By Rob Corder
Foreclosures can strengthen the real estate market if the courts apply them fairly, says Rob Corder.
Foreclosure is a desperate last resort for lenders and mortgage holders that have reached an unrecoverable breakdown in their financial relationship.
It is in every party’s interest to avoid this last resort, but the fact that it is now a
practical legal option in the UAE
will, in the long run, be good for the market.
The mortgage market operates on trust, with a few contractual safeguards that allow some recourse should things go wrong.
Around the world, lenders do their best to minimise their risk by checking that borrowers are able to pay their mortgages. They build in a safety net by demanding considerable down payments that they can keep if they are forced to foreclose. Contracts are signed that identify in minute detail the obligations and rights of both parties.
Home owners do their own risk assessment. Is the house structurally sound? Can I afford the mortgage if I lose my job? How will I cope if interest rates increase?
The problem in the UAE is that these checks and balances were virtually impossible to replicate in the early days of the real estate boom, and even today the legal system is still vague in parts and untested.
In the early days the risk of legal problems was built into the price. At launch, an apartment in Jumeirah Beach Residence could be bought off plan for as little as AED250,000. The early buyers were seasoned property developers who knew a high risk, high reward market when they saw one.
As the market soared in 2006 and 2007, prices no longer reflected the risks. The legal system was still relatively immature and a dangerous asset price bubble was inflating.
By this stage, the professional investors had made their millions, and the amateurs (including perfectly sensible people who wanted to switch from renting to buying for their family homes) were the only buyers in town.
These amateurs, particularly those that bought off plan on projects that are currently mothballed, are today facing foreclosure on properties that they have never even seen built.
They are trapped in a purgatory where master developers are protected by RERA, which is allowing them to label projects as delayed, rather than cancelled.
A delayed project means property owners cannot get their money back, which means mortgage payments must be maintained even though the value of the investment is way below the size of the debt.
Normal foreclosure rules should not apply in this circumstance. The fault lies with the developers and with RERA, not with home buyers.
RERA should pull the plug on stalled projects so that buyers can get their deposits back and pay them straight into the banks to clear their mortgages. If this doesn’t clear the entire debt with a bank, the bank would most likely have to write off the loss and move on. This must not be deemed a criminal offence.
It is unfair and legally questionable for banks to punish hard working families that paid huge deposits for homes that, through no fault of their own, have never been built.
Foreclosure is a necessary legal option in a mature real estate market that ought in time give banks greater confidence to lend again and get the real estate market moving. But private households should be protected by the courts in instances where the blame lies with developers and authorities.
Hard hitting comments there, with a large dose of common sense. And therefore likely to fall on deaf ears in Dubai. From lack of protection over whether visa would be issued with bought propertires, to little protection from the banks over mortgage rates, to unqualified levels of annual maintenance payments for built property, to no control over developers finsihinng unfisnished projects - the property market that was Dubai is turning into one of the worst nightmares for thousands of people.
Hope somebody care to listen and understand this.
Same situations here in Bahrain, we have invested 30% down payment on our "home" with the bank lending the remaining 70%, with only 20% outstanding the development has stopped 2 years into construction due to the developer having NO FUNDS!! What a surprise, a $750 million development being allowed to begin on speculation and no back up funds, who pays, the gullables who simply want to invest in a mortgage and a home, who suffers, the same people? Now we are left continuing to pay our mortgage for nothing to show for it except a grief stricken half build building site and the developers do what they like when they like and nothing is done? When will Shari'a law recognise the the faults and step up?
Although i agree 100% with the sentiment and the logic of this article it doesn't reflect the fact that buyers bought, developers sold, contracts were signed, toothless RERA failed to regulate as it was mandated to do and the banks were pulled in to finance the majority of all purchases... Ask each entity who is to blame or who is responsible and they will blame each and every other party...but never themselves! In a development that is not completed due to the Developer failing to complete or begin a development...the law should protect the buyer in all instances. That is not to say the buyer should not be responsible for the contract they signed, moreover that they should be protected by law, against the law until the whole mess can be sorted out. It appears the developers in all of this just simply fold, run or the law does everything it can to protect them. RERA is a complete waste of time and the banks...well they do need their money back. Maybe the banks should fight the developers not only get their money back but also assist their own borrowing customers who are indebted to the bank. It is the developer who is at fault. It is the developer who should suffer and have their assets frozen where it can be proven that the developer is not progressing with the development. For all other foreclosure cases, it is unfortunate because economic circumstances are driving the banks to recover their monies so they don't go under. Its a self centred business model...but what do you expect from the banking industry?
"The problem in the UAE is that these checks and balances were virtually impossible to replicate in the early days of the real estate boom, and even today the legal system is still vague in parts and untested." I think this fails to appreciate that there is a fundamental incompatibility between the UAE legal system and property purchases or other major investment in the UAE, especially by foreigners. Laws are passed by decree, normally without public consultation or notice periods, and there is no judicial ability to review and strike down decrees/laws on constitutional grounds. While this can result in very swift and efficient action at times, it poses a risk to anyone investing that the goalposts might move without any warning, and without you having any comeback. The promise of residential visas to property owners being a case in point. It is not to say that one should not do business in the UAE of course (I am still here!). Only that one should properly price in the risks of paying up front for the biggest purchase of your life in a place where you have simply to trust that the seller will deliver, and have virtually no recourse if they don't. It is also a little rich of AB to imply that from 2006 it was clearly a bubble and only amateur investors were buying. Do you really want everyone to go back and look at your archives? Right up until the crash, and beyond, you had a constant stream of articles telling people how Dubai property was a safe and sound investment and would not crash.
I spoke to my lawyer regarding the foreclosure law and who is responsible for the deficit balance of any property sold in negative equity with a residual mortgage balance... His answer in the case of Sharia Compliant Mortgages is that the BANK is responsible for the mortgage deficit, NOT the borrower. In the case of Non-Compliant mortgages it is the BORROWER who is responsible for the mortgage deficit. The devil is in the detail...of your contract. But at least this should bring a ray of light/hope to some.
Rob, you have raised some very valid points. What most people (those who bought properties) would like to see is developers being penalised for not fulfilling their promises. I don't think it is fair that only the buyers should be penalised when the sellers too are guilty. Also I can't remember reading any articles on Arabian Business in 2006, 2007, 2008 and even till first half of 2009 which clearly stated that the Dubai Property market was a bubble. Would you care to show us some examples? The press kept insisting that Dubai's property market was immune to the global economic scenario.
Please feel free to search AB under the name Stephen Corley from years 06 to 09 inclusive and also under Mishal Kanoo for the evidence you seek. We trumpeted the inevitable disaster to a deaf audience for years
I'm not sure the banks will ever take the cost of the developers defaulting, but they should definitely be held accountable in some way. Rather than assisting customers holding mortgages on projects not going ahead, the banks have increased interest rates. The banks should at least allow payment holidays or the rate of defaults will continue to be huge.