Banks mull restructuring mortgage loans: banker

UAE banks are considering restructuring of real estate mortgage loans they provided during the boom years of 2007 and 2008 to avert a massive default crisis following a steep fall in property prices, according to a local banker.

Abdullah bin Khalaf Al-Otaiba, Director of the Corporate Banking Group at the government-controlled National Bank of Abu Dhabi (NBAD), said banks are studying this option because of the steep decline in the property asset value.

“They also realise what guarantees they have received when they extended these loans…it has become clear to them that the income from mortgaged property will not cover the debt installments agreed on between the banks and debtors before the eruption of the global fiscal crisis,” Otaiba was quoted as saying by the Arabic language daily Emarat Alyoum.

“This is encouraging banks and debtors to consider restructuring of the mortgage loans…extending the period of repayment with unchanged interest rates is among the options being considered.”

Otaiba cautioned banks against pushing debtors to sell their property asset at a low price to avert resorting to court.

“This pressure by banks will only lead to a further decline in the property prices…what we need is cooperation between banks and the Central Bank to devise legal frameworks that serve the interests of both parties.”

Otaiba gave no figures on mortgage credit but data released by the Central Bank showed the UAE’s 23 national banks and 28 foreign units have lavished in excess of Dh160 billion in such loans by the end of July.

The bulk of the loans were extended during 2007 and the first eight months of 2008, when the country and other Gulf oil producers were basking in an economic and business euphoria due to a surge in crude prices.

The situation was reversed by the crisis that flared in September 2008 and sharply pushed down the real estate sector in the UAE and other regional countries after it was one of the fastest growing sectors.

The downturn coincided with regional debt default crises that have allied with the economic downturn to force banks to largely boost their loan loss provisions. Analysts expect the banks to keep taking provisions because of the real estate downturn despite the recent debt deal announced by Dubai World.

“My feeling is that banks are also making provisions against real estate loans on expectations the property sector is poised for a further decline,” said Ziad Dabbas, financial adviser at NBAD.

According to a key Western financial institution, UIAE banks have emerged as more vulnerable to real estate downturns than those in other Gulf oil producers because of their massive lending for that sector.

The Washington-based Institute of International Finance (IIF) said over-exposure to real estate and Saudi businesses has eroded the Gulf banks’ asset quality.

“In the UAE, the banking system is significantly exposed to the construction sector and the highly speculative real estate sector. Several banks in the UAE are exposed to high levels of credit risk in connection with the family-affiliated conglomerates in Saudi Arabia and government-related entities in Dubai.”

Emarat Alyoum quoted an unnamed banker as saying rescheduling of mortgage loans is now a “strong option” for banks.

“Banks are worried that corporate and individual investors might not be able to pay back their debt…….resorting to court to tackle this problem will not be feasible for most banks,” the banker said.

“I believe the loans that are affected are those extended during 2007-2008 as debtors are usually given three years go complete construction, rent and sale of the property before they start paying the debt installments.”

Quoted by the paper, a prominent businessman in Abu Dhabi said he believed all real estate projects in the UAE are financed by banks.

“All buildings and other real estate ventures in the country depend mostly on bank funding…owners rarely use their own funds to finance such projects,” said Otaiba Saeed Al Otaiba, Chairman of Al-Otaiba Group.

A source at the Central Bank told the paper said no property project in the UAE had been shelved just because of lack of bank funding.

But the source added: ”The real estate is no longer an attractive sector…it should be noted that the Central Bank laws ban banks from extending mortgage loans that exceed 20 per cent of their total deposits…the Central Bank is now working on a comprehensive mortgage law, which we expect to issue by year end.”

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