Sales consent could help banks avoid foreclosures

Dubai banks could cut their losses on defaulted properties by selling them with their owners' consent to avoid lengthy foreclosures, putting further pressure on prices that have already lost half of their peak values. Last week Barclays Bank became the first lender to successfully bring foreclosure proceedings against the owners of defaulted properties in Dubai and analysts expect more cases to follow after prices fell by as much as 50 per cent from their autumn 2008 peak.

Under UAE law, banks can sell mortgaged property if the owner agrees. Without consent, they must seek a court order, allowing the mortgage to be legally transferred to a new owner. "It is possible for the bank and the defaulting customer [mortgagor] to agree on settlement terms whereby the bank and the customer may agree to transfer the property to either the bank's nominee or to a new purchaser," said Rafiq Jaffer, a senior associate at Al Tamimi and Company, a Dubai-based legal firm.

"This is the case where the bank and a customer co-operate. Basically, you need either the consent of all parties or a court order to take possession of the property." Customers could agree to such a sale to avoid being pursued by debt collectors. The issue was highlighted this week when it emerged that a bank had tried to sell a three-bedroom apartment, the owner of which was in arrears, on the Palm Jumeirah development in Dubai. The unit was offered for sale at Dh1.7 million (US$463,000) - about 35 per cent lower than comparable apartments currently being sold on the island, according to the agent handling the sale.

However, it was unclear whether the owner gave consent for the sale of the property, after it was withdrawn from the market yesterday. "The landlord and the bank are trying to sort out certain issues as the landlord owes the bank money. Everything is on hold because the bank has to follow the rules of the Dubai Government. "We first need to see if this property is legally allowed to be sold," said the sales agent, who declined to be named.

Saud Masud, an analyst at the investment bank UBS, said investors might find prices of foreclosed properties up to 40 per cent lower than units being sold by their owners as more banks looked to offload non-performing home loans from their books. "It would be difficult for buyers to overlook the distress-level pricing in the auction market as compared to secondary markets," Mr Masud wrote in a report.

But other analysts say large numbers of foreclosed properties hitting the market are unlikely to materialise because banks are fearful of the destabilising effect such a fire sale would have. Al Tamimi claims to be handling most of the foreclosure cases in the country, but has so far filed fewer than 10 cases and is only likely to submit between four and six further notices in the next three months, according to Mr Jaffer.

Banks have so far gone to considerable lengths to prevent customers defaulting on mortgages, to avoid having to write down further provisions. In some cases they offer "payment holidays", monthly instalment reductions or extensions to the tenure of loans in a bid to make them less financially onerous to homeowners. However, sharp property price falls and widespread job losses could lead to a slew of property owners defaulting on their mortgages this year. Some homeowners have preferred to default rather than try to continue paying after the value of their properties fell below what they had cost - a situation known as negative equity.

Moodys, the international credit ratings agency, expects about 12 per cent of residential mortgages in Dubai to default by the first quarter of next year. That represents about 3,240 properties out of a total of about 27,000 mortgaged properties in the emirate. * with additional reporting by Sarmad Khan and Angela Giuffrida @Email:uharnischfeger@thenational.ae