UAE banks are moving to restructure mortgages for defaulting homeowners rather than repossessing in a bid to cut their losses on bad property assets, experts have said.
Dubai introduced a repossession law in 2008, in the wake of a property collapse that saw house prices slump 60 percent from their peak. But few banks have pursued foreclosure proceedings to recover properties, preferring instead to renegotiate payments terms with owners and avoid writing down further provisions, said lawyer Mazen Boustany.
“The courts are the last resort. Everybody wants to avoid going to court,” said Boustany, head of banking and finance at law firm Habib Al Mulla & Co.
Options include payment breaks or reductions to monthly installments of home loans.
“Banks are accommodating and agree to rescheduling [of mortgages] and only go to court if they have no other avenue,” he said.
Barclays Bank in May became the first lender to sell a first repossessed property at an auction held by the Dubai Land Department. The lender was also the first to repossess a home in January 2010, clearing the way for lenders holding about $16bn of homes loans to attempt to recover their losses.
The property, a villa in The Springs, had a reserve price of AED1.2m ($326,700) and sold for AED1.22m ($332,145). But the sale failed to prompt the expected flood of repossessed homes onto an already strained housing market.
Mortgage advisory firm Independent Finance said banks remained reluctant to repossess and auction off properties, in part because of the lengthy foreclosure process and the still sliding value of real estate in Dubai.
A number of lenders were also holding back properties in the hope of a recovery in prices, which would allow a more profitable sale on the open market, said general manager Sami Wani.
“We have witnessed price rises in Springs, Meadows, Arabian Ranches, Green Community, The Villa Project, Cedar Villas, Downtown and JBR. These rises are varying from 3 to 7 percent,” he told Arabian Business.
“The banks have decided to hold back properties for some more time and dispose of them profitably in the open market. This is better than going down the repossession route, which is very time consuming and expensive.”
A lack of clarity over foreclosure proceedings may also deter banks from attempting to offload properties, said Jean-Luc Desbois, managing director of Dubai mortgage brokers HomeMatters.
“Banks would rather avoid foreclosure, as the laws and processes are still unclear. Restructuring loans to assist clients in financial difficulty is the preferred option for all banks.”
Property prices in Dubai soared after the city opened its real estate sector to foreign investors in 2002, granting them freehold ownership rights at many developments.
From start-2007 to mid-2008, prices rallied almost 80 percent, Morgan Stanley estimates showed, with billions of dollars worth of new projects launched by local developers.
But home prices in Dubai, the Gulf property market that had the biggest reversal because of the financial crisis, fell more than 60 percent in the wake of the global credit crunch.
House prices in Dubai showed signs of recovery in the third quarter, with slight rises in prime projects such as Palm Jumeirah and Arabian Ranches, Jones Lang LaSalle said in September.
But analysts remain concerned that the estimated 33,000 new homes scheduled to hit Dubai’s market by end-2012 could cause fresh declines in rental and sale prices – a situation that could worsen if a high number of repossessed homes are released to market.
Andrew Goodwin, director of real estate consultancy DTZ, said the auctioning of repossessed homes could further knock market confidence by revealing the true picture of the industry’s price decline.
“Traditionally mortgage repossessions are liquidated in auctions and while there have been a few, there is a concern that this is inherently a transparent process and could unsettle the market and have a knock on effect to the remaining lenders,” said Goodwin.
“This is no different from what we see in more mature international markets, such as the UK, where banks are working with clients to hold assets until the market can sustain a sale. I do not see anything sinister in this, it’s a practical approach.”