The window of the Better Homes estate agents at Jumeirah Beach Residence is full of properties for sale, but none of them are foreclosures. Outside, the street bustles with Saturday morning shoppers. There is little sign of housing distress here, despite prices of some apartments falling by 45 per cent since the end of last year. Banks facing losses of as much as Dh24 billion (US$6.54bn) on bad home loans have yet to foreclose on properties in the Emirates, fearing they may become embroiled in a legal quagmire that could take years to resolve.
Instead, lenders are negotiating with distressed mortgage holders in a bid to recover some capital and avoid having to start potentially costly legal proceedings that hinge on an as yet untested mortgage law. "The banks want to resolve things on their own, they don't want to go through the courts," says Mohammed Sultan Thani, the assistant director general at the Dubai Land Department, the body that will oversee the auctioning of foreclosed properties under the 2008 Mortgage Law. Mr Thani says he has not yet seen any home repossessions.
Amlak, the country's largest mortgage lender by assets, says it typically lowers monthly instalments or grants payment holidays of three to six months when a borrower has trouble paying. "We have not repossessed any properties as yet. However, we are considering a few cases for foreclosure," said Arif Alharmi, the chief executive of Amlak Finance. The introduction of foreign ownership rights in 2002 triggered a six-year property boom in Dubai, which attracted investors from all over the world and funded the construction of tens of thousands of villas and apartments that continued to rise in value until last autumn, when prices collapsed. In the first quarter, Dubai house prices have fallen 41 per cent, according to Colliers, while UBS forecasts properties in the emirate will fall as much as 70 per cent over the course of this year from their peak value last autumn.
Foreclosures have risen worldwide this year amid falling property prices and a lending squeeze that has reduced the number of people able to tap mortgage finance. Home repossessions in the UK soared 50 per cent in the first quarter of the year to 12,800, compared with a year earlier, the UK Council of Mortgage Lenders said last week. It estimates the number of repossessions will double this year to 75,000 homes. In the US, foreclosure filings rose to a record 342,038 last month, according to RealtyTrac, which is based in California.
It is a world away from the laid-back cafe society of Jumeirah Beach Residence in Dubai, where 36 skyscrapers housing 25,000 residents in luxury apartments were built in just five years at a cost of Dh6bn. There are no boarded-up properties along The Walk, a beachfront thoroughfare crammed with cafes, boutiques and restaurants. Inside Better Homes estate agents, Jannie Biddulph, the residential sales manager, says the prices of a two-bedroom apartment without a sea view has fallen by about 45 per cent since the end of last year, from highs of between Dh2.2m and Dh2.4m to about Dh1.2m to Dh1.3m. Despite the steep declines, he says, none of the apartments on the company's books is foreclosed.
"The listings on our system currently are not distressed sales," Mr Biddulph says. "The banks are not releasing all these units; I don't know how they are going to cope with all these units during the next few months though, because I think there will be buyers who will be facing issues." He adds: "Obviously this is stock that we would love to get our hands on because you have the advantage of being able to negotiate on them. But we are not listing any defaulted sales."
While homeowners in the UAE with mortgages in default may be in a more comfortable position than their counterparts in the UK and the US, banks in the country are much less able to realise gains from bad loans than lenders in other markets. Credit Suisse estimates UAE banks could lose as much as Dh24bn, or almost half of their Dh60bn overall exposure to mortgages. That assumes properties lose half their value on average and banks recover 50 per cent of their collateral, while three out of every four people in negative equity default on their loans. "Borrowers running negative equity on their investments have a high incentive to default," says Mohammed Hawa, a Credit Suisse analyst.
EFG-Hermes, Egypt's largest bank, estimates potential bad mortgage loans in the UAE at about Dh6bn, based on a much lower default rate. Under this scenario, one in five homebuyers is expected to default and banks would recover half of the mortgage value. "There is clearly the potential for a significant loss in terms of proportion, but in absolute terms it would not be massive," says Raj Madha, an analyst at EFG-Hermes.
So-called negative equity, when owners owe more in outstanding payments than their property is worth, is one of many reasons why banks are avoiding foreclosures. If a bank lent, for example, 80 per cent of the money for a house that lost 50 per cent of its value, the bank would only be able to recover about 60 per cent of what it is owed. "They would realise a big loss," says Matthew Hooton, a partner at the law firm Ashurst in Abu Dhabi.
The UAE's largest mortgage lenders are Tamweel and Amlak, followed by Emirates NBD, Abu Dhabi Commercial Bank, HSBC and Standard Chartered. "HSBC continues to have a very strong mortgage book," said Venkatesh Srikantan, the regional head of assets and liabilities, HSBC Bank Middle East. There had been no repossessions, he added. Brokers say that a flood of foreclosed houses could destabilise the market and delay any recovery in prices. "A sudden glut of auction property could shatter any fragile recovery," says Chris Dommett, the chief executive at the brokerage John Charcol Middle East.
For many, it is only a matter of time until the foreclosures start to emerge. "Eventually it will make more sense for banks to enforce and take the loss," says Mr Hooton. Before that can happen, however, lawyers say the UAE needs a more streamlined legal framework, which would allow banks to seize a home when the mortgageholder stops making payments. "These issues need sorting out. People are already in arrears and banks have been slow to respond," Mr Dommett says. Some suggest the Federal Government should consider a buyback scheme, where the Government buys distressed properties at the loan value from banks and manages them in a separate company. Such a step would free up money from the banks' balance sheets.
"Currently, it remains unclear how large the volume of non-performing home loans is, and further legal clarity with respect to foreclosure may help to clear the current ambiguity," says Sana Kapadia, a property analyst at EFG-Hermes. So far, Dubai is the only emirate with a mortgage law, which it introduced last August. It contains one paragraph about repossessions and auctions: "The property can be sold in the case where the borrower does not pay back his loan at maturity. A judge can issue a decision to seize the property and prepare for an auction according to the legal procedure applied by the Land Department."
In other emirates, repossessions would be purely governed by the contracts between the bank and the mortgage customer, leaving more scope for abuse on the part of the banks, Mr Hooton says. Because Dubai's law is so new, no bank wants to become the first to test it by triggering a repossession case. Such cases could take years to go through the system, lawyers say. The judge can always give the homeowner a period of an additional 60 days of grace or completely halt the process if an auction were to inflict "substantial damage" on the homeowner, Mr Hooton says. He says local, Sharia-based courts can be "very merciful, with a very humanitarian side".
Until then, banks are dealing with the issues on a case-by-case basis, at their own pace. "We recommend to banks to solve it with their clients," says Mr Thani from the Land Department. One banker says: "Typically, we will send two or three letters, then we will invite the customer to our legal department. Instead of executing any legal action, we always end up rephasing or rescheduling the loan."
How long banks will be able to maintain this approach should the number of bad loans increase is as yet unclear. None of the banks contacted for comment disclosed when, or if, they planned to start foreclosure proceedings on properties currently in default. However, it may not be long until that happens. "By the end of the summer we will know exactly what the situation is," Mr Thani says. firstname.lastname@example.org