Real Estate-Backed Mortgages and Alternative Recovery Techniques: Evidence from Selected Banks in Tanzania

Abstract

Inefficiencies accompanying foreclosures in recovering outstanding debts of real estate-backed mortgages have necessitated banks and other mortgage lenders to opt for alternative recovery techniques. Extant studies have focused much on the application of workouts mainly in developed economies (which are characterized by well-established real estate and financial markets) with less attention from emerging economies. This study aimed at exploring how banks in Tanzania apply alternative recovery techniques in real estate-backed mortgages. A qualitative approach was used to collect the data from multiple commercial banks in Tanzania. Interviews, annual reports, and government documents were used to triangulate the information. Findings revealed that different forms of workouts are preferred. The most preferred technique was mortgage modification, followed by mortgage refinancing. Other workout techniques such as forbearance, transfer of debt to a new borrower and short sale are minimally applied.  Likewise, the banks were found applying the scare-tactics to enforce the customers do all they can to clear their debts before considering the use of the workouts. The study recommends that to facilitate optimal workouts, all stakeholders including the government, the bank systems, borrowers, and real property professionals must jointly cooperate for mutual benefits. The study proposed that further research could explore the fraudulent practice of borrowers that limit operationalization of workouts. Moreover, an investigation on whether borrowers’ benefit by changing terms of their repayment could be made. Finally, further studies are needed to investigate whether there is heterogeneity in the application of workouts between commercial and residential mortgage with a view to establishing whether borrowers’ default intentionally or not.