Overview of Saudi Mortgage Law - Case Study Example

Overview of Saudi Mortgage Law The passing of Saudi mortgage law is expected to rejuvenate Saudi housing prices and demand, since more people have a ready market access. As per the analysis from various experts, the passing of this entire law could steer a new mortgage period boom. In Saudi Arabia, the aspect of financing has since been a customarily avoided sector by various financial institutions mainly due to failure to establish appropriate regulations. A leading group of specialists (Capitals Group International) with regards to Sharia-compliant finance mortgage gave a greater focus in its recent report on the significance of affordability, consumer education and customization of mortgage finances in the Saudi Kingdom (Kratovil, Robert et.al., 1981). For the growth and development of each and every economy, housing markets are deemed as being very critical. They are the main sources of national wealth due to the fact that home ownership assists various families in safeguarding their mere earnings in very stable and long-term assets. Finance industry often forms the basis of any functional housing market since it acts as a critical connection between demand and supply. As per the CGI report, Saudi Arabia has traditionally maintained very successful financial economic policies and industry regulations. So, in order to ensure the extension of its track record with regards to successful regulation towards the mortgage sector, Saudi Arabia has to extrapolate principal lessons from subprime crisis, uphold a discreet regulatory stance with regards to management of credit risks, with the aspect of affordability acting as its key cornerstone, as well as promotion of effective consumer education and protection policies. The mortgage policy is aimed towards opening up the liquidity ratio within the Saudi market, and the ultimate availability of the entire mortgage finances will have a greater likelihood of boosting the real estate market. Within the framework of a growing mortgage market including that of Saudi Arabia whereby the current mortgage grants only represents 2% of the GDP, various substantial conclusions can be arrived at. It can be ascertained that an inadequate scale of regulation is required as compared to more established mortgage markets. In the process of crafting a regulatory structure for this growing industry plan, policy-makers have to ensure that enough attention is accorded to credit risk and consumer protection management. With proper address of these regulation areas, the outlooks for maintenance of established mortgage market receives a vast increase (Kratovil, Robert et.al., 1981). The regulators challenge will be the aspect of enacting sufficient regulation for consumers’ protection and setting up of sufficient mortgage lending as well as corporate governance principles for the financing organizations, while avoiding over regulation at the same time so as to arrive at a probable point of creating excess constraints on such an escalating industry. Examining the Saudi Arabia’s regulatory framework regarding mortgage lending, which currently exists as draft legislation, it is entirely comprised of five major packages that makes up a very comprehensive mortgage law. These five key law packages includes: Mortgage Registration Law, Financial Leasing Law, Enforcement or Execution Law, Real Estate Finance Law and Financial control Companies Law. They all play very distinct roles within this set-up. For instance, Mortgage Registration Law allows for mortgage utilization in financing of the real property, with mortgage registration included. Financial Leasing Law on the other hand plays a role of regulating the activities, incorporation, as well as governance of the financial leasing firms. In line with this, Enforcement or Execution Law plays a role of expanding the authority of the judicial courts towards provision of injunctive and declaratory relief, as well as enforcing orders of such calibre. Real Estate Finance Law on the other hand plays a role of governing firms engaged that are engaged in real estate finances. Finally, the financial control Companies Law plays a pivotal role of regulating the activities, incorporation, as well as governance of the finance firms. Regarding the affordability issue, CGIs general analysis indicates that the median income level of a household in the entire Kingdom is higher as compared with other rising markets. Therefore, the element of setting up reasonable leverage edges will not excessively restrict the conventional markets accessibility to adequate mortgage finances. Instead, promotion of positive consumer behaviours can be done through factoring in of practical down payment requirements that will promote positive consumer habits by encouraging buyers to keep focus on the affordable housing alternatives. Deteriorating lending criterions induced the international mortgage disaster. The thrust for enhanced homeownership, even amongst the low income households has created a weak leverage within the international mortgage market. A main deduction from this sequence of events is that, a safe lending climate can be created only if effective and adequate risk management strategy that is driven by practical regulatory is maintained. Maintenance of a prudent lending pattern that cap the offered financial amounts to consumers are based on their credit profile, existing income, as well as the foreseeable and current financial obligations that remains as a critical component of maintaining a sustainable and healthy mortgage market. Following the ultimate passage of the Saudi Arabias law regarding mortgage issues, CGI will hence be launching a finance firm on Sharia-compliant Saudi growth regarding money supply has increased to a greater extent. The bank deposits growth also remained at a rather healthy level as time and savings continued to receive gains from the viewpoints of higher interests while the sensitive activity within the stock exchange exerted a little effect on the demand deposits. These outcomes highlight clearly the constructive momentum surrounding the Kingdoms entire banking sector. The progressive deposits build-ups are witnessed especially when banks plays a greater role towards driving the economic development. Saudi Arabia is entirely considered as one of the latest acceded nations to the World Trade Organization and is emerging as dynamic member. On the other hand, Saudi Arabia is an active participant in the current negotiations on Doha Development Agenda and it strongly gives support to all the efforts that are aimed at bringing out a successful ending to those negotiations within the soonest possible time. The development strategy adopted by Saudi Arabia has led to a constructive economic performance within the few past years with regards to the GDP growth, external current account and overall fiscal position