Implementation of the Saudi Mortgage Law Developing an Effective Mortgage - Research Paper Example

Implementation of the Saudi Mortgage Law Developing an Effective Mortgage An overview of the Saudi Mortgage Law and the potential impact it may have on the Saudi Economy and Saudi banking system An overview of the Saudi Mortgage Law The Saudi Mortgage Law has been established as a measure towards stimulating more mortgage borrowing by the Saudi nationals, to increase the number of the homes that are owned by the Saudi nationals through mortgage financing. The homes owned through mortgage financing in Saudi Arabia accounts for less than 4% of the total home ownership in the country (Omar and Al-Mukarramah, 7). This is a very small percentage for the world’s largest oil exporter, owing to the fact that more developed economies like the UK has 70% of their nationals owning homes that are financed through mortgage financing. Thus, the provisions of the Saudi Arabia ‘real estate mortgage law’, which was signed into law on July 2, 2012, offer different ways through which the law will be implemented. First, under the ‘Enforcement’ Law, the law has provided that judges should hear and enforce mortgage disputes and insolvency actions (Delloite, 2). In this respect, the law has allowed the courts to decide on the order of the repayment of the mortgages, in a way that would guarantee swift repayments. Under the ‘Real Estate Finance’ Law of the Saudi Mortgage Laws, an elaborate architecture and framework for the authorization and licensing of banks and other non-banking companies to offer mortgage facilities has been established. Thus, according to this section of the law, banks will be allowed to own real estate’s for the purpose of facilitating mortgage lending (Khan, 2). Additionally, the government will facilitate the banks and companies offering the mortgage services, through publicizing real estate market activities, while at the same time granting the companies and the banks an access to the notary registers and the courts (Delloite, 2). This section of the law has also provided that a credit risk must be undertaken on the borrowers, through the aid of the authorized and available credit bureaus, to ensure the creditworthiness of all borrowers. Further, the Saudi Mortgage Law includes a section under the ‘Registered Real Estate Mortgage’ Law, which provides for the procedures of the registration of mortgages (Khan, 7). The registration requirements include the requirements for clear statement of the pledged property offered against the mortgage, the provision for the transferability of a mortgage to a third party, the right of the mortgagees to apply to the courts for the prohibition of the undervaluing of their collaterals, as well as the right of the lending institutions to ask for further security, should the collateral be of a lower value than the mortgage requested (Delloite, 2). The ‘Finance Lease’ Law section of the Saudi Mortgage Law on the other hand provides for the rules surrounding the finance of the leasing, where the leasing agent is charged with the asset risk, while the lessee is charged with the responsibility of asset protection and responsible use during the leasing period (Delloite, 3). This section of the law also provides for the transfer of the lease after the maturity of the lease term, while permitting the leasing agent to ask for rental payments on the event of default, for as long as the rentals payable do not exceed the value of the late payments (3 Delloite, 2). Finally, the Saudi Mortgage Law contains a section under the ‘Finance Companies Control’ Law, which provides for both regulatory and supervisory framework under which the finance companies that are compliant with the sharia law in Saudi Arabia can provide the financing for real estate (Delloite, 3). Under this section, the law also provides for other different forms of financing under the Saudi Arabian Monetary Agency (SAMA) (Delloite, 3). Potential impact Saudi Mortgage Law may have on the Saudi Economy and Saudi banking system The Saudi Mortgage Law may have numerous positive effects both on the Saudi economy and also on the Saudi banking system. This is because, the laws provides for the opportunity for the Saudi Arabian banks to diversify their product offering into real estate’s financing, through allowing the banks to own real estate (Omar and Al-Mukarramah, 4). The implication of this form of diversification is that the banks will have an opportunity to increase their revenues and consequent profitability. Additionally, the legal and regulatory framework guiding the issuance of the real estate financing by the Saudi Arabian banks has been eased, with the government chipping in to play the role of a facilitator (Khan, 3). This simply means that the legal hurdles and the costs associated with government restrictions will be greatly reduced, making the real estate financing a profitable venture for the banks. However, one major way in which the banks will be affected negatively is through increased competition for mortgage lending. The Saudi Mortgage Law has provided for other non-banking financial companies to also be licensed for the offering of the mortgage facilities to the Saudi nationals (Omar and Al-Mukarramah, 12). The effect of this provision is that there is a high likelihood of stiff competition created by the entry of the non-banking finance companies into the real estate market. This means that the banks may not earn as much profitability from the market as they would, if the non-banking companies were not involved in mortgage lending. On the other hand, the effect of the Saudi Mortgage Law on the Saudi economy is that; economic growth of the Saudi Arabian economy will be stimulated, owing to the fact that there will be more liquidity in the economy, which will in turn stimulate business, production and consumption, resulting in increased economic growth (Fabozzi and Kalotay, 2). The easing of the mortgage lending will have the effect of freeing up some capital that is already held up in homeownership plans, owing to the fact that the prospective home owners can now buy their homes in piece-meal, as opposed to saving for lump sum purchases. This will mean that such prospective homeowners will have more liquid cash flow, which will in turn be utilized into the Saudi Arabian economy through different consumption or capital expenditure channels, thus stimulating more economic growth (Fabozzi and Kalotay, 2). 