Questions: Q1. The National business news referring to website: https://www.then
ID: 2555245 • Letter: Q
Question
Questions:
Q1. The National business news referring to website: https://www.thenational.ae/business/property/saudi-arabia-introduces-measures-to-bolster-mortgage-financing-1.661854 has announced the following:
Saudi Arabia introduces measures to bolster (strengthen & support) mortgage financing. Central Bank announced steps to help cut home financing costs. The Saudi central bank earlier in the year 2017 increased the maximum loan-to-value ratio for mortgages to 85 per cent, from 70 per cent, for real estate finance companies. Waseem Obaidi/The National
Saudi Arabia’s central bank revealed new mortgage measures aimed at galvanising the housing market as the kingdom embarks on boosting affordable homes for its citizens. The Saudi Arabian Monetary Authority (Sama) said on Twitter that mortgage holders will be exempt from paying administrative fees when they switch between floating loan rate to fixed loan rates. Mortgage holders can also move from one mortgage lender to another at no extra cost.
Faced with a housing shortage, Saudi Arabia is undertaking a slew of measures to help provide homes to its citizens as part of its National Transformation Program 2020, which aims to increase the percentage of Saudi home ownership from 47 per cent to 52 per cent. The programme envisages increasing the percentage of real estate financing to non-oil GDP to 15 per cent from 8 per cent. The plan also sets a goal of tripling the percentage of residential units developed by approved real estate developers to 30 per cent by 2020.
Sama also said in January it would allow mortgage finance companies to provide more funding to home purchases by raising the maximum loan-to-value ratio for home financing from 70 per cent to 85 per cent for citizens’ first home ownership only. The bank licensed a national home finance company, Bidaya and introduced an affordable mortgage programme in conjunction with the ministry of finance. The government also approved a 2.5 per cent “white land tax” to prod land owners to develop idle plots for residential use rather than hold on to their undeveloped properties.
From the above information answer the following questions:
1-Which type of bank is the above announcement made for? Briefly bring out the important points given by the central bank of Saudi Arabia, SAMA on mortgage financing.
2-‘Mortgage banking is primarily a fee-based rather than interest rate spread– based business.’ Explain your view on the announcement made by SAMA on administrative fees and its effect on banks income.
3-Bring out the Main risk-return trade-offs and financial analysis issues of Mortgage Banks
4-What are the measure taken under National Transformation Program 2020 on mortgage financing in KSA?
Explanation / Answer
Answer: The Saudi central bank announced above announcement for mortgage financing companies.
The central bank & SAMA announced following important points on mortgage financing,
another at no extra cost,
Answer: Mortgage banking is purely a fees based banking business.
SAMA announced Mortgage holders will be exempt from paying administrative fees when they switch between floating loan rate to fixed loan rates.
This would impact the mortgage banking income in a negative way.
For instance, when you are trying to change your loan rate from a floating to a fixed one or vice versa within Bank, Bank will charge you a administrative conversion fee for changing over from a fixed rate loan to a floating rate loan or vice a versa.
Banks income would reduce by such announcement as Mortgage holders also have choice of moving from one mortgage lender to another at no extra cost.
Mortgage Banks?
Answer: The more risk one is willing to take, the higher the return one will be able to get.
The prices of mortgage banking are not the result of trading in an open market, which implies that the lenders may be price setters rather than price takers. In addition, the returns that banks are finally able to obtain may be smaller than the required rates in the presence of default risk, but their exact value is not observable. The correlation between probabilities of default and recovery rates also affects the expected return. For instance, a negative correlation would yield a further reduction in expected returns, since recoveries would then be smaller in bad times, which is precisely when probabilities of default are higher.
Mortgages are the safest category of loans, although they yield smaller returns than consumption loans.
Answer: The measure taken under national transformation program 2020 on mortgage financing in KCA is as follows.
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