surpluses, and moderate inflation. On the other hand, Saudi Arabia entirely responded with an appropriate countercyclical policy towards the global economic crisis through a considerable fiscal incentive that worked towards limiting the effect of the world’s financial crisis, as well as contribution to the revival of the world’s demand. Additionally, Saudi Arabia has exercised a little moderation with regards to imposition of the latest trade restrictions in spite of the international economic downturn. The most significant segment of Saudi Arabias economic schedule is the aspect of promoting the private sector venture from foreign and Saudi companies. The latest statistics indicates that Saudi Arabia is among the eighth highest beneficiary of the foreign direct investment (FDI) globally (Wallison, Stanton & Ely, 2004). This sort of achievement resulted from positive developments within the entire national economy and the ultimate steps that are often taken towards improving its investment environment. This includes the opening-up of certain major economic activities that are aimed towards boosting foreign investment. The Kingdom is also endowed with well-established long-term goals and visions of that includes improvement of the living standards, development of human resources, diversification of the economic foundation, and the ultimate increase in the economic productivity. To accomplish this pursuit under the expected and current global conditions, Saudi Arabias Development Plan, has adopted various main macroeconomic objectives. These include; Increase of the economic growth rates, stabilizing prices and Combating inflation, Maintenance of the foreign exchange rate stability, Achieving balanced development in all regions of the Kingdom, Diversification of the national economic structure, Increase of the private sector’s contribution to the economic development, Increase of the employment opportunities, Raising of the market efficiency, Improvement of the payments balance, and the act of ensuring adequate economic integration with appropriate Member states. Fannie Mae and Freddie Mac: Fanny Mae (The Federal National Mortgage Association) and Freddie Mac (the Federal Home Mortgage Corporation) are some of the largest corporations in US that were established through a Congress charter so as to establish a secondary market scheme for the residential mortgage loans. They played a greater role in recent financial collapse in that; there was a sort of imbalance in terms of mortgage award thereby leading to massive downfall that directly hindered with the country’s economy. Fannie Mae and Freddie Mac, being the key housing enterprises sponsored by the government (GSEs), tend to hold very dominant sectors in the United States’ mortgage market. They have possibly surpassed the mortgage subsidies with regards to interest rates of about 25–50 foundation points to the homebuyers throughout their ultimate interventions within the entire housing market. This has mainly been due to the aspect of easing the interest on loans to people who did not have the ability of buying a house. Therefore, any form of policy plan reform that would eliminate Freddie Mac and Fannie Mae from the United States mortgage market, would have greater likelihood of eliminating the interest rate on mortgage subsidy (Wallison, Stanton & Ely, 2004). The past four decades witnessed the setting up of Freddie Mac and Fannie Mae as the ultimate government-sponsored enterprises through the Congressional charters. This means that, they were accorded the permit of operating with as the private ownership financial institution model but with the ultimate aim and objective of fulfilling the public demands and missions. They were entirely established so as to offer a stable funding source for the residential mortgages within the all nation (Perry, Vanessa, 2010). This includes even housing loans for low and average-income families. Freddie Mac and Fannie Mae perform that mission along their actions in the resultant mortgage market. They tend to purchase mortgages with certain standards from the banks and many other originators, before pooling them into the mortgage-backed securities that are guaranteed against losses incurred from defaults based on the primary mortgages, and selling such securities to the investors. The structural pattern of the United States’ economy was used by the CDA analysts for investigating the possible macroeconomic impacts of eliminating Freddie Mac and Fannie Mae agency activities. An economic forecast was simulated whereby Freddie Mac and Fannie Mae activity ceases, hence ending the probable mortgage subsidy with regards to the subjected interest rates passed to the market borrowers. Such an economic forecast was hence compared to a stringent baseline economic forecast that reflected no changes in Freddie Mac and Fannie Mae agency activities (Rockville, 2005). The simulation outcome pointed out that as the labor and economic markets stabilizes over the forecast period or around ten years. The real household’s consumption increase and disposable incomes are relative to the baseline levels by around 0.08 % and 0.03 %, respectively. In addition, the borrowing costs that were related to entire mortgages tend to rise within the forecast time period, hence leading to a 2% decrease in acquisition of house mortgage and 0.75% decrease in the household liability holdings’ level. The aspect of deleveraging households over such forecast timeframe tends to offset some sort of decrease with regards to changes in the household holdings on financial assets (Hill & David, 2001). Opponents often argue that; elimination of these mutual institutions would possibly lead to a very serious deterioration within the United States’ mortgage market, which would probably lead to the significant worsening of the economy. We however find that elimination of Freddie Mac and Fannie Mae agency activities or transactions would have very minimal effects on the markets and the general economy. The mean annual real output decline over the forecast period of 10 years is at around 0.04 %. Works Cited Hill, David S. Basic Mortgage Law: Cases and Materials. Durham, N.C: Carolina Academic Press, 2001. Print. Kratovil, Robert, and Raymond J. Werner. Modern Mortgage Law and Practice. Englewood Cliffs, N.J: Prentice-Hall, 1981. Print. National Mortgage Law Summary. Rockville, Md: American College of Mortgage Attorneys, 2005. Print. Perry, Vanessa, and Carol Motley. "Dreams and Taboos: Home Loan Advertising in the United States and Saudi Arabia." Journal of International Consumer Marketing. 22.2 (2010): 199-212. Print. Reforming Housing, Fannie Mae, and Freddie Mac. New York, N.Y: Films Media Group, 2012. Internet resource. Wallison, Peter J, Bert Ely, & Thomas H Stanton. Privatizing Freddie Mac, Fannie Mae, and the Federal Home Loan Banks. Washington, D.C.: AEI Press, 2004. Print. Read More