Assessing the Impact and Effectiveness of Saudi Arabia’s Real Estate Mortgage and Finance Laws on Secondary Markets: A Landmark Reform or Missed Opportunity?

Abstract

This dissertation offers an assessment of the legal, economic, and financial impact of Saudi Arabia’s newly enacted Real Estate Finance Laws on Saudi Arabia’s residential real estate market. The objectives animating the new legislation are growth and expansion of the domestic mortgage market segment through a mature system of debt securities and the regulation of mortgage companies and their activities. Using doctrinal analysis of primary and secondary sources, the dissertation will assess whether the statutory framework on real estate law has achieved these aims while overcoming the limitations of the previous Sharia-governed system. Saudi Arabia is experiencing a period of economic transformation, bringing demands for a top-to-bottom modernization of its real estate laws. These demands have been fueled in large part by a growing shortage of housing and affordable home-financing options. This dissertation will demonstrate that the market in mortgage finance has been slowed down by the absence of a robust mortgage registration and securitization regime. The Saudi legal system hitherto lacked clearly defined property and contract laws. The law governing permitted forms of real estate finance, securities, and debt enforcement were determined by Saudi courts applying (uncodified) principles of Sharia. The legal uncertainty created by the absence of a statutory framework dedicated to real estate law, including statutory rights of ownership, was further undermined by the lack of a formal system of deed notarization and registration. Aggrieved parties were denied any formal means of taking and perfecting consensually-created security interests in real estate, a deficiency further underscored by the historic refusal by Saudi courts to enforce non-Sharia-compliant collateral against debtor parties to a loan agreement. Unable to register a legal or equitable interest in real estate, lending institutions have had few incentives to enter Saudi credit markets and meet the growing housing demand. Attempting to formulate and implement effective solutions to the country’s rapid economic modernization and housing shortages, the Saudi leadership passed a new statutory framework known as the Real Estate and Finance Laws. This legislation was adopted in 2012 and brought into force in 2013. In a radical departure from the existing law and judicial practice, the new legislative framework established the basis for a securitization regime and liberalized rules relating to mortgage and lease finance. Now that the legislation has been in force for almost ten years, this dissertation aims to provide a timely analysis of the strengths and limitations of the new regime, focusing on whether implementation and enforcement of the laws have been effective at addressing the country’s growing housing shortage. Viewed through this lens, this dissertation will provide background for its analysis of the new Real Estate and Finance Laws with a wider discussion of barriers to access, risk-regulation, and securitization of mortgage finance in Saudi Arabia. The relationship between law and markets is a central theme in the dissertation. Strikingly, some commentators have indicated that Saudi Arabia could experience a housing crash in the near future if effective macroprudential measures are not taken to improve the liquidity of lending markets. From the above premises, this doctoral study will examine what measures Saudi Arabia will need to take if regulators are to steer the stable and sustainable growth of emerging real estate finance markets, including secondary finance markets. This will require an investigation of the efficacy of Basel risk mitigation standards applied to the peculiarities of the Saudi banking system to mitigate the risk exposures that resulted in the collapse of Western mortgage subprime markets in 2008-2009. The study will contend that the success of the new Saudi economic strategy, including its plans to stimulate private investment in housing and mortgage markets, will depend on the ongoing liberalization of the country’s capital and finance laws, on a reliable system of real estate securitization, and on expansion of Sharia-compliant structured finance options.