Mortgage litigation booms as banks lose patience

Banks in the UAE are beginning to take tough calls on home loan defaults, with one of the country's largest legal practices firms witnessing a massive jump in mortgage-related litigation and arbitration in the first quarter of 2010 compared with the corresponding period of previous year.

"Banks are losing their patience [after] restructuring mortgages and hoping that things would change, and have started to go to court. Such cases tripled in the first quarter of 2010 compared with the first quarter of 2009," Husam Hourani, Managing Partner of Al Tamimi & Company, told Emirates Business.

Most banks have announced that they would assist genuine defaulters by renegotiating maturity periods, etc, but with a number of speculators opting for strategic mortgage default – when a homeowner stops paying their mortgage because the property value may have declined to less than what is owed to the lender even though the borrower is still financially able to service the debt – many banks are now seen taking the legal recourse.

"It seems that most of the banks have taken the decision that they are going to go against home mortgage defaulters, and it seems that now this is the stage where we will see more and more [such] cases," Hourani said.

In the past 12 to 18 months, UAE banks have become increasingly conservative while advancing home loans as the global economic slowdown led to price-corrections in the country's real estate sector.

Evidently, after more than doubling from Dh56.47 billion in 2007 to Dh125.83bn in 2008, the mortgage portfolio of UAE banks grew just 12.6 per cent to Dh141.71bn in 2009, according to Central Bank statistics.

According to Colliers International's latest Dubai House Price Index, numerous banks "revised upward the loan-to-value ratio (LTV) and lowered interest rates" during Q1 2010, with leading mortgage providers now offering LTVs of "75 to 90 per cent with interest rates varying between 6.5 and 8.5 per cent."

However, the Colliers report reiterated that "banks remain selective in offering finance, providing it against specific projects [mainly completed or near completion] and only to borrowers who can meet the strict lending criteria adopted by most banks".

Although some banks have started to take the litigation route, analyst opinion remains split on the best way forward. "As the real estate market slowly improves, we expect banks will look more closely at their mortgage portfolios and bring more court actions, but for now, the industry is still largely in a 'wait and see' mode," said Richard Bell, Senior Associate, Clyde & Co.

"The UAE is different to many jurisdictions in that the banks are not afforded a self-help remedy. Self-help is where a bank takes possession of the property and sells it. In Dubai for example, self-help is replaced by a system whereby once formal procedures have been followed, the relevant authorities will arrange for a public auction of the mortgaged property," added Nick Clayson, partner and Head of Real Estate, Middle East, Norton Rose.

"We understand that a number of banks have adopted an alternative position to the statutory position by negotiating with the borrower at the time of default. Such negotiations have resulted in agreeing that the bank may take ownership of the asset immediately [rather than the asset going to public auction] leaving the bank to decide the method and timing of disposal – effectively a negotiated self-help at the time of default," he added.

However, Clayson explained that the law does not provide for such alternative positions. "The Dubai Mortgage Law does not allow the banks and borrowers to agree such a method in the mortgage agreement or any subsequent agreement [although my understanding is that such an agreement at the time of default would probably be lawful]," he said.

"In a fluctuating market, banks may favour negotiating with their borrowers at the time of default over risking an uncertain result at public auction. Banks initially took a cautious approach with some continuing to await regulatory clarification that negotiating at the time of default is not deemed beyond the spirit of the law," he added.

Moreover, experts maintain that the high cost of litigation and a host of other factors make out-of-court negotiations more feasible to legal recourse. "We haven't seen a significant increase in the number of mortgage cases going to court," Clyde & Co's Bell said.

"This is due to a number of factors, including the cost and uncertainty of litigation, weak demand in the property market [which has an impact on the re-sale price of re-possessed property], concerns about possible negative publicity and concerns that if too many properties are repossessed and sold, this may further depress prices," he added.

"While some actions have been taken against absconding mortgagors who have left the UAE altogether, the overall trend we are seeing is that banks are holding off on taking across the board legal action against defaulting mortgagors until market conditions improve and there is more clarity in the regulatory regime applying to mortgages," Bell said.

"In respect of the latter issue, the recent decision of the Dubai Courts in the Barclays Bank case [where the Courts granted an attachment order over the property of a defaulting mortgagor] has been widely hailed as a positive development for mortgage lenders, but there is still uncertainty as to what the procedure is for the re-sale repossessed property," he added.

Nonetheless, Al Tamimi's Hourani insists that his legal firm is enjoying a swathe of litigation and arbitration opportunities.

"Earlier, our litigation team was doing 30 per cent of the work while commercial corporate banking and real estate were handling 70 per cent," he said.

"Now, arbitration and litigation for 2009 have jumped from 30 to 55 per cent while the rest has been reduced to 45 per cent. To be honest, we still see an expansion in litigation and arbitration activity this year, especially in banking. Earlier, it was mostly litigation concerning real estate developers and contractors while this year, we are seeing a substantial increase in home mortgage-related litigation," he said.

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