Spectre of foreclosure hits home

Robert Ditcham

• Last Updated: January 17. 2009 8:30AM UAE / January 17. 2009 4:30AM GMT

ABU DHABI // The UAE’s housing market is facing the grim prospect of negative equity and repossessions for the first time.

While the US revealed the severity of its housing crisis this week, with 2.3million property foreclosures last year, an 81 per cent leap on 2007, the UAE has yet to see default on a significant scale.

But mortgage specialists fear this lack of experience in dealing with distressed homebuyers amid sinking house prices could lead to bad news for lenders.

In the past, while house prices were on an upwards surge, buyers who struggled to meet monthly repayments could sell their home at a profit and repay their debts.

But times have changed. Dubai house prices fell eight per cent in the last quarter of 2008, heralding the spectre of negative equity for properties bought immediately before the crash.

People are also losing their jobs, lending is considerably tighter than six months ago and mortgage interest rates are still steep at eight to nine per cent.

Higher interest rates typically make mortgage repayments unaffordable to those who had taken out cheap loans, which can lead to default and foreclosure.

“It wasn’t that long ago when to utter Dubai and default in the same sentence would have evoked derision,” said Keith Parker, the conference manager of IIR Middle East, which is holding a training course in March on default management for mortgages.

“Today, negative equity and repossessions are becoming increasingly part of the business language. An alarming number of home owners are falling behind on their payments; some are estimating as many as 40 per cent.”

Mature markets that have experienced downturns in the past have a tried-and-tested method of dealing with serious defaults. This includes issuing default notices, seizing properties and auctioning them to recover the arrears on the mortgage.

But the foreclosure and auction process outlined in the UAE’s new Mortgage Law has yet to be tested, an official at Dubai Land Department said.

Instead, banks that choose to foreclose face a potentially long and expensive battle to recover arrears on a mortgage through the civil court, which is typically unwilling to order residents out of a property.

“Here, you can’t have your home repossessed if it’s your only home,” said Ibrahim al Sukhi, the general manager of Credit Rating and Collection (CRCQ), a subsidiary of Al Qudra Holdings.

“Under the Islamic way in the UAE, a debtor won’t be put in jail or have his home taken unless it’s the very, very last resort.”

Mr al Sukhi, whose company is employed by banks and financial institutions to pursue debtors, said he expected to see a rising number of mortgage defaults in the country, especially in Dubai and particularly by people who bought properties off plan before the credit crisis.

He said he had been recently approached for advice by six people who had put down multimillion-dirham deposits on properties but were now unable to meet the next payment or the full amount outstanding.

But according to mortgage specialists, there are several alternatives. First, the Government could pump more money into the banking system, this time insisting that it is made available to borrowers at a reasonable mortgage interest rate.

Second, banks could show more flexibility in the repayment of home loans, rather than allowing borrowers’ difficulty in making payments to become genuine defaults that require legal action.

The danger to lenders is that they repossess properties that cannot be sold in a diving market and eventually become cheaper than the value of the debt.

The need to show this flexibility is urgent because of the UAE’s transient population, said Chris Dommett, the chief executive of independent mortgage adviser John Charcol Dubai.

Mr Dommett said in cases of negative equity, where the property is worth less than the outstanding mortgage, the incentive for the borrower to keep up repayments disappears.

“In a place like Dubai, where most of the homeowners are transient expatriates, this risk is increased,” he said. “Faced with uncertain job prospects, a property which is worth less than they paid for it and a mortgage that they cannot afford, many would decide to cut their losses and head for home.”

The extent to which banks can manage these situations sympathetically could prove crucial in determining whether the UAE experiences a short-term property correction or a major crash.

“You cannot get blood out of a stone. There are going to be people who just cannot get together the cash to make the monthly instalments,” said Mr Dommett.

“It is in both parties’ interest to work together to resolve the issue. This could involve a principal repayment break or a rescheduling of the loan over a longer period.”

However, there could be relief on the horizon. The Central Bank and the Government have reduced interest rates by dropping the base rate and making additional funds available to banks.

Mortgage specialists anticipate further rate cuts in the future, which would make new and existing mortgages cheaper and stave off the threat of widespread repossessions and a property market collapse.

rditcham@thenational.ae