By David Nicholson
The development of Dubai's home mortgage security arrangements is one of the industry's most interesting stories.
The home loan industry is an industry that is in its infancy in Dubai, developing alongside the residential property industry.
It has been recently reported that something in the order of 30% of residential properties in Dubai are financed from home loans.
The development of the home mortgage security arrangements is one of the property industry’s most interesting stories.
If international norms are a guide, the home loan industry is clearly set to boom provided that the money to lend is available and the legal framework is in place to enable banks and financial institutions (FI's) to take larger positions in the home loan market.
The development of the home mortgage security arrangements in Dubai is one of the property industry's most interesting stories.
As the law embodying freehold title for foreigners was not in place, security arrangements had to be invented to enable banks and financial institutions to take security over properties upon which they lent.
This was done by the master developer establishing cooperation agreements with the individual banks that set out tripartite arrangements between the master developer, the banks and FI's and their borrowers, whereby the borrowers would assign (in the case of Islamic financing) and conditionally assign (in the case of conventional financing) the purchase contracts that embodied the right to ownership of the properties.
This was supported by the master developers setting up their in-house ‘mortgage registers', and being the administrator or any subsequent transactions affecting the property.
This invention was necessary as otherwise the banks and FI's would have no basis for home lending, pending the establishment of the property laws.
This process has underpinned home lending in Dubai for the past three years for completed and delivered properties and also for off-plan purchasers.
With the implementation of the Dubai Property Law enabling foreigners to own real estate, the Escrow Law that governs the use of off-plan purchaser's instalments and the Joint Ownership of Property (strata) Law that regulates the ownership and management of common property, Dubai now has a set of laws that give foundation and support to buyers and to lenders.
Banks and FI's can now register their mortgages against the title deeds to borrower's properties.
The next step is for Dubai to implement a mortgage law that will better define the rights and remedies of mortgagors and mortgagees.
There might also be consideration given to the rules for the selling by banks and FI's of loans to potential borrowers, in order to avoid the prospect of mis-selling.
At the present time the process for the recovery by banks of defaulted mortgage loans from the proceeds of the sale of the properties requires judgment and execution through the courts.
Court procedures can be lengthy and costly and the taking of people's homes is a sensitive issue in any jurisdiction.
Nonetheless, there is a need to clearly define the rights and obligations as banks and FI's need to have the confidence that they can enforce their security.
Similarly, potential borrowers need to have protection to ensure that they are in a position to fully understand the obligations and costs of the loans they are taking out.
One of the issues that had arisen from the US Federal Reserve enquiry into the sub-prime crisis is that some home mortgage lenders aggressively sold loans to borrowers who had little chance of repaying them.
They had proposed new rules that would force lenders to show customers that they can realistically afford their loans and disclose all hidden fees showing that even in mature markets the relationship between lender and borrower needs close consideration and intervention from time to time.
David Nicholson is General Counsel at Nakheel.