The unavailability of mortgage finance in Pakistan continues to pose a challenge to the government’s efforts to provide affordable housing for the vast majority of the country’s low-income groups. According to a recent State Bank report, Pakistan has an annual housing demand of nearly 700,000 homes – only one-half of which is met by the market. The remainder appends itself, in its unfulfilled capacity, to the unmet demand; creating a housing shortage of approximately 10 million residential units.
This dearth of mortgage financing facilities has stemmed, primarily, from the ineffective foreclosure laws in Pakistan – should the matter be encased in a nutshell.
On July 29, President Arif Alvi promulgated an ordinance aimed at addressing the hurdles that have impeded mortgage financing in the country for quite some time. The law, titled ‘An ordinance to provide for the efficient recovery of mortgage-backed securities by financial institutions’ (Ordinance No. IX of 2019), was one of the 11 legislations approved by the National Assembly on November 7.
As its name suggests, the ordinance aims to ensure the efficient recovery of ‘mortgage-backed security’ or financial assistance provided by the country’s financial institutions. Its preamble proclaims that it has been formulated ‘for the purposes of facilitating financial institutions in granting those securities’; so that it ‘ultimately acts as a catalyst for satisfying the housing needs of the people of Pakistan’.
Several measures, facilitating recoveries on default, were introduced through the ordinance. These include:
1. An option for recovery without recourse to a court or tribunal
Previously, one of the major hurdles that impeded mortgage financing in Pakistan had to do with the banks not being able to pursue non-judicial foreclosures. This option had been provided under Section 15 of ‘The Financial Institution Recovery Ordinance, 2001. The Supreme Court, however, in a 2014 case titled ‘National Bank of Pakistan v Saif Textile Mills’, had declared the section to be in violation of the borrower’s constitutional right of ‘due process of law’.
Section 3 of the ordinance on mortgage-backed securities, reinstated the legal applicability of the said non-judicial foreclosure process – provided that it is done in accordance with its other provisions. This section states that any legal right (including those created through the mortgage) relating to a property, created in favour of a ‘secured creditor’ (a bank or a financial institution), can be enforced by them ‘without the intervention of any court or tribunal’.
In simpler words, a bank, acting under the provisions of this ordinance, is now allowed to recover the mortgage money or relevant interest without requiring recourse to a court or tribunal for intermediary facilitation.
Furthermore, the ordinance allows a bank to proceed with foreclosure procedures under Subsection (4) of Section 3 after the elapse of 60 days since its issuance of a notice requiring the defaulter to pay his/her secured debt or any of its instalments.
2. Banks’ permissibility to avail the state’s assistance
Not only does the new ordinance allow banks to take possession of properties for the recovery of their dues, it also enables them to approach the state to facilitate their control of such assets.
To practically pursue such concerns, the bank or financial institution involved in the proceeding is required (under the ordinance) to make a written request to the state authority requesting it to take possession of any secured asset or a document related to it. The state authority will then take the necessary measures to ensure compliance of such a request.
Further, the ordinance stipulates that the government will announce the relevant authority through the rules to be made under this ordinance. It also declares that no action performed by the state authorities in compliance with these sections of the law can be questioned ‘in any court of law or before any authority.’
3. A limited right of appeal
Initiating frivolous cases in courts to avoid accountability on defaults is a commonly used method pursued by loan-borrowers in Pakistan. These cases, as is generally observed, are then seen to ‘crawl’ their way through the overburdened judicial system; making for long and unnecessary delays, as per their original intent.
The president’s ordinance, however, has largely done away with this loophole.
Under its meticulous framework, a borrower is only allowed an appeal against an action taken under Subsection (4) of Section 3 (referenced above) if he/she submits 75% of the amount claimed in the notice of recovery sent to him by the lending bank. In other words, the borrower may challenge the action pertaining to the sale or possession of his property by the bank only if he submits 75% of the payable amount to the court.
This deposit requirement only applies to the borrower, however. Any other aggrieved person affected by the action of the creditor need not make any such submission in order to raise an appeal.
Additionally, the banking court (or High Court: the upper court of appeal) can only stop the sale of the mortgaged property if it is satisfied that:
- No mortgage agreement is in place;
- All the mortgage money has been paid back;
- The mortgagor, or any other person raising such an appeal, has deposited the outstanding mortgaged money to the court.
4. The ‘Due Process of Law’ and protection of the borrower
Since the ordinance is intended to encourage banks to provide mortgage financing facilities to the general public, it comes as no surprise that its tenets dole out immense protection to their interests. But the framework does come with a number of necessary stipulations to safeguard the rights of borrowers.
The ordinance makes it mandatory, for instance, for lending financial institutions to register any relevant agreement with the Central Depository Company (CDC). Any borrowing arrangement, as such, can only be made valid once it has been so officiated. Further, the registration applications will need to include all the details of the agreement; including the written indication of its validity and monetary value.
Further, the ordinance also makes it essential for the mortgaged property to come with a ‘reserve price’. This price has to be equal to the interest secured by the borrower under the agreement – with the property only allowed to be sold through a public auction and at a price higher than its reserve price.
The law also makes the provision for the borrower to receive compensation and cost, but only in the case of wrongful possession by the bank.
Other important provisions
Some of the other important provisions that form part of the ordinance are as follows:
- A suit or legal action cannot be instituted against a creditor (bank or financial institution) for any of its actions taken in ‘good faith’ under the ordinance.
- Civil courts will have no jurisdiction over any matter(s) pursued under this ordinance.
- The ordinance overrides any other law inconsistent with its legal provisions.
When considered in retrospect, and over the socioeconomic changes wrought under the few months since its announcement, this ordinance has been a much-awaited law for Pakistan’s banking sector – a practical guarantor, in effect, of the success of mortgage financing in the country.
The legislation changing foreclosure laws in Pakistan is also expected to facilitate the development of Prime Minister Imran Khan’s Naya Pakistan Housing Programme (NPHP) to provide affordable housing to lower income groups; which relies (for the most part) on private sector funding.
On an overall footing, the far-reaching impact of this law would definitely help in changing the dynamics of the country’s housing sector.
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