DIFC proposes New Mortgage Model

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DIFC, the financial and business gateway between the regional emerging markets and the world, and Absalon Project, a joint venture between affiliates of VP SECURITIES A/S and Soros Fund Management, today launched a Feasibility Study for the establishment of a mortgage system in the UAE based on the principles of the Danish Mortgage Model. The proposed Model involves private residential mortgages being funded by the issuance of standardised bonds, creating a large and liquid mortgage bond market.

Dr. Nasser Saidi, Chief Economist and Head of External Relations, DIFC Authority, commented: “Sustained recovery of the real estate sector is essential for the revival of growth in the region. The underlying economic fundamentals and demographics are positive. However, reform and development of housing finance are necessary for the medium and long-term recovery of the real estate sector.
“We have proposed the set-up of a mortgage securitisation mechanism to create a market similar to the Danish Mortgage Market. No investor has ever had a loss due to mortgage default, despite several financial crises.” According to the Feasibility Study, the proposed mortgage model would reduce the risk and exposure of real estate developers and lending institutions. It would also provide additional funding to the housing finance market and give strong impetus to the financial markets as an engine of economic growth. The Feasibility Study has been well received by commercial banks, mortgage banks, construction companies and developers, regulators, investors and stock exchanges.

A unique feature of the Model is the interchangeable nature of the mortgage and the bond. It allows a homeowner to retire their mortgage not only by paying it off directly, but also by buying an equivalent face amount of bonds at market price. Importantly, because the value of homes and the associated mortgage bonds tend to move in the same direction, homeowners should not end up with negative equity in their homes. Essentially, as house prices decline, the amount that a homeowner must spend to retire their mortgage decreases because they can buy the bonds at lower prices.
Dr. Nasser Saidi also proposed the establishment of an Emirates Mortgage Guarantee Corporation (EMGC) to support the recovery of the region’s mortgage markets. The EMGC would provide insurance coverage to eligible institutions, banks and specialised mortgage credit providers of a maximum percentage amount (e.g. 30%) of the total mortgage value. Essentially, the mortgage insurance scheme would spread risk and stimulate market liquidity.

Dr. Nasser Saidi continued: “Once legislative gaps which exist in the UAE are filled, the system could be implemented within an 18 month period. Moreover, the Model is compatible with both traditional mortgages and ljara mortgages. The main objective is to create as large and liquid a bond series as possible.” Dr. Nasser Saidi discussed the Feasibility Study at the Arab Real Estate ‘&’ Urban Development Conference at the Grand Hyatt Hotel in Dubai. The Conference was organised by the Arab Administrative Development Organisation, part of the League of Arab States, in collaboration with the Dubai Land Department and its regulatory arm, Real Estate Regulatory Agency, and DIFC.

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