Dubai’s housing rout sent prices down 52 per cent in the past year, prompting some homeowners to abandon their cars and mortgage payments and flee the country. Not one received a foreclosure notice.
Until now.
Barclays plc has won the sheikdom’s first foreclosure cases in court, clearing the way for lenders holding about US$16 billion of Dubai home loans to take action when borrowers don’t pay.
Islamic lender Tamweel PJSC, the emirate’s biggest mortgage bank, has several of its own foreclosure claims pending and estimates about 3 per cent 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 fuelled price increases left the market, according to Deutsche Bank AG. Moody’s estimated in September that 12 per cent 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.
Mr Waugh estimates that the process may take two to four months.
Barclays, Britain’s second-largest bank, said in an e- mailed reply to questions 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 United Arab Emirates 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 per cent to 32 billion dirhams (S$12.1 billion) as of November, compared with a year earlier.
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, chief executive officer Wasim Saifi said.
Tamweel’s default rate has been ‘hovering between 2.5 per cent and 4 per cent 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.
The absence of mortgage securitisation here makes it easier for UAE lenders to restructure loans than their counterparts in the US, where mortgage debt was often sold on to investors.
UK-based Standard Chartered plc and HSBC Holdings plc top the list of foreign banks providing mortgages in the UAE, according to Deepak Tolani, senior research associate at Al Mal Capital PSC.
‘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 PJSC 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, Mr Masud said.
‘It’s a slippery slope,’ he said. ‘Mass auctions may re-price the property market in a meaningful way as investors prefer to pick real bargains in auctions.’
A cultural stigma attached to forcing people out of their homes has also deterred foreclosures. However, that may not protect speculative investors who helped drive prices up by buying several properties with the aim of selling at a profit soon after.
‘The mortgage law has given clarity and certainty to the exact process that must be followed by anyone wishing to enforce a mortgage,’ said Mr Waugh, whose firm is currently handling fewer than 10 repossession cases.
Dubai’s population, which is about 90 per cent expatriate, may drop by 8 per cent in 2009 and another 2 per cent in 2010, UBS AG estimated in March last year. Dubai’s immigration department doesn’t provide regular statistics on visas.
Citizens make up only about 20 per cent of the overall UAE population, which largely consists of workers from countries including Pakistan, the UK and Lebanon. Workers have one month to leave the country after their work visas are cancelled.
Dubai first allowed foreigners to own property in 2002. That led real estate prices to quadruple in the following six years, helped by a growing expatriate workforce and speculation fuelled by borrowing.
The UAE last year scrapped a rule that automatically qualified homeowners in Dubai for a permanent residency visa. Owners of properties valued at one million dirhams or more are now required to renew residency visas every six months.
About 65,000 residential units will be completed in Dubai by 2011 and the emirate needs to create a minimum of 100,000 white-collar jobs to satisfy oncoming supply, Nomura said on Oct 15.
Deutshe Bank estimates that 30,000 units may be delivered by the end of this year.
‘When people talk about litigation in the Middle East, they’re concerned over the possible time it would take to obtain a judgment,’ Mr Waugh said. ‘The speed at which it appears judgments may be obtained under the mortgage law is a real, positive sign for banks.’ The Barclays cases were filed in November, he 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 has lost his job’ or when a property is worth less than the amount owed on it, Mr Thani said.
Mortgage loans totalled 137.6 billion dirhams in July last year, central bank data shows. About 25,000 to 30,000 mortgages have been taken in the UAE with over 95 per cent of them in Dubai, analysts say.
The central bank estimates that real estate accounts for about 13 per cent of total loans in the UAE. Shuaa Capital’s Ms El Boury said the real figure is ‘much higher’ and official numbers aren’t realistic ‘given the financing contributions to real estate construction and development in the UAE.’
The new mortgage law applies to only some kinds of Islamic lending, Mr Waugh said.
Shuaa estimates about 25,000 mortgages were extended by Tamweel and its competitor Amlak alone. The two lenders, which control more than half of the UAE’s mortgage market, are set to merge this year. Shares of both companies have been suspended since November 2008.
The biggest risks to banks come from loans underwritten after 2007, which are ‘most probably in deep negative equity by now’, Moody’s Mr Yacoub said.
Also at risk are Islamic Istisna’ mortgages where a buyer doesn’t make any payments until the property is delivered, he 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 Mr 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.’
Source : Business Times – 12 Jan 2010
