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Wed 13 Jan 2010 07:32 PM

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UAE banks in no rush to use foreclosure law

Banks to use foreclosure option as a last resort to avoid incurring losses.

Banks in the UAE, heavily exposed to the region's ailing real estate market, can use a local foreclosure law to reclaim assets, but a sharp increase in repossessions is unlikely for now, lenders and analysts said.

Barclays this week became the first bank in Dubai to win a foreclosure order, yet other mortgage lenders are in no rush to follow suit as they seek to avoid adding pressure to an already bruised real estate market.

A court ruling allowed Barclays to foreclose on several properties, though a spokeswoman for the bank declined to give more details on the case.

Dubai's property sector has suffered a sharp correction under the global financial crisis, with prices down more than 50 percent from the height of the boom, according to analysts' estimates.

Dubai's two biggest mortgage lenders Amlak and Tamweel, whose shares were suspended in 2008, have suffered in the crunch and plan to merge.

A foreclosure allows a lender to seize the property of owners who have been unable to keep up with mortgage repayments. The economic slowdown in the region, combined with the bursting of Dubai's property bubble in late 2008, significantly increased the risk of payment defaults.

Yet some banks say the foreclosure option will only be used as a last resort, because the diminished value of property assets means they will incur losses.

Amna Saleem, mortgage officer at Standard Chartered, said: "The bank is not foreclosing any properties right now, nor reclaiming."

The bank is an active player in the mortgage market here which continues to lend despite the downturn.

She added: "Properties are undervalued right now, so banks will be making a huge loss on them."

"Instead, the bank is introducing a debt relief programme, to re-evaluate the financials of people who have not made repayments in two months or so. The bank is asking them to just make the interest payments."

The retail lending head at a major international bank in the region said lenders will also await further clarity on the foreclosure legislation before taking matters to court.

Speaking to Reuters, an executive, who did not wish to be identified said: "It is too early to talk about how the foreclosure law will unfold, it depends on what the process is and how much time it takes."

He added: "It also depends on the underlying value of the asset; property prices in the region have fallen considerably. Banks may want to pursue the customers rather than claim the property."

Analysts were also cautious about interpreting Barclays' case as an indication banks will initiate foreclosure procedures on a large scale.

Ali Khan, managing director and head of brokerage at Arqaam Capital, said: "I don't necessarily think this (Barclay's foreclosure order) will set a precedent for a foreclosure tsunami."

He said: "We've been told banks are trying to work with borrowers and we haven't seen any message shift."

"Their priority is to stabilize the housing market rather than throw in a sledgehammer and create possible ripple effects," he said.

Other experts pointed to the foreclosure ruling as an important step in the development of Dubai's real estate market, known for its extravagant projects like the world's tallest tower and man made, palm shaped islands.

Matthew Green, head of research and consultancy at CB Richard Ellis Middle East, said: "Typically we would not expect this process to be utilised for every type of dispute, rather those cases where no other logical route is available for the banks to follow."

He added: "It's another important process now in place, helping the real estate market edge towards maturity." (Reuters)

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Real 10 years ago

The UAE bank will not be interested in using the foreclosure law as long they have the guarantee cheques which allow them to impose any fee, rules or regulation on their client who will never be able to object unless he have the capability to pay back in full or he is planning to run away !!, apart from that banks will always threaten to put him in jail and will do that at their will if he refuse to obey to their payment schedules or demands , the foreclosure law will only be used if the client run away and they were not able to pressure or threaten him . Moreover, the majority of mortgages contracts in the past was made according to the Shariaa law which prevent the banks from demanding any balance payment once they take over the property due to the fact that they are partner in the deal (it’s lease to own contract and not simple mortgage ). The entire situation will be cleared once the expected new bankruptcy law is declared ; this will be accompanied by cancelation of the current cheques protection where all the bounced cheques will be referred to civil courts instead of police , these move will force the banks to reach amicable settlement with their clients and give the investors fair and legal chance to defend their rights .

Telco guy 10 years ago

Spain has a very different legal framework and still banks are not keen on foreclosure. They rather keep the mortgage alive for as long as possible, waiting for a miraculous recovery, rather than foreclose and take a hit on their books. Spain's central bank is supporting these as it keeps Spanish Banks with healthy profits... for the time being.

Rajagopalan 10 years ago

I thought the banks' right to foreclose the properties would already be incorporated in the loan documents. Then why they have to go to the court to enforce it, if they decide to invoke on that clause? Can somebody clarify please? I agree that it is purely a bank's choice whether to invoke the foreclouse clause or not. Not invoking the forclosure clause but introducing a debt relief programme seems more comfortable.