MANAMA, 25 December 2007 — In the backdrop of a subprime mortgage crisis in the US which squeezed credit markets worldwide, causing losses in billions of dollars, Bahrain is likely to become the first country in the region to introduce a new framework minimizing the risk factor for lending institutions to a maximum to 70 percent. Informed sources said that the new regulations, being framed by the Central Bank of Bahrain (CBB), will be in place early next year, perhaps bringing the new risk ratio for issuers and receivers of the mortgage loans.
A senior executive, who did not wish to be identified by name, said that the matter of having new regulations on mortgage loans would continue to be a very delicate matter as far as lending institutions are concerned. “The CBB had circulated a directive asking for our opinion, and, indeed, there is a very heated debate going on over this issue as many institutions, especially those doing good business, see it as a mere counter-productive exercise.
“With the realty sector, being one of the strongest pillars of the national economy, the CBB needs to be more cautious as any slowdown in business will directly affect the economic development. Any regulation putting a definite bar on things will have repercussions like the slowing down of business which will not be a welcome sign for institutions involved in this business.”
Instead of putting on a limit, he said, the CBB should be asking banks and financial institutions to take all precautionary measures and follow the stringent regulations already in place before giving a go-ahead for any new approval. He further said excess liquidity in the region as well as the flow of funds from the West including the US after 9/11 has triggered a property boom.
and this has become a main pillar of the regional economies.
He said that a broad set of guidelines with regard to signing loan deeds, capital adequacy of the institution, audit and vigilance by regulators will largely help minimize the risk or crisis like that of the sub-prime mortgage crisis in the US. The subprime mortgage financial crisis of this year represented a sharp rise in home foreclosures which started in the United States during the autumn of last year and became a global financial crisis within a year.
The root of the crisis started with subprime mortgage loans which were made to higher risk borrowers with lower income or a lesser credit history than prime borrowers. The share of sub-prime mortgages to total originations increased from 9 percent 11 years ago to 20 percent last year.
Mortgage lenders who retained a credit risk (the risk of payment default) were the first impacted as borrowers became unable or unwilling to make payments. Due to a form of financial engineering called securitization, many mortgage lenders had passed the rights to the mortgage payments and related credit-default risk to third-party investors via mortgage-backed securities (MBS).
Individual and institutional investors holding MBS faced significant losses as the value of the underlying mortgage assets and payment streams declined and became difficult to predict. In addition, certain legal entities designed to isolate this risk from the originating lenders, called collateralized debt obligations and structured investment vehicles, held substantial amounts of such securities.
As the value of payments into these entities declined, their value also declined, forcing the sale of MBS at fire-sale prices in some instances. The value of US subprime mortgages was estimated at $1.3 trillion as of last March with over 7.5 million first-lien sub-prime mortgages outstanding.
Approximately 16 percent of sub-prime loans with adjustable rate mortgages (ARM) are 90 days into default or in foreclosure proceedings as of last October, roughly triple the rate of two years ago. The estimated value of sub-prime ARM resetting at higher interest rates is $400 billion for this year and $500 billion for next.
