Saudi Arabia's new mortgage law will transform home financing in Saudi Arabia to property-secured lending from the current practice of extending loans based on salary assignment, or banks' automatic deductions from borrowers' salaries to repay home loans, says a leading rating agency. Saudi banks have also spotted a good opportunity in home financing as a means to sustain the current lending revival to retail customers, says a report from Standard & Poor's titled "How will Saudi Arabia's new mortgage law affect domestic banks?"
The agency believes that domestic banks are likely to expand their mortgage lending activity significantly over time, strengthening their competitive advantage versus nonfinancial companies and foreign banks operating in Saudi Arabia. "We think domestic commercial banks would capture most of the potential growth in mortgage lending, much as they did when the regulator reorganized the investment banking sector in 2007. For instance, Arab National Bank already operates under the parent/subsidiary model prevalent in the domestic investment banking sector via its affiliate Saudi Home Loans," Standard & Poor's Ratings Services added.
It says the new mortgage law is important for Saudi Arabia because it will increase individuals' access to home financing, "which is positive in our view owing to the country's widening housing gap and increasing social needs, given the lack of affordable housing in the middle-income segment." S&P added: "We understand that the government has already earmarked $ 67 billion to finance this program from the 2011 fiscal surplus." It also points out that Saudi banks have traditionally offered home-buying loans, and not mortgages, because home-buying loans are not fully secured by the properties being acquired but instead primarily secured by banks' automatic deduction of loan repayments from borrowers' salaries.
The report said that conditions for home financing had changed recently and Saudi banks' Pillar III disclosures under Basel II show a clear accelerating pattern in term of residential housing loan booking. The Real Estate Development Fund 's ( REDF ) standing as the largest provider of home financing seems therefore increasingly contested, it says. According to the Saudi Arabian Monetary Agency (SAMA), the report said retail real estate financing stood at about 18 percent of consumer financing as of June 30, 2012, versus 8 percent in 2008. In particular, S&P says the newest and smallest banks were very active in home financing segments as early as 2010, rapidly gaining market share over traditional players. The REDF , a specialized government-owned entity — has historically been the primary home-finance provider.
In its September 2011 Article IV publication, the IMF puts the REDF market share at about 80 percent of outstanding Saudi home financing in 2011. The IMF further indicates that REDF is struggling to keep up with demand, resulting in a waiting list well over 15 years, and to monitor the quality of lending, of which it reports half as delinquent. Saudi authorities, in the run up to the implementation of new mortgage laws, boosted REDF 's capital by $ 11 billion in March 2011, aiming to increase the availability of housing loans. The government has also transferred REDF to the Ministry of Housing, which was upgraded from its former status of General Housing Authority, with a budget of SR 15 billion, the report pointed out.
According to SAMA, the report said retail real estate financing stood at about 18 percent of consumer financing as of June 30, 2012, versus 8 percent in 2008. In particular, the newest and smallest banks were very active in home financing segments as early as 2010, rapidly gaining market share over traditional players. S&P added: "We expect banks to further develop their organizational structures to not only fully include mortgages, and also the associated insurance products. Domestic banks have sufficient balance sheet power, in our view, and already have sufficient physical coverage of Saudi Arabia.
This would be difficult to replicate for most privately-held finance companies, and certainly for the handful nondomestic bank branches allowed to operate under domestic regulation. Lastly, domestic banks are already familiar with Shariah-compliant finance-lease lending as outlined in the new mortgage law package." The agency describes SAMA as an effective, thoughtful, and hands-on regulator. Positively, the Saudi authorities have also planned for state loan providers resembling Fannie Mae and Freddie Mac in the US, currently designated as the Saudi Real Estate Refinancing Corporation, to provide liquidity and stability to the fledgling mortgage market.
We understand this entity will be able to issue mortgage-backed securities, notably to avoid any funding issues stemming from the expected strong growth in mortgage lending over the longer term," said the report. It points out that the draft legislation prescribes strict approval chains, standardized contracts, and mandatory reporting on mortgage borrowers. "We consider these steps as positive developments, especially because authorities have laid the foundation for the creation of a centralized database, along the lines of that of the Saudi Credit Bureau, which in ou rview has enabled consumer finance to grow according to its potential," S&P said. It said the new law also outlines the possibility for the REDF to work with banks, which could further boost banks' fee collection, and enable a larger portion of Saudis to access home financing.