Bank of Israel Governor Stanley Fischer has rejected the Knesset Finance Committees request that he exempt young couples from the central banks new limits on variable-rate mortgages.
Fischer appeared before the committee on Tuesday to inform the MKs about his fears of a possible real estate bubble and its dangers. At that meeting, he told them he would consider such an exemption.
But when the final version of the new mortgage regulations were released yesterday morning, they contained no such special treatment for new home buyers.
Fischer is worried that as interest rates rise, which he is sure they will, borrowers will find their monthly payments rising quickly and be unable to pay back the loans they took at very low interest rates. This would not only be a tragedy for the home owners, Fischer said, but if there are large-scale foreclosures, this could undermine the stability of the entire banking system.
Perhaps surprising was who was given an exemption from the new rules: foreign investors.
The Bank of Israels new rules limit the variable-rate portion of a mortgage to only 33.3% of the total. But foreign investors in local real estate are allowed to take out variable-rate loans in foreign currency for more than 33.3% of the total loan. Yet even if the banks provide such loans to foreigners, their total level of variable-rate mortgage loans cannot exceed a third of all housing loans.
Bank executives say this could actually hurt Israelis even more, as the banks will lower the level of variable-rate mortgages for Israelis to less than one third to enable themselves to increase the amounts for foreigners.
Foreign-currency denominated loans are particularly attractive at the moment but also particularly dangerous. They are attractive because most foreign-currency denominated loans are linked to the LIBOR, the London Interbank Offered Rate, which is now about 0.5%. But such loans not only bear the risk of rising interest, they are also at the mercy of currency fluctuations.
The new rules for Israelis apply not only to variable-rate interest linked to prime interest rates, but also to those linked to foreign currency.
Supervisor of Banks David Zaken told the committee: The directive is especially important for young couples and borrowers with low repayment ability, since the risk they are exposed to is especially big, due to the difficulty they will face if their monthly payments increase because of an interest rate hike. For this reason, the Bank of Israel did not consider excluding these or other specific populations from the directive.
The central bank did make a few changes in the draft regulations it released last week. One concerned foreign investors; another exempted bridging loans of less than three years; and a third exempted loans of under NIS 100,000.
Yesterday, the central bank reiterated that the new regulations are intended to protect home buyers and ensure they will be able to meet their future payments.
The chairman of the Finance Committee, MK Moshe Gafni (United Torah Judaism), said yesterday he has yet to see the new regulations, but if there is a technical and practical way to exempt various groups from the new rules and the rules are not all-inclusive then young couples should be exempted.
Gafni said he would speak to Fischer and ask for clarifications.
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