awaited Saudi mortgage law could be enforced in 2012, Banque Saudi Fransi (BSF) said in a study. The enactment of the mortgage law will act as a catalyst for the domestic real estate sector, enhance the market's sophistication and widen funding options for middle-and low-middle income groups if applied and enforced, it said. The report cited the chairman of the Shoura Council as saying earlier this month that the law's approval had been prioritized at the recommendation of King Abdullah, Custodian of the Two Holy Mosques. "As such, we anticipate the law will come into force by next year following a number of delays," BSF's chief economist John Sfakianakis said. "Until now, someone hoping to buy a home would either dip into family savings or get a bank loan – options reserved for those who could afford substantial down payments, repayment schemes of 15 years or less, and high charges…mortgage recipients thus fell into a relatively low-risk profile for banks." It said that many banks have cited retail banking as a key growth segment, adding that once mortgage financing rules are entrenched, banks will lend more. "But they will be cautious not to support the creation of a subprime market comprising individuals barely able to keep up with installments, particularly if rates begin rising as is likely to happen starting next year," it said. "To curb lending risks, banks should apply reasonable income caps such that any borrower cannot take a mortgage of more than one third to 40 percent of their total income. The law should also maintain a 'safety ratio' of around 50 percent of gross income to prevent lenders from over-extending themselves." The study said the mortgage law could change the entire equation. "The law could challenge this norm by allowing banks to repossess properties and evict owners who default on loan repayment." BSF noted that globally, foreclosure rules enable banks to demand repayment if a homebuyer fails to pay installments. In the event of a default, a judge appoints an agent to sell the property in a public auction to pay off the mortgage, it said, adding that such a practice is often regarded as inconsistent with the values of Islamic law. "So it will be crucial to monitor how the law handles this issue. Mortgage finance regulations have nonetheless, been applied successfully in other predominately Muslim countries such as Egypt and Malaysia," it said. "The draft Saudi law contains five components, including regulations on mortgage registration, enforcement, financial leasing companies, real estate financing companies and general finance companies. It is crucial that the law set up a central body to register title deeds, replacing the current system of having notaries public record deeds in a less standardized way." "If protections for banks are adequate, they will in the long run be willing to increase the risk profile for borrowers, which could create greater loan opportunities for lower-income Saudis….with a mortgage law in place, borrowers would also eventually be able to secure loans at lower costs because of the legal backing involved in mortgage financing," the study said. "It will take time before the benefits of the mortgage law will be fully felt as banks will need to test the legal system's ability to enforce evictions. Banks, meanwhile, would slowly need to restructure mortgage financing schemes to eliminate charging interest on the principal amount recurrently throughout the loan's duration rather than on the reduced amount." BSF noted that the passage of the mortgage law coincides with a period of continued risk-aversion among Saudi banks in the aftermath of the 2008 global financial crisis and regional default problems. Under Islamic mortgages, banks buy the property on behalf of the borrower and resell it to them at a profit, allowing the buyer to pay them back in installments. Another ‘lease to purchase' method involves the mortgagee renting the property from the bank, while paying down the principal and gaining equity. BSF said the absence of a clear mortgage law framework to govern property ownership, property repossession, enforced eviction and asset liquidation in the case of delinquency has deterred banks from expanding lending in this segment.
