High-finance Mortgages Dropas Banks Become Risk-averse

In this feverish housing market, bankers are scared of getting stuckwith assets worth less than the loans made to buy them.

The proportion of mortgages representing a high proportion of the house value plunged in October as banks turn increasingly risk-averse.

Among its efforts to cool down Israel's raging home property market, the Bank of Israel handed down new rules a year and a half ago to discourage banks from making mortgage loans that constitute a high proportion of the purchased home's value. If the bank lends more than 60% of the value of the home, it costs the bank (and therefore, the homebuyer ) more.

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It is not against the rules for a bank to make such equity-light loans, but they are riskier for the lending bank. If the value of property starts to drop, the home value can fall below the value of the mortgage more quickly. Then if the buyers start to default, the banks can get stuck with foreclosed homes worth less than the outstanding loans made to buy them.

In October, banks lent NIS 71 million to homebuyers who put up less than 10% of the equity, borrowing 90% or more of the value of the home. That figure was down 37% from September and 45% compared with August of this year, according to the Bank of Israel's statistics.

The central bank's figures also show that loans comprising 90% or more of the home value constitute only 3% of total mortgage lending in the country.

The steep drop in the last few months indicates that the banks are turning risk-shy. So are the borrowers - and so is Ezer Mortgage Insurance Company, the only local insurance company that provides mortgage guaranty insurance, which protects mortgage banks.

There is good reason for this: Prices in the febrile housing market have begun to plateau and even turn downward. Nobody can say whence housing prices from this point but many feel they will decline further.

The drop in high-finance mortgages is far steeper than the drop in total mortgage lending. This cannot be because of the change in rules since, as said, the central bank jacked up the cost of high-finance mortgages a year and a half ago.

"The banks are taking a lot less risks these days. This has nothing to do with the Bank of Israel's directives," says Michael Ben Ishay, chief risk officer at the Bank of Jerusalem. Simply, the bankers are terrified of getting stuck with assets worth less than the loans made to buy them, he says.

Making a crisis snowball

When the value of a dwelling is smaller than the outstanding loan, borrowers are less motivated to make good on their loan payments. That is how the sub-prime crisis in the United States snowballed into monstrous proportions. Borrowers preferred to let the bank foreclose in order to shake off the loans.

The newer the loan, the less of it has been repaid and the bigger the outstanding amount - and the greater the temptation to walk away, leaving the property in the hands of the bank. If the bank has lent 90% of the home value, all it takes is for property values to drop by 10% for this scenario to turn realistic.

That said, Ben Ishay doesn't believe Israel will reach the sub-prime straits that America did, for a number of reasons. First of all, he says, the rules are different: The American banks routinely lent far greater proportions of the home value, sometimes more than 100%. Secondly, those banks sold the risk onward: that is, they securitized the mortgages and, therefore, didn't care about the risk of the buyer defaulting.

Thirdly and most importantly, says Ben Ishay, American loans are non-recourse, which means that once the bank had foreclosed on the property, the borrowers in trouble were not held personally liable. That isn't how it works in Israel. "Nothing will help you here. The bank will hound you until you return the last shekel," he says.

The riskiest high-finance loans in the local banking system are the ones extended to nonresidents. Even if not defined as such, they are effectively non-recourse loans.

"Nonresidents aren't like Israelis. You can't garnish their salaries or seize their car," Ben Ishay explains. Local banks therefore won't normally lend a nonresident more than 60% of the home value.

The ones suffering most from the new risk-aversion trend in the system are young couples short on equity who had hoped to buy a nicer home with a big mortgage. Right now they're out of the game, says Ben Ishay.

There are many reasons to anticipate that housing prices will drop further, one being the government's explicit intention to bring about just that situation, by spurring the construction of new housing. A large part of the protests in Israel this summer was over the high cost of housing.

Another reason is that the Bank of Israel has been maneuvering to reduce bank lending to the construction industry (to builders and homebuyers alike ), for the sake of safeguarding the banks. Now the banks are starting to pull back from lending as well. The upshot could be that for all the government's intentions, the shortage of housing in the country, if there is one, may not be relieved any time soon.