Some anxiety about real estate is inevitable

Dubai: Soothsaying based on Amlak's announcement that it has suspended writing new mortgage loans is guaranteed to become a major Dubai pastime, especially because it comes on the heels of two other worrisome events: Emaar announced that it is allowing customers additional time to pay mortgage loans and Emirates NBD has discontinued lending to foreigners.

With real estate markets wilting around the globe, some anxiety about Dubai's is inevitable. The local market is particularly sensitive to the high proportion of expatriates. Thus the concern is heightened that expatriates, if they lose their jobs or suffer business reversals, can easily walk away from their mortgage obligations.

Here is where the global economy has its limits.

Enforcement

In many, if not most of the cases, enforcement would most likely become an issue. But in truth, experience in the United States and other countries shows that if a homeowner cannot pay, then the chance of him walking away from the property, returning it to the lender for disposition, increases.

Even with a robust economy, Dubai residents would not be able to purchase properties without a source of financing.

Therefore, the major issue is to what extent the cessation of lending at Amlak, even if temporary, along with similar actions by other lenders may have on the availability of mortgage loans.

Though details are sketchy, it seems clear that these cutbacks are occurring because the lenders cannot find sufficient investment capital. Illiquidity has plagued many capital markets and indeed has been a root cause of much of the financial crisis.

However, the difference between Dubai compared with developed markets is that Dubai, and the UAE, are still evolving the financial infrastructure that supports mortgage lending. For example, the securitisation of mortgage loans which allows the base of investors willing to provide money to lenders which in turn lend for mortgages is still developing.

In the US, Fannie Mae and Freddie Mac handle most securitisation of residential loans. While both organisations have received a great deal of bad press for losses, and have received help from the US government, in truth they continue to operate successfully. This includes raising money through capital markets to continue funding mortgage lending.

But sophisticated securitisation depends on having detailed and reliable information about consumers. In the US, for example, this is done through three major credit agencies. The massive quantities of data they collect are then put through a rigorous analysis to grade consumers in terms of credit worthiness.

Of course, in cultures accustomed to doing business based on personal relationships and trust, the indifference of such a numbers-driven approach can be off-putting.

Nonetheless, grading credit risk improves the ability of lenders to price credit. Those with the best credit get the lowest rates for mortgage loans. People with credit issues pay higher rates. But at least the lending system is better protected, though certainly not insulated, from credit default.

Globalised turmoil

Of course, it's unfair to beat up Dubai as being behind the curve, so to speak. In truth, no country in the world has remained unscathed by the current financial crisis. The truth is we are living in a hapless era of turmoil, partly explained by the fact that globalisation outgrew the institutions that govern international monetary management. The weakness was revealed by Wall Street excesses unchecked by Washington regulators responsible for protecting the investing public, though other culprits share blame as well.

So what we are getting is not only a wake-up call on a worldwide basis, but now alarm clocks are ringing in Dubai as well. What it means - whether Amlak's announcement develops into something more troublesome or not - is that Dubai must continue to press for improvements in the fin-ancial infrastructure to support its real estate market.

Rod Monger is an independent journalistwho writes on economic, business andpolitical issues