Saudi Arabia Said to Plan Fannie Mae-Style Mortgage Company

Nov 20, 2015

Saudi Arabia is working with the Boston Consulting Group to help start a state-owned mortgage firm similar to the U.S.’s Fannie Mae and Freddie Mac as it seeks to develop a secondary market for home loans, people with knowledge of the plans said.

Public Investment Fund, the kingdom’s sovereign wealth fund, will provide most of the approximately 10 billion riyals ($2.67 billion) of the institution’s capital, three people said, asking not to be identified because the plans aren’t public. PIF is in the process of selecting an executive to lead the new company, according to two of the people.

Saudi Arabia is seeking to boost home ownership amid one of the world’s lowest mortgage penetration rates. It approved a mortgage law in 2013 and is planning to tax undeveloped land within urban boundaries to boost the availability and affordability of homes. The mortgage law, which has been debated for more than a decade, will overhaul the kingdom’s home-finance market, from registering mortgages to allowing judges to prosecute police officers who fail to carry out eviction orders.

“This is a way for the government to play a supporting role in the development of the mortgage market,” said Murad Ansari, a Riyadh-based analyst at EFG-Hermes Holding SAE. “It’s difficult for banks to take on long-duration liabilities, which are mortgages, when they are mostly funded by short-duration liquidity.”

Saudi Arabia’s finance ministry and the wealth fund didn’t respond to calls and e-mails seeking comments. The Boston Consulting Group declined to comment when contacted by Bloomberg.

Initially, the Saudi entity will be tiny in comparison with Fannie Mae, which was bailed out by the U.S. in the 2008 financial crisis and has since returned about $142.5 billion to the federal government.

Mortgages make up around 8 percent of total loans in Saudi Arabia. The central bank estimates real estate loans at about 100 billion riyals. So far, that amount has been “small enough for banks to hold,” Ansari said, adding that banks would need a vehicle to generate liquidity as their mortgage book grows.