by Daniel Costello

Dubai's housing crisis has sent prices down by more than half in the past year, prompting some homeowners to abandon their cars and mortgage payments and flee the country. One thing that hasn't happened in the country: a foreclosure.

That is until now. Barclays Plc won the sheikdom's first foreclosure cases in court, clearing the way for lenders holding about $16 billion of Dubai home loans to take action when borrowers don't pay.

 

The successful foreclosures by London-based Barclays may open the floodgates in Dubai's property market, which went from the world's best in 2008 to the worst after credit dried up and speculators who had fueled price increases left the market, according to Deutsche Bank AG. Moody's estimated in September that 12 percent of the 27,000 residential mortgages in the sheikdom would default within 12 to 18 months.

Banks and developers until now have avoided the process of reclaiming homes through the courts, barred by tradition and an arcane legal process that few understood. The Barclays and Tamweel cases may change that, because they show that a 2008 mortgage law — setting out rules for default, foreclosure and repossession — is working.

Islamic lender Tamweel PJSC, the emirate's biggest mortgage bank, has several of its own foreclosure claims pending and estimates about 3 percent of its mortgages are in default.

"Banks will be more aggressive in pursuing legal action if they see the process is efficient," said Dubai-based Antoine Yacoub, a banking analyst at Moody's Investors Service Inc. "They were trying to avoid the courts and restructure most of their loans, but once they see a precedent has been set, they will be encouraged to push more cases through."