1. A review of the role of the two main GSEs in the USA mortgage market has played over the last two decades in the USA The two main GSEs in the USA mortgage market have played an important role in fostering home ownership by the USA nationals. This is because; both the Fannie Mae and Freddie Mac have stimulated the channeling of funds to mortgage borrowers, though making credit more available in the secondary mortgage credit market (Fabozzi and Kalotay, 1). The Fannie Mae and Freddie Mac plays the role of purchasing both the mortgage loans and the mortgage securities from the mortgage lenders, thus allowing the lenders to have more cash in their accounts, which they can then be able to lend to the interested borrowers of mortgage facilities (Fabozzi and Kalotay, 1). This way, two GSEs has played the role of developing a string housing market financing structure, where the lenders do not need to worry about the lack of funding to lend to the interested borrowers of mortgages. This is possible since such lenders can easily convert their loans into funds, through selling the mortgages or the mortgage-backed securities to the two GSEs, which can then redeem these loans and securities through repayments from the borrowers (Fabozzi and Kalotay, 1). Further, the two GSEs have also stimulated increased home ownership by the USA nationals, owing to the fact that the GSEs makes lending funds readily available for the mortgage lenders, who are in turn able to offer their mortgages to the customers at more favorable terms, compared to a situation where accessing mortgage funds would be limited (Fabozzi and Kalotay, 5). In this respects, the mortgage borrowers are offered reasonable down payments, since the lenders will b able to convert their loans to liquid funds easily. On the other hand, the mortgage lenders are also able to formulate flexible and consumer-friendly mortgage instruments that retail at highly competitive interest rates, owing to the fact that accessing the funding for the mortgage lenders is not restricted to the down payments or the mortgage repayments only (Fabozzi and Kalotay, 2). Therefore, the two GSEs have played an important facilitating role in the housing market of the USA, by creating a secondary market for mortgage re-sale, which stimulates a high level of mortgage turnover for the lending institutions, and thus increases their revenues and profitability. Prior to the establishment of the two GSEs in the USA, mortgage lending was very limited, owing to the fact that lending was restricted to the finances available from the down payments, interests and periodic repayments of the mortgage loans. In this respect, the lending terms were strict and overburdening for the mortgage borrowers, since they required a down payment of 40% of the mortgage value, and the repayment of the balance within a period of 2-5 years (Fabozzi and Kalotay, 1). However, since the establishment of the two GSEs, the lending terms in the USA have become flexible, with low-percentage down payments being demanded, while the repayment period has also been extended for up to 10 or more years. The downside of the two GSEs however is that they have increased the rate of mortgage default reasonably, due to the lenient lending terms applied following their establishment, which do not guard against mortgage defaulting effectively (Delloitte, 7). 2. An outline of the importance of creating a liquid secondary mortgage market in an economy The creation of a liquid secondary mortgage market in an economy is important, since it helps to alleviate the funding limitations associated with lack of sufficient funds for mortgage lending by the lending institutions (Fabozzi and Kalotay, 1). In the absence of a liquid secondary mortgage market, the lending firms must depend of the down payments and periodic repayments in order to be able to accumulate funds for lending to other customers. However, a secondary mortgage market that is liquid stimulates the rate of lending and borrowing within the economy, since the lenders can easily access liquid cash to lend to the customers, who can in turn spend the cash easily in the economy. The overall effect is that a liquid secondary mortgage market plays the role of stimulating economic growth, through increasing the accessibility of liquid funds both for the mortgage lenders and borrowers, who in turn increases the flow and circulation of such funds throughout the economy (Delloitte, 6). In addition, the creation of a liquid secondary mortgage market within an economy serves for the creation of an investment vehicle in the economy, since the mortgage loans and the mortgage-backed securities can then be converted into investment tools, which are then issued to the investors through the financial or the credit markets (Fabozzi and Kalotay, 3). This way, a liquid secondary mortgage market serves to stimulate the growth of an economy. 3. A recommendation on the structure the KSA government should implement in order to facilitate the development of the KSA mortgage market It is recommended that the Saudi Arabian government should adapt a two-tier mortgage market structure. This is a form of mortgage structure combining both the primary and secondary mortgage markets (Fabozzi and Kalotay, 7). This is necessary because, the primary mortgage markets can channel mortgage funding to the Saudi Arabian nationals effectively, while the secondary mortgage market will serve to refinance and liquefy the primary mortgage markets through the resale of the mortgage loans and the mortgage-backed securities (Fabozzi and Kalotay, 1). This way, the mortgage market in Saudi Arabia will operate efficiently, since the mortgage lenders will not fall short of the necessary liquid finance to lend to the mortgage borrowers. To achieve this, the Saudi Arabian government should create some GSEs, which will be responsible for offering a secondary mortgage market to the banks and the non-financial companies offering mortgage facilities in the Saudi Arabian mortgage market (Omar and Al-Mukarramah, 11). However, while establishing the two-tier mortgage structure constituting the secondary and the primary mortgage markets, it is important that the Saudi Arabian government institutes the necessary measures, which will safeguard against the high risk of mortgage default that is associated with a two-tier mortgage market structure. Works Cited Delloitte. Saudi mortgage laws A formula for a well-functioning market? Deloitte Transaction Services LLC., 2013. 1-8. Print. Fabozzi, Frank and Kalotay, Andrew. Ginnie Mae and the Secondary Mortgage Market: An Integral Part of the American Economic Engine. Ginnie Mae, 2010. 1-18. Print. Khan, Mazhar. “Saudi Mortgage law”. Investment Research, March 2013. 1-9. Print. Omar, Jabal and Al-Mukarramah, Makkah. “Kingdom of Saudi Arabia – New Mortgage, Real Estate and Financing Laws”. The Middle East Quarterly Bulletin, 2013. 3-21. Print. Read More