The threat of jail for people who have defaulted on their mortgages is driving more home buyers to flee the country.
Thousands of new apartments bought by investors at the top of the market are now being delivered, triggering mortgages that many cannot afford to pay.
"It was just too much to handle," said one buyer, who fled a few months ago.
An airline pilot who lived in the UAE with his family for seven years and who was facing hundreds of thousands of dirhams in payments he could not afford on three long-delayed homes, now worth 30 to 40 per cent less than he paid, said lenders had refused to renegotiate and eventually cashed a Dh3 million (US$817,000) security cheque, which bounced, he said.
"There is no way out of it," the pilot said. "You can't win. The threat of the security cheques is too large."
Lenders in the UAE typically hold personal cheques from borrowers as a guarantee on the loan, along with the property. If the cheques bounce when the lender is in default, the borrower could be liable for criminal prosecution under UAE law.
"It's an antiquated and inviable system in the modern world," said Ludmila Yamalova, a partner in HPL Yamalova & Plewka, a Dubai law firm.
"These are people who don't want to flee," she said. "If it wasn't for the cheques, people would be willing to remain in the country and renegotiate."
A recent Dubai Government decree removed some criminal penalties on bounced cheques, but it does not apply to mortgage deals, lawyers say.
Thousands of home buyers with mortgages are wrestling with the situation. More than 20,000 apartments and villas are scheduled for completion in Dubai in the next year, according to Jones Lang LaSalle, the property company.
Many of the units are worth 40 to 50 per cent less than what buyers paid for them at the height of the boom.
Job cutbacks and long delays in delivering projects have exacerbated the problems for many struggling buyers.
"We can't pay what we don't have," said a buyer, whose husband lost her job in the downturn. The buyer, who spoke on the condition of anonymity, has a Dh7.8m mortgage on a villa the couple bought in 2008. The property is now worth about Dh4 million.
Her lender offered to repossess the home, but the couple would still have to pay Dh30,000 a month for the next 10 years, plus Dh400,000 to cover the shortfall in the price.
"Unfortunately it seems they are giving me no choice and I really don't want to leave here," she said. "When jail is the option of a bounced cheque it incentivises people to just leave."
It's difficult to ascertain how many people are dealing with problem mortgages. The Central Bank reported last week the number of non-performing loans carried by UAE banks rose from 6.25 per cent in December to 6.67 per cent of total loans at the end of April.
Last week HSBC loosened its requirements for mortgages, noting that default rates are improving.
Some industry experts believe the percentage of troubled mortgages is much higher than reported. Lenders are taking different approaches to dealing with the home buyers, industry experts say.
"Some banks have been co-operative and others aggressive," said Shahram Safai, a partner at Afridi & Angell. "I don't think it's fair to paint all banks with the same brush."
Banks contacted by The National this week said foreclosing on property and cashing security cheques was generally seen as a last resort.
"So far all our efforts have been with customers trying to find alternatives," said Mohammad Zaqout, the head of personal finance at Al Hilal Bank. "We haven't foreclosed on a property. Typically this would be a last resort.
"Security cheque is a last collateral - it means you are there to move on with disciplinary action against the client, after your resources have been exhausted … in order to pressure the customer, not necessarily to cash the cheque, and negotiate new terms and to solve the issue." Cashing security cheques was "very rare", he said.
Barclays encourages customers in financial distress to make contact at an early stage.
"Taking legal action is a last resort and before considering this option, we work with our customers to help them manage their commitments," the bank said.
"Unfortunately, some customers are unable to meet their financial obligations, and only after all avenues have been exhausted, and the customer becomes unresponsive or refuses or is unable to pay, do we consider pursuing legal remedies through the courts," said Barclays.
The pilot who fled the country said he was still trying to work out a compromise with his lenders. But he was in constant fear that he would be tracked down.
"I'm living with this every day," he said.