Mortgage legislation to protect lenders

The Government is to issue the first law regulating Dubai's growing mortgage industry.

Dubai opened up its property market to foreign investors in 2002.

DUBAI // The Government is to issue the first law regulating the emirate's growing mortgage industry in a move that observers say could encourage more lending by foreign and domestic banks and finance companies and persuade more buyers to invest in Dubai. Several foreign banks had been "sitting on the sidelines" waiting for the law to be passed, said Chris Dommett, the chief executive of the independent mortgage adviser John Charcol Dubai. "They'll still have the credit risk, but won't have the operational and regulatory risks that exist," he said. "My guess is that more players will be entering in the relatively near future on the back of this." He said the more the market was regulated, the less chance there was of a "major correction" to property values. "Confidence levels will be higher, it will attract a wave of more conservative buyers and it will encourage the banks to be a little bit more open in their lending," he said. Marwan bin Ghalita, chief executive of Dubai's Real Estate Regulatory Agency, said the law "will give the lender more control and confidence in that all their rights will be registered with the Land Department. "And if anything happens regarding foreclosure, they can follow an easy process instead of going through the courts." Defaults on loans are uncommon in Dubai, where property prices have appreciated strongly. Borrowers who are struggling to meet their payments can simply sell their property for a profit, allowing them to swiftly repay the lender. However, when house prices begin to level off, as is widely expected, this will become less of an option. Morgan Stanley said recently that although property prices in the emirate had surged 79 per cent since the beginning of 2007, it expected to see a 10 per cent fall in prices by 2010. Under the law, which could be in force within three months, mortgages for completed properties, those still under construction and long-term rented property will have to be registered with the Dubai Land Department. In addition, a court will be set up to deal specifically with foreclosures in the event of borrowers seriously defaulting on their repayments. The announcement was "very good timing", said Mr Ghalita. "The whole world is talking about a mortgage crisis and to what extent banks in Dubai are financing property." Dubai's property boom began in 2002, when it allowed foreign investors to buy property on a freehold basis. The emirate's mortgage business has burgeoned since then, with home loans in the UAE jumping 55 per cent in the year to March, according to the central bank. But the emirate currently lacks a process to deal with foreclosures outside of the civil courts, which typically take two years to process cases and are unlikely to order residents out of the property to allow a lender to recover its money. The lack of a personal credit rating agency in Dubai can also make lenders cautious about lending money. Under the new law, any investor who defaults on a loan will have to sell their property via a public auction managed by the Land Department. "The key for the banks is what process is in place to repossess and sell property in case of default," said Mr Dommett. "Fortunately, the market has been heading upwards almost continuously and there have been no loan defaults that have gone to the stage of repossession." However, he said, the new law was "vital to ensure that the banks have a clear process by which they can recover their money. That would particularly apply if the market was to go down." Law No 14 of 2008, signed this week by Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai, will come into effect 60 days after it has been published in Dubai's monthly official gazette. The move has been welcomed by property developers. David Nicholson, general counsel at the Dubai-based property developer Nakheel, said: "As the laws make rights and responsibilities and the enforcement process clearer, it will help eliminate some risks and encourage greater lending." Securing a mortgage in the UAE is often a complex procedure. Many banks and finance companies will lend only to people buying from a limited number of property developers, while confusion over the documents required to obtain a mortgage alienates borrowers. The law will also require that mortgages taken out on properties in Dubai be sold only by registered financial institutions. In addition, it will require borrower and lender to present complete financial documents when the mortgage is registered. Property granted by the Government to Emiratis will be exempt from the legislation. [e-mail]