(MENAFN - Khaleej Times) Banks are expected to submit their proposals to the UAE Central Bank today regarding the recent controversial regulation on mortgage financing, a source in the banking circle told Khaleej Times on condition of anonymity.
The matter is considered very important for banks and other stakeholders and that's the reason Emirates Banks Association probably met in Dubai twice during the week for the first time since its establishment in 1985 on a single issue.
"The senior bankers have finalised the proposals during their second meeting on Tuesday that suggested at least 60 per cent cap for expatriates on certain conditions and maximum 80 per cent limit for Emiratis," according to the source.
They are also looking for some clarifications on new regulations and most importantly want delay in the rules, so they can make policies according to the guidelines provided by the Central Bank, he added.
Previously, there were no loan-to-value (LTV) limits and some banks lent as much as 90 per cent of the value. But the UAE Central Bank issued new rules on December 30 and put restrictions.
The Central Bank restricted mortgages for expatriates to 50 per cent of the value of the property for a first home and to 40 per cent for the second property. For UAE nationals, it said financial institutions may lend up to 70 per cent of value for the first dwelling and up to 60 per cent for a second property.
"There is no choice for banks other than to obey the regulator's instructions and they have to follow the guidelines otherwise will face fines or penalties," said the source, adding that property sector will face the music as they have no other alternatives, but to sell the property while banks have a lot of other options to use their liquidity for other products.
"The new mortgage cap aims to pre-empt a real estate bubble. It is intended as a quantitative prudential safeguard to prevent excessive exposure of the banking sector to real estate. However, a cap ratio is also pro-cyclical: property values will tend to rise during a business upturn and high growth and so will bank lending as a result. If there is a downturn it will be difficult to call back loans and borrowers would walk away if the equity value is negative," Dr Nasser Saidi, former chief economist at the Dubai International Financial Centre, told this scribe earlier in the week.
"Witness what happened in the US, UK and European property markets during the Great Financial Crisis. A major issue is how will property values be assessed and how frequently?" Saidi added.
He emphasised that normally LTVs ratios are decided by lenders taking account of current and prospective interest rates, the risk characteristics of the borrower, the riskiness of the asset being offered as collateral, their own balance sheet and liquidity in addition to the prospects for the economy over the period in which they expect to have the exposure.
Real activity and employment in the construction and property sector and related services sector will be negatively affected, he added.
Craig Plumb, head of Research at Jones Lang LaSalle in Mena, said: "" If these rules are implemented, it would have a major impact on Dubai residential property market. When we say major, it will reduce demand for residential property and reduce pressure on price increase."
Plumb said that the recent UAE Central Bank announcement about caps on mortgage loan-to-value ratios shows that government authorities are concerned about market stability and want to avoid any rapid increase in real estate prices.
Real estate brokers already announced sharp decline in property enquiries in Dubai and also recorded cancellation of a lot of strong deals at the eleventh hours as buyers cannot afford 50 cash.
