RIYADH, Nov 22 (Reuters) - Saudi Arabia is studying draft
regulations that could see the creation of a real estate
refinancing company similar to U.S. firm Fannie Mae, according
to proposals published by the central bank this week.
The regulations are part of long-awaited government efforts
to develop a housing mortgage sector in the conservative kingdom
where the restrictions of Islamic sharia law have made it
difficult to secure lending against property.
The world's top oil exporter faces a housing shortage,
particularly among lower and middle-income people, as land
prices rise rapidly. In July, the government passed laws to
regulate mortgage and lease lending.
The regulations proposed this week fleshed out the laws,
principally by saying the government may establish Saudi Real
Estate Refinancing Corp to develop a secondary market in home
mortgages.
A secondary mortgage market allows lenders to spread risk
and tap new sources of funds. Fannie Mae was established by the
U.S. government in the 1930s to finance such a market.
The new corporation, with a minimum registered capital of 2
billion riyals ($535 million), would have to stay majority
state-owned but real estate financing companies would be allowed
to acquire stakes up to a combined total of 30 percent.
The corporation might also offer shares to the public. It
could provide the secondary mortgage market with access to both
local and foreign financing instruments, the draft said.
DEFAULTS
Local financial firm Arqaam Capital has said the
introduction of a legal framework for mortgages will see the
amount of lending to purchase housing in Saudi Arabia eventually
double to 12 percent of gross domestic product. The country's
GDP is about $650 billion.
However, the full framework is some way from being
established. Implementing regulations on how defaults will be
handled, a big concern for lenders who fear sharia courts and
Saudi police will not evict people who fail to pay loans, have
not yet been published.
Some lenders already offer mortgage-like products, but the
lack of a clear legal framework has restricted the market to
comparatively wealthy Saudis in high-paying jobs, whose payments
can be deducted by the bank from their salaries.
"The problem was how do you get that person to repay if they
cannot be kicked out of their house," said Nicholas Diacos of
The Law Firm of Saleh al-Hejailan.
"In terms of making competitively priced financing in this
market, it was a nightmare because the financiers were pricing
the risk into their finance."
While lower-income borrowers can rely on a government
housing fund, the lack of a range of financing options has
contributed to the home shortage because developers tend to
focus on the top end of the market where profit is higher.
Mortgage-related regulations released so far suggest an
increasing reliance on structures compliant with sharia law,
said a Gulf lawyer who follows Saudi Arabia closely.
He said Saudi economic reforms typically involved a long
process in which layers of additional reforms were added to any
groundbreaking law, as happened with capital markets legislation
in the past decade.
"It is a continuum. There is a lot more that will need to be
fleshed out over the course of the next 12 months and beyond as
people put these structures into place. It is not a panacea but
I do think it is a good start," he said of the mortgage rules.
(Editing by Andrew Torchia and Dan Lalor)