This question has been generating a lot of buzz in the past few weeks within property investment circles.
A Fannie Mae for the UAE?
ABU DHABI // Should the country create its own Fannie Mae to improve liquidity and get home buyers back into the market? This question has been generating a lot of buzz in the past few weeks, as property executives and mortgage professionals struggle with the impact of the global financial crisis on the UAE. "Something needs to be done," says Nicholas Maclean, the regional director of the property consultancy CB Richard Ellis.
"There are people in the marketplace who want to buy and they can't get finance. We need to enable them to keep the industry going ? The concept of a Fannie Mae at its basic level would work." Fannie Mae is the popular name for the Federal National Mortgage Association in the US. It exists alongside other "government-sponsored enterprises" such as the Federal Home Loan Mortgage Corporation, or Freddie Mac, that are privately owned but regulated heavily by the government.
Fannie Mae is charged by the US Congress with "providing stability and liquidity in the secondary mortgage market, providing secondary-market assistance relating to mortgages for lower-income families, and promoting access to mortgage credit throughout the nation, including underserved areas", according to the website of the housing and urban development department. Fannie Mae and Freddie Mac operate by buying loans from banks and other lenders and then either holding them in a portfolio or securitising them to be sold on to other investors.
This ensures funds are available to institutions that lend money to home buyers. Because these entities have a standing line of credit from the US Treasury of US$2.25bn (Dh8.26bn) and a perception of reliability because they are connected to the government, they can raise money from the capital markets cheaply and make mortgages more affordable. Analysts have said a similar system in the Emirates could spur lending for home sales to low-risk home buyers. "This could rejuvenate the mortgage market," says Chris Dommett, the chief executive of the Dubai office of mortgage adviser John Charcol. "It would allow banks to lend more by taking some of the risk away and allowing them to securitise their books.
"There are a lot of very good credit-risk buyers in the market who can't get finance right now and that's where the emphasis has to be. How can we get them what they need?" The new entity created by the merger between Amlak Finance and Tamweel could have some Fannie Mae-type roles, but the Government has released few details on what the merged company will look like. Whatever the outcome, analysts agree it is crucial that any lender or mortgage securitisation vehicle have conservative lending standards to avoid a repetition here of the subprime mortgage crisis in the US.
Fannie Mae was created in 1938 after the Great Depression, when it was difficult to get mortgages because of the collapse of asset values and inherent risk in lending for property sales. "These were really entities designed to create liquidity to get the wheels moving again," says Andrew Charlesworth, the head of corporate finance at the regional office of the property consultancy Jones Lang Lasalle. "That is really quite a good reference point for the UAE and our attitude towards solving these issues."
The problem in the UAE is that banks have been nervous about the property market since the effects of the credit crunch started to be felt late last year. Most banks and home finance companies were forced to cut mortgage offerings because they could no longer borrow from international banks to lend to home buyers. At the same time, sentiment in the market began to fade, leading to reduced transactions and prices across Dubai. Abu Dhabi, to a lesser extent, has also been hit.
The Federal Government responded by making available up to Dh120bn in emergency funding to banks to boost lending. Last month, the Abu Dhabi Government injected Dh16bn directly into five Abu Dhabi banks. But banks have not been lending the money out to home buyers because they are still trying to get their loans-to-deposits ratio back to 100 per cent. Sultan Nasser al Suwaidi, the Central Bank Governor, said last week that this gap was about Dh110bn.
"The banks' appetite for mortgages is extremely low right now," says Damian Hitchen, the managing director of Gulf Lenders Network, a mortgage brokerage clearing house and consultancy. "Clearly we need a stimulus into the economy. The longer we wait to address this, the more adverse the impact is going to be." As early as 2007, Nasser Saidi, the chief economist of the Dubai International Financial Centre, was calling for the Government to establish something akin to Fannie Mae.
In a paper titled, A Mortgage Market for the UAE, Mr Saidi said "the establishment of a government-owned or government-sponsored entity or entities could jump-start the securitisation process" in the country. "Securitisation is an essential financial process that needs to be adopted not just to create a mortgage market, but to help finance infrastructure in the region," he wrote. Mr Saidi declined to comment for this article because he is writing a new paper on the topic.
Fannie Mae and Freddie Mac have drawn the ire of politicians and observers in the US because of their roles in the subprime mortgage crisis. Under political pressure earlier this decade, Fannie Mae and Freddie Mac began increasingly lending to subprime buyers who had a higher risk of defaulting on repayments. The companies' actions directly contributed to the recession now gripping the US and have had an impact around the world.
This is why it is important for the UAE to gear such an entity towards low-risk home buyers, says Mr Charlesworth. "What we can do is look at what worked and what didn't," he says. "We would need stronger governance and oversight. We wouldn't want to end up in the same trouble that the US is in now." @Email:firstname.lastname@example.org