe to see that the trend of foreclosures are on the rise. The same model will be adopted by the banks here in the UAE...especially Dubai. There is a saying in the investment industry...your first loss should be your only loss. I do not see the banks waiting in the wings whilst other banks take advantage of todays market prices. The bank that acts last, gets the last price...which will be lower than the first property foreclosed. Banks do not inherently have hearts...they have self interest at the centre of their business model. Should the banks actually decide to start foreclosing you will see a natural decline in Dubai property prices...that is for certain. Maybe this law is the one that breaks the nerve of landlords and investors alike. The writing is on the wall that prices are going to drop. How everybody reacts in the next 2-3mths will tell you how far prices are set to fall. If the banks do as the western banks have done, Landlords and investors will become spooked and those that are aware of what happens in the west will know its time to liquidate and sit on the fence until prices stabilise again. The only thing that will stop a fall in prices is some bewildering belief that the Credit Crisis will be over within the next 18mths. It won't because it can't. Look at Greece, the ECB declared they will not bail out its nations debt problems. Look at Ireland, Bankrupt and in massive unemployment. Look at Iceland...75% of their poplulous DO NOT want to repay the foreign banks on their debt issues and a referendum is planned soon. Iceland WILL default on its foreign debt issues. Spain has 20-25% unemployment, Portugal the same. The knock on effects are massive, globally and it will impact on Dubai. We are not insulated as was seen by DW's potential default last December... Banks here and globally need to swell their balance sheets to survive. There is still a massive, massive squeeze on available credit worldwide. Only 2-3mths ago, a banking conference in Dubai declared that there was a liquity issue within the banking sector in the UAE of $11bln = AED40bln. The easiest way to add to their balance sheets is to recover what they can from non-performing mortgages and ultimately foreclosures
If the bank forecloses my house and it sells for less than the outstanding mortgage value, will I still be liable to pay the difference? Is this a kind of limited bankruptcy that will allow property owners to get out at a limited loss (what they have paid so far) or will UAE's debt laws still apply to the difference?
Actually dvelopers should be held responsible. I have a property from Damac, masterdeveloped by Nakheel for which I have taken loan and has been paying the EMI regularly. But the completion is delayed beyond anyone's imagination and the property is not yet handed over to me. If it was handed over, at least I could have lived there and saved on my rents. Now I keep paying interest for the mistake of the developer..! So court should actually ask the erring developers to pay the interest and not the poor buyer !
Nasir/12% Sorry, you wont get a clean chit if you default on your mortgage, and the bank forecloses and sells your house for less than the amount you borrowed. You will be liable to repay the difference between the amount you borrowed and the proceeds of the forced sale. As an example, if you bought your house for 2,000,000 with an 80% mortgage, you borrowed 1,600,000. If your house sells at auction for 1,000,000, then the bank will be chasing you for 600,000 (plus costs, plus interest).
If a property in negative equity is foreclosed on and sold in the market it does NOT allow the borrower to just walk away from the remaining balance owed and get a clean 'chit'. The borrower is STILL responsible for the full repayment of the mortgage deficit + costs. Unless the banks are prepared to write off the deficits, they will chase the borrower until it is repaid, much like any other loan. I don't know if Mortgage Indemnity Policies/Guarantees were put in place for mortgage borrowers in the UAE...but even if they were, the market has still dopped too far for the banks to be fully covered. There will still be deficits...and those will have to be repaid. This law is good for the banks but not the mortgage holders/borrowers in financial difficulties...
The comments I read here are not only shocking, but display the immaturity of the market and its participants. The same people who laughed at me for not wanting to buy and earn obscene returns on a property which was already overpriced, and hence called me a coward or imbecile, are the same type of people who now blame the developers for their financial difficulties. Risk management is not only done by the banks but by every responsible investor. I can't invest if I can't afford to lose the investment or bridge the loss until the original value is recovered. Of course mortgage owners pay interest linked to the risk exposure of the underlying asset, but that does not include a fully comprehensive insurance policy. If investors check their mortgage policies I am sure they will search in vain for a clause that says "In case of devaluation of your property we will return your loss, reduce the loan amount, adjust your repayments and issue a stupidity bonus cheque to cover your dependants". Why should they. I can only hope that this crisis has taught a lot of people a valuable lesson in investments; a game which is usually only played by professionals with large research knowledge behind them. Drivers are not allowed on the roads without a driving licence; hobby investors should not be allowed to gamble away their family's future based on greed, hear-say and advertisements. I hope that the learning curve is steeper than the previously calculated profits!
Totally agree with A Non Buyer - where are all the people crawing at bars 18 months ago about the vast sums of money they had made on property, bragging that they had their retirments made already and genuinely contemlating giving up their day job to become full time real estate invetsors? Leading the cry about how unfair the UAE is. And how they were hoodwinked. Grow up. It was not unfair when they 'thought' they were tripling their money inside a few months. That was cause they were smart people. And before anyone accuses me of sour grapes, do me a favour. You pays your money, you takes your chances.
I get a bit upset when others blame me for being stupid, having invested in this market. Well I donâ€™t call myself an investor as my plan was to live here and built myself a life for the future. Yes, I lost money like so many other people but Iâ€™m not a dirty investor trying to push the markets to highs for my own benefit. These investors who flipped properties for a 10% gain per month were to blame but also the developers who kept increasing their prices, the agents to collect their commissions, the land department who collected a lot of money due to registrations, all those are to blame! For months Iâ€™m trying to get my money back as the retail-shop we bought was cancelled, the real-estate agent closed and the owner on the run. They list people on the wanted list for a few thousands but what about my hundred thousands and what about your millions???? Is there anyone doing something about it???