Betting the Bank on Mortgages

Debt figures released this week by the Bank of Israel show that home loans were the lenders’ big growth engine in 2012.

The five big banks are only due to publish their 2012 financial results in another three weeks, but in the meantime the Bank of Israel has provided some clues as to how the banks were making their money last year.

The central bank’s figures on business and household debt showed that mortgage lending was the banking industry’s most powerful growth engine in 2012. New mortgages granted actually grew by NIS 46 billion, which was partly offset by home loans that matured over the source of the year. All told, the value of outstanding homes loans grew by NIS 21 billion, or 9.5%, to NIS 242.2 billion.

Over the last decade the banks’ combined mortgage portfolio has grown by NIS 135 billion, an increase of 125%.

The 9.5% jump in home loans last year compares with an increase in total bank lending growth of just 2.35%, to NIS 818 billion. But if you discount the growth in mortgage lending, banking lending actually contracted by 0.5%.

Indeed, in their key business of corporate lending, the commercial banks are facing heightened competition from institutional investors. Bank of Israel figures show that lending by institutions, like insurance companies and pension funds, grew by NIS 9 billion last year ‏(a 37% increase‏), to NIS 32 billion.

Institutional investors are awash in liquidity at a time when the commercial banks are trying to meet tougher capital adequacy ratios and need to reduce their risk assets.

The contrasting figures between mortgage and other lending go a long way to explaining why the competition to make mortgages has become so intense in the banking industry: It is one of the few areas where demand is strong and lenders can increase their portfolio of outstanding loans.

The party is going strong, but the Bank of Israel is determined to take away the punch bowl.

Out of concern that the banks are getting drunk on mortgage risk, Banks Supervisor David Zaken last October ordered tougher new loan-to-value ‏(LTV‏) ratios, with a top rate of 75% for first time buyers, 70% for people upgrading to a bigger house, and 50% for property investors who have no intention of living in the residence they are buying. The rule went into effect this year.

Data published by the central bank this week for January show that the measures have been effective, forcing the banks to restrain the relative amount of debt they allow home buyers to take on. Just before the new LTV ceilings were imposed, some 6% of all mortgages were leveraged by 75% or more. In January, that figure fell to 3.4%.

Full impact in February

That decline includes home loans that were granted before the new LTV ceilings were set and were in the middle of being processed. The February mortgage data will show the full impact of the new rules and bring the 75% figure down to zero, thereby reducing the risk the banks are taking upon themselves.

However, Zaken hasn’t been resting on his laurels. The banks have become addicted to home lending, so last week he ordered them to set aside bigger financial cushions than they have until now against their ever-growing mortgage portfolios.

If he can’t wean the banks off their mortgage-granting addiction, he can at least force them to collect bigger risk premiums against the loans they do make. What that means for the home-buying public is higher rates of interest.

Zaken has said he doesn’t believe the banks are adequately pricing the risks that they are taking on when making mortgages, especially amid the economy’s slowing growth and the outlook for rising unemployment. That will make it harder for borrowers to meet their mortgage payments and endanger the banks’ financial health.

While the banks have been making new mortgages with abandon, mortgage benefits granted by the government to home buyers with rights have actually declined by 40% over the past four years, to NIS 23.4 billion last year. In 2012 alone, the value of the benefits dropped 15.3%.

It’s not that the government stiffened conditions for rights holders. Rather, it is a function of the very low interest prevailing in the commercial market. Bank of Israel figures show that mortgage rates are the lowest ever in Israel’s history. In many cases, it is cheaper to take a mortgage at market rates than one offered by the state.

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Haaretz