Saudi Arabia's Mortgage Law - Essay Example

Mortgage The term mortgage in the simplest and most basic sense and aspect refers to the and situation where loan for purchase of a property mostly a house is secured on the property by a lien. Lien in this instance refers to a third party or person who lay claim of the property as collateral or security and in case the person fails to repay the loan, the he or she can recover the property. It is important to note and mention that the document which specifies the exact conditions and terms on how the loan or the borrowed money is to be repaid constitutes a mortgage. Thus, this paper will look into the notion and concept of mortgages relative to Saudi Arabia. In the recent past, the council of ministers approved laws and policy frameworks in the financial sector. The inaugural plans and attempts on mortgage policies and frameworks were pushed by King Abdullah (Obstfeld and Rogoff 7). It was in this respect and aspect that the Jadwa, an exhaustive and comprehensive five laws which factor in the real estate financing, mortgage registration and the guidelines of enforcing mortgages. In principle, the laws stipulate that people could secure their financing or loan through REDF (Real Estate Development Fund). The real estate development fund is a branch or an arm of the government which deals with capital and subsequent lending. One benefit that the law provides is that private citizens could use the funds from the Real Estate Development Fund could to obtain and secure mortgage from private companies. It is expected that the Jadwa laws and policy framework would have a positive impact on the economy. This is so because the low and middle income earners in the country would have a chance and opportunity to own their own homes. A good example is that the unemployed people can also have the chance and opportunity to own their own houses secured by the Real Estate Development Fund (Claessens, Demirgüç-Kunt, and Huizinga 861). In the economic and social welfare aspect, it would make the economy of Saudi Arabia to be boosted. It is conventional knowledge and common truth that other corresponding sectors of the economy would be promoted. The cement and building industry would be boosted since the people who would build the houses would get employment opportunities. The infrastructural architecture would also be improved since new trends and units of constructions would be done so as to maintain the appeal of the housing units to the buyers or people. Similarly, the insurance companies which would also provide the cover for the mortgages would be boosted. This is so because the mortgage policies would demand that mortgages are covered by a proper and valid insurance cover and policy which would accompany a borrowing which would be long term in nature. In the same line of thought and reasoning, the banking systems and the micro-credit institutions would grow because they are the one which would provide the financial muscle for the mortgages. Thus, in brief, it would be proper and thorough to articulate and mention that banking sector and system would be boosted. This is so to ensure that the banking system would grow in corresponding stature so as to cover and service the need for the high number of people who would require to acquire the mortgages. GSEs are a common term and concept used to refer to the government sponsored enterprises which provide capital to unique and certain borrowing sectors of people in the country who may not be in good financial position. For instance the farmers, homeowners and students who may not have huge financial muscles to take loans from the private entities. This is to say and mention that the government sponsored enterprises has played an important role and function to help it revive the economy and caution the citizens during times of distress. A practical case and example of the government sponsored enterprises that have played a critical role in the United States of America include the Freddie Mac and the Fannie Mae. In the year 2003 and 2004, these enterprises bought and purchased huge volumes of Alt-mortgages. Empirical evidence and facts point to the direction that Alt-A-mortgages which required that the people who were given the mortgages were required to subject their repayment to a high debt-to-income ratio. In brief, this implies that the mortgage is a high loan to value which would have been a tricky situation if the economy was during depression. It is important to note ad mention that the Alt-A-Mortgages required that the borrowers of the mortgages did not provide proper documentation to provide their collateral and security for their mortgages. In the same line of thought and argument, the United States of America is one of the biggest countries and economies in the world. Thus, there are a lot of space and openness where the private mortgage companies and insurance companies operate and sell mortgages to private citizens. However during recession and depression or when the economy is not stable, the private companies could enforce their business contracts and thus raise the borrowing terms of agreements. This is to mention that the private entities would be interested and concerned by the huge returns that would be made. However, in the last two decades, the above named companies Freddie Mac and Fannie Mae has stepped in to help cover and caution the citizens against the high interest rates during times of unclear economic conditions or situations. The secondary mortgage market on its part refers to the market where servicing rights and loan are sold or bought between the investors, mortgage security providers or aggressors and the mortgage originators. In the clinical sense and aspect, the secondary mortgage market permits the banks or the mortgage sellers to sell the mortgage plans to insurance companies, federal government and pension plans such as pension funds (Gotham 360). The proceeds or the liquid cash that is obtained from the transactions are then used by the mortgage providers, banks or credit companies to offer more mortgages. One of the outright benefits and advantages for a secondary mortgage plan in any country such as the United States of America is that it makes access of credit to be easy. This is to say that borrowers across all the geographical locations in the world would be in a position to borrow the mortgages regardless of their geographical location. This argument and logic stems from the fact that money being a liquid asset is easily mobile and transferable from one person to the next person while maintaining its value. Secondly, the secondary markets help the economy by relieving the monopoly of the mortgage markets from the banks and the credit institutions. Instead, it becomes easy for the other tertiary bodies such as the government sponsored enterprises to venture into the same market and provide competition in the form of fair pricing. More players and stakeholders implies that the mortgage buyers and the nation as a whole would have variety to choose from in terms of competitive prices and flexible repayment and servicing terms. This argument and notion explains that the liquid assets or money could be used by the lenders or the sellers of the mortgages to reach more people at faster time at a cheaper price and more flexible service terms and conditions. For instance, when the Freddie Mac and Fannie Mae did buy the mortgages from banks and then resold them to other private investors. In so doing, they bundled them into mortgage –backed securities which were easily transferable from one person to another. In brief, mortgage could be accessed by many people across the geographical board at a relatively faster rate. Recommendation for the mortgage market Given the fact that the Jadwa policy framework has now been approved by the council of ministers, it would require that the KSA political system adopts a series of measures. Firstly, it should develop an oversight regulator which ought to be a fair and objective arbiter in such matters. This should be an all inclusive body which would be formed by the private sectors and the public players. In principle, the regulator should be the highest body to deal with issues around mortgage and insurance henceforth. Secondly, it should establish a secondary liquidity market where the Real Estate Development Fund would have a direct say and proposition. This is so because the benefits of a secondary liquidity market in the mortgage aspect are several as stipulated above. In retrospect, there should be a policy framework for the secondary liquidity players where public firms or corporations would be involved in case there would be need or urge to protect the interests of the public. Lastly, it is my guided and respectful view and opinion that the KSA political government and leadership should introduce government sponsored enterprises which could also acts as a buffer body for the low and middle income earners. This argument and reasoning stems from the fact that the poor may not be in a proper or good position to afford the service terms offered by the credit and banking institutions in Saudi Arabia. Work cited Claessens, Stijn, Aslι Demirgüç-Kunt, and Harry Huizinga. "How does foreign entry affect domestic banking markets?." Journal of Banking & Finance 25.5 (2001): 891-911. Gotham, Kevin Fox. "Creating liquidity out of spatial fixity: the secondary circuit of capital and the subprime mortgage crisis." International Journal of Urban and Regional Research 33.2 (2009): 355-371. Obstfeld, Maurice, and Kenneth Rogoff. The mirage of fixed exchange rates. No. w5191. National bureau of economic research, 1995. Read More