Saudi mortgage law to take time

A long-awaited mortgage law in Saudi Arabia is expected to be delayed further as it still faces obstacles in the appointed parliament after nearly two years of debate, a key bank in the Gulf Kingdom has said.

Once it is approved, the law could trigger massive bank financing for housing but it will unlikely transform the real estate sector overnight or directly address housing supply constraints that have kept rents and property prices at very high levels, the Saudi American Bank Group (SAMBA) said in a study.

It said the mortgage law, which deals with default and other issues that have impeded mortgage lending by banks in the Kingdom, apparently gives lenders the right to foreclose on properties in default, while lenders would gain the added security of reporting debtors through a central authority, rather than through a notary public as is currently the case.

“The bill is currently with the Shura Council (parliament), but consideration of the bill has been delayed….… final approval by the Council seems unlikely in the near term, given a number of issues relating to oversight and enforcement of the law that have yet to be resolved,” the study said.”

“Once it is enforced, the mortgage law will not transform the housing finance landscape overnight. The law should help to transform potential demand into real demand, but it does not—directly at least—address supply constraints.”

SAMBA said it believed the passage of the law would be an important breakthrough in opening up housing finance to a large section of the Saudi national population—the low- and middle-income earners.

“By effectively providing collateral the mortgage law would give banks the comfort they need to expand lending,” it said.

“By effectively providing collateral, the law should therefore provide lenders (primarily banks) with the comfort to expand mortgage lending significantly. Banks have been geared up to accelerate mortgage lending for a long time and are well capitalised with low loan-to-deposit ratios. A well-functioning credit bureau is in place, and salaries are paid directly into bank accounts.”

The study expected that once the law is fully implemented, potential exists to liberalise the market, by allowing in non-bank providers.

It said competition in Kuwait and the UAE has led to a wide range of primary mortgage products, and features such as penalty-free refinancing, second mortgages on favourable terms, and fixed interest rate mortgage products.

“These are important advances… for example, the capacity to borrow against accumulated home equity allows households to tap their housing wealth directly and to borrow more when house prices increase….. similarly, the absence of early repayment penalties frees the borrower to refinance their mortgage debt in the event that interest rates decline,” it said.

“A mortgage market could also open the door to securitization in the country.. securitisation gained a controversial reputation during the global financial crisis, but that should not obscure its inherent advantages….. by allowing banks to deploy their capital more effectively, securitisation encourages credit growth and helps to deepen financial markets.”

SMABA said it expected that the law might not encourage a significant increase in housing credit until it has been properly “tested”.

In practice, it added, this would mean the legal authority ruling in favour of a lender in a case where the borrower was in default.

“ It might also require actual foreclosure of a property before lenders have sufficient comfort to expand lending significantly,” the report said.

“In addition, the law will only cover property that has the proper permits. It is estimated that 30-40 per cent of existing residential property in Saudi Arabia lacks proper licensing owing to a failure to obtain official planning approvals.”

But the report expected the law to constitute what it described as a “catalyst” to increase both demand and supply in the housing sector.

“If the law releases demand, particularly at the lower- and middle-income level, then we think that new developers will indeed be attracted to the market—helped by the fact that development opportunities elsewhere in the Gulf region have dwindled substantially in recent years,” it said.

“Similarly, as demand is released and new supply is stimulated, so new providers of valuations, insurance and other auxiliary services will enter the market. With greater mass should come better quality and greater consistency…ultimately, the mortgage law could prove to be a catalyst for a number of positive developments in the Kingdom beyond the obvious boon to construction, downstream industries and securitization. There is enormous untapped economic potential in the middle- and lower-middle classes—potential that could be released by providing them with the means to secure their own property.”

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