Minimum Capital Requirements for Credit Risk

For an exposure secured by real estate to be classified as a “regulatory real estate” exposure, the loan must meet the following requirements: 1. Finished property: The exposure must be secured by a fully completed immovable property. This requirement does not apply to forest, desert and agricultural land. This criteria can be met by loans to individuals that are secured by residential property under construction or land upon which residential property would be constructed, provided that: (i) the property is a one-to-four family residential housing unit that will be the primary residence of the borrower and the lending to the individual is not, in effect, indirectly financing land acquisition, development and construction exposures described in paragraph 7.82; or (ii) sovereign or PSEs involved have the legal powers and ability to ensure that the property under construction will be finished. 2. Legal enforceability : Any claim on the property taken must be legally enforceable in all relevant jurisdictions. The collateral agreement and the legal process underpinning it must be such that they provide for the bank to realize the value of the property within a reasonable time frame. 3. Claims over the property: The loan is a claim over the property where the lender bank holds a first lien over the property, or a single bank holds the first lien and any sequentially lower ranking lien(s) (i.e. there is no intermediate lien from another bank) over the same property. However, where junior liens 20 provide the holder with a claim for collateral that is legally enforceable and constitute an effective credit risk mitigant, junior liens held by a different bank than the one holding the senior lien mayalso be recognized. 21 In order to meet the above requirements, the national frameworks governing liens should ensure the following: (i) each bank holding a lien on a property can initiate the sale of the property independently from other entities holding a lien on the property; and (ii) where the sale of the property is not carried out by means of a public auction, entities holding a senior lien take reasonable steps to obtain a fair market value or the best price that may be obtained in the circumstances when exercising any power of sale on their own (i.e. it is not possible for the entity holding the senior lien to sell the property on its own at a discounted value in detriment of the junior lien). 4. Ability of the borrower to repay : The borrower must meet the requirements set according to paragraph 7.65. 5. Prudent value of property : The property must be valued according to the criteria in paragraphs 7.66 to 7.68 for determining the value in the loan-to- value ratio (LTV). Moreover, the value of the property must not depend materially on the performance of the borrower. 6. Required documentation: All the information required at loan origination and for monitoring purposes must be properly documented, including information on the ability of the borrower to repay and on the valuation of the property. 7.64 SAMA may require banks to increase the risk weights in the corresponding risk weight tables as appropriate if they are determined to be too low for real estate exposures based on default experience and other factors such as market price stability. Banks will be informed accordingly. 7.65 Banks should put in place underwriting policies with respect to the granting of mortgage loans that include the assessment of the ability of the borrower to repay. Underwriting policies must define a metric(s) (such as the loan’s debt service coverage ratio) and specify its (their) corresponding relevant level(s) to conduct such assessment 22 . Underwriting policies must also be appropriate when the repayment of the mortgage loan depends materially on the cash flows generated by the property, including relevant metrics (such as an occupancy rate of the property).