A new whitepaper released by Deloitte examines the potential mortgage industry in Saudi Arabia and highlights key issues that need to be addressed in order to create both lender and consumer confidence in this market. The whitepaper lists the five laws that will make up the Finance Law, which are the result of a program implemented by the Government of Saudi Arabia for the development of a functional primary mortgage market.
The Deloitte whitepaper lists and describes the new laws, followed by a discussion of lenders and consumers’ potential concerns with regards to the new mortgage infrastructure.
Laws governing the mortgage industry as five laws are outlined in the whitepaper relating to the implementation of a sound mortgage environment. These are The Enforcement Law: allows for judges to hear enforcement disputes and insolvency actions (such as foreclosure); The Real Estate Finance Law: provides the regulatory architecture for the authorization and licensing of banks and finance companies to enter the real estate market; The Registered Real Estate Mortgage Law: requires the registration of real estate mortgages and The Finance Lease Law: prescribes the rules surrounding finance leasing.
The Finance Companies Control Law: provides a regulatory and supervisory framework for Sharia’a compliant finance companies to provide real estate financing.
The implementation of three of the five laws was completed in February 2013. However, the final intricacies of the remaining laws, the Enforcement Law and the Registered Real Estate Mortgage Law, are yet to be resolved and the laws have yet to be enacted.
“Saudi Arabia is making significant steps towards the creation of a mortgage industry and is opening up to finance providers,” Robin Williamson, managing director of financial advisory services at Deloitte Middle East, said. “Nevertheless, the transformation will not occur overnight, not least because two of the five laws are yet to be completed.”
Deloitte experts suggest that in order to arrive at a well-functioning mortgage system, laws and regulations governing this industry should provide stakeholders, in particular banks (lenders) and households (borrowers), with a reasonable degree of comfort and confidence in the system. The Deloitte whitepaper presents the key concerns that lenders and consumers are likely to face in relation to the mortgage market.
Lenders’ key concerns include the ability to demand and secure assets pledged against debt. The ability to service the debt is another critical concern of lenders; this will be partially addressed by the establishment of a centralized credit agency and the implementation of a credit check on all mortgage applications.
A consumer concern relates to the variance between the costs of mortgages in comparison to renting. First time buyers are likely to be subjected to higher interest rates and thus higher repayments. As such, mortgages for most properties may be unfeasible for low and middle income families who may opt for renting as the most financially viable option.
Deloitte experts highlight the need of ensuring confidence in the mortgage system between various stakeholders. In addition to the concerns already listed, transparent practices, fair treatment for lenders and borrowers and equivalent protection of their rights are key factors in creating buyer and lender confidence.
“In principle, the multi-dimension reforms appear sufficient to develop a functioning mortgage market; however, fundamental to this is whether they are executed in their entirety, or whether there is any uncertainty as to their exact definition,” Williamson, added.