Riyadh, Saudi Arabia – Saudi Arabia is making significant strides in developing its mortgage-backed securities market, a move that aligns with the Kingdom's Vision 2030 goal of increasing homeownership to 70% by 2030 and reducing the cost of housing. By developing this market, the liquidity of residential properties can be improved, and real estate developers can secure the necessary financing. This will contribute to achieving Saudi Arabia's objectives of increasing homeownership and fostering sustainable growth in the real estate sector.

To underscore the importance of this development, the Saudi Real Estate Refinance Company (SRC), a subsidiary of the Public Investment Fund, recently signed a memorandum of understanding with Hisana Investment Company to develop the securitization market in the Kingdom. Previously, in August 2024, SRC had signed a similar agreement with BlackRock, the world's largest asset management firm, to explore developing mortgage-backed securities programs in the Saudi market. Additionally, in November, SRC signed a memorandum of understanding with King Street, a specialized capital management firm, to activate initiatives aimed at creating an efficient and sustainable mortgage refinancing system.

What is Securitization?

Securitization is a financial process that involves converting a pool of illiquid assets, such as loans, receivables, or other financial assets, into tradable securities. This process allows financial institutions or companies to raise cash by selling these securities to investors. In this process, assets are pooled into a portfolio or fund, and then securities are issued backed by those assets. These securities are often referred to as asset-backed securities or, in the case of mortgages, mortgage-backed securities.

The primary purpose of securitization is to improve liquidity, distribute risk, diversify funding sources, enhance market efficiency, and stimulate economic growth. The original owner of the underlying assets transfers the associated risks to the holders of the securities, while investors receive a return based on the cash flows generated by the underlying assets.

Mortgage-Backed Securities vs. Traditional Bonds

Dr. Fahad Al-Huwaimani, an economic expert and member of the Saudi Economic Association, told Asharq Al-Awsat that creating a secondary market for mortgage-backed securities would stimulate the buying and selling of these securities among investors, benefiting the mortgage finance system. He noted that the memoranda of understanding signed by the Saudi Real Estate Refinance Company aim to establish a sophisticated system for trading mortgage-backed securities issued by the company, which differ from traditional bonds and sukuk. The company will issue these securities using specific technical standards to enhance their attractiveness to both domestic and foreign investors.

Al-Huwaimani explained that mortgage-backed securities are financial instruments issued by a specialized entity, such as the Saudi Real Estate Refinance Company, after purchasing a portfolio of mortgage loans from banks. These securities are then rated according to their risk levels and sold as high-, medium-, or low-risk securities, each with a different yield. This is a more advanced type of mortgage-backed security compared to traditional ones that simply pass on cash flows to investors without assuming risks such as default or prepayment.

Reduced Risk for Banks

Al-Huwaimani added that selling mortgage loans enables banks to generate significant liquidity, allowing them to extend new mortgage loans. This creates a win-win situation for all parties: banks gain new liquidity, investors find attractive investment opportunities, and the refinancing company benefits from the spread between the purchase price of the portfolios and the proceeds from selling the securities to investors.

Al-Huwaimani noted that the availability of constant liquidity for banks, due to the presence of an entity willing to purchase their mortgage portfolios, will reduce the risk for banks and enable them to provide new loans. Furthermore, the activity of the mortgage-backed securities market and the entry of foreign investors will increase competition among banks, encouraging them to attract customers continuously. Additionally, the benchmark price published by the refinancing company will positively impact the cost of loans provided by banks.

New Growth Horizons

Dr. Ihsan Buhulayqa, an economic advisor and founder of the Jawatha Consulting Center, told Asharq Al-Awsat that this step will contribute to activating a secondary market for mortgage-backed securities and making the Saudi real estate market more efficient from the borrowers' perspective. It will also align with efforts to reduce interest rates, as the source of funds will not be bank deposits but the financial market. This will shift the market's objectives from risk hedging to a plan focused on opening new growth horizons and enhancing liquidity in the mortgage finance sector.

Buhulayqa emphasized the importance of maintaining the stability of the real estate market and safeguarding it by striking a balance between supply and demand for real estate. This can be achieved by limiting the inflation of real estate prices driven by excess liquidity, on the one hand, and providing incentives to increase the supply of housing units, especially residential properties, on the other.