By Shaheen Pasha
Draft regulation sees debtors forced to either repay mortgage or vacant property.
Saudi Arabia's long-awaited mortgage law will give lenders more rights including the ability to foreclose on properties in default, according to a draft seen by Reuters.
The arrival of the mortgage law is expected to drive Saudi housing demand and prices as more people access the market.
The sharia-compliant legislation, which has not been finalised yet, allows lenders to enforce their mortgages by reporting debtors to a central authority and forcing them to either repay their debt or vacate a property.
"This is a huge development and the draft is a step in the right direction," said Michael McMillen, partner and head of Islamic finance at law firm Fulbright & Jaworski LLP.
"The overall structure of this law is very familiar to a collateral security structure and it's obvious they've taken a long time to work through both what financiers want and how sharia works."
The draft law also addresses concerns over subprime mortgages, implementing a "safety ratio" which will prevent lenders from giving financing beyond the means of the consumer. Specifics regarding the ratio have yet to be established.
The mortgage law, which has been in planning stages for almost a decade, was supposed to have been implemented last year. Saudi officials now expect it to be passed in a few months with few, if any, changes to the current draft, sources said.
The Saudi Arabian Monetary Agency (SAMA), the country's central bank and one of the authorities overseeing the draft, was not immediately available for comment.
Under current Saudi mortgage lending practices, a notary public records a title deed that the property is subject to a mortgage. But notary publics are known to refuse to record those rahns, or pledges of property to secure a debt, if they have any concerns over the lender.
The new law creates a central authority to register the documents, reducing the role of the notary publics and making it easier to validate mortgages.
The registration clause, which extends beyond home financing to commercial real estate, could draw more commercial finance business to Saudi Arabia.
If the law is finally put into place, it could usher in a new boon period for mortgage financing in Saudi Arabia -- an area traditionally avoided by financial institutions due to a lack of proper regulation.
"The opportunity is enormous," said Jarmo Kotilaine, chief economist at NCB Capital in Riyadh. "If we look at this from the perspective of the financial sector, mortgage lending has been one of those missing elements."
Saudi Arabia's population has risen to over 25 million, according to government estimates, posing a challenge to the government in terms of providing jobs and housing. Annual housing demand may hit 160,000 new units each year and up to 50,000 units in unmet demand, according to Egyptian investment bank EFG Hermes.
Interest in commercial real estate, in particular, could take off with the passage of the law. International lenders have been reluctant to step into the Saudi property market amid a downturn in the Gulf real estate sector and a debt meltdown at two Saudi family firms.
"There is great demand for projects like hotels and malls in Saudi Arabia," said Nabil Issa, a lawyer at King & Spalding.
"It's likely that lenders will initially focus on commercial lending and as they get more comfortable with the new mortgage law, that it will extend into other areas."
NCB Capital said real estate prices are expected to rise 20 percent over the next three years in Saudi Arabia.
Last month, the Saudi finance ministry's Public Investment Fund (PIF), which is one of the largest investors in the Saudi stock market, agreed to take a 20 percent stake in Real Estate Finance Co. (REFCO). Refco is planning to start offering home loans in 2010. (Reuters)
In the case of banks (unlike other lenders who cannot create money from nothing as a ledger entry), we have seen from the US staged crisis that banks make more money by foreclosing after about 7 years and through the FDIC insurance. Remember that banks create money from nothing as a ledger entry, i.e. the bank created a ledger entry with which you purchased the house. How can it take posession of a real asset from the money it created from nothing?
Some would assume that if they have already gone through a mortgage foreclosure they are done with it once the home has been sold. Well, that isn't correct. If you have a delinquent home loan and you are foreclosed on, the lender can sue you to recover funds once they have sold the home. If you are heading towards an underwater mortgage, you're better off getting the bank to agree to a short sale before anything else, because a lawyer to fight a lawsuit costs more payday loans