Saudis study Fannie Mae-style plan for housing

Angus McDowall
Reuters Middle East

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


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.


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)

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