Mortgage market needs a little push

Contrary to popular belief, it is still possible to find a mortgage in Dubai. The former key players such as Amlak and Tamweel may have closed their doors for new business, but others are prepared to lend on a conservative basis to good quality end users.

Ninety per cent finance might be a thing of the past, with average loan-to-value (LTV) ratios of 70 per cent, but with prices falling to more reasonable levels, some buyers can still afford the down payment.

Banks are generally blaming a lack of liquidity for their reluctance to lend.

However, their confidence has been dented by seeing property values fall for the first time in Dubai, and they fear that the market has some way to fall before it stabilises. When the market was rising they were confident that in the time between a valuation and the loan disbursal, the value of their security would have increased.

In a falling market, the opposite is true, and most banks will not even rely on the original price of a property as the basis for their lending. In contrast to most of the Western world, interest rates in the UAE remain very high, and this is deterring potential property buyers at the same time as squeezing the repayment ability of existing borrowers.

Borrowers who took out mortgages when the rates were around six per cent are now paying around nine per cent, and in terms of monthly installments this is a significant increase.

Add to this the likelihood of negative equity and job insecurity, and it is not hard to see why people are reluctant to commit to a mortgage.

So what can be done to bring interest rates down to more acceptable levels and to encourage the banks to open their doors at least tentatively for mortgage lending? The key concerns of liquidity and confidence need to be addressed, and in some ways the liquidity issue is the easier of the two.

A direct injection of deposits by the federal government or the Central Bank into the banking system, with a proviso that at least a percentage of the deposits need to be made available for sensible mortgage lending at reasonable rates could be done quite quickly.

Unlike many of the Western banks, banks in UAE do not need bailing out yet. Restoring confidence in the property market could take time, but in the meantime the government could assist by guaranteeing a portion of each mortgage.

An alternative would be to establish a government backed institution along the lines of Fannie Mae to guarantee loans and to facilitate securitisation of the banks' mortgage portfolios, thereby increasing both liquidity and confidence.

Of course, this institution would have to avoid the sub-prime pitfalls, which have caused so much damage to Fannie Mae and Freddie Mac, but this should not be difficult in a market which has traditionally been conservative in its mortgage lending. It has been suggested that the merged Amlak-Tamweel entity could be used for this purpose once it is back on its feet.

The other major issue facing banks is that of defaults. The Mortgage Law, which came into being last year, covers foreclosure, but the process has yet to be fully tested in practice.

Banks will need to deal sympathetically with borrowers facing difficulties in their mortgage payments, to avoid forced sales, legal disputes and reputational damage. The tactics used in recovering credit card or car loan debts will not work. The mortgage market is still alive in Dubai, but it is in urgent need of resuscitation before the cost of rescuing it becomes too high.

Banks have taken a major hit to their confidence, as well as downsizing their sales and processing units, during the current crisis.

They will only venture back into this market tentatively, so we cannot expect 90 per cent mortgages any time soon, and while interest rates should come down as Eibor drops, the banks will be reluctant to reduce the margin over Eibor that they charge to cover their risks and other costs. The best we can hope for in the short term is a gradual easing of the lending criteria, slightly lower interest rates, and stabilised property prices.

Longer-term growth requires a more robust regulatory framework, reliable liquidity, and a property market free from the driving influence of speculators.

Once these are established the market should recover and mature on a level that is much more sustainable than before. 

- The author is the Chief Executive Officer of John Charcol Dubai.

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