One of the many ways the government has tried to rein in Israel’s soaring home prices has been to lower the ceiling on how much they can lend home buyers against the value of the property they plan to buy.
But consumer-lending reforms have paced the way for the rise of online peer-to-peer – P2P – lenders over the past year, most of whom are happy to make mortgages above the Bank of Israel’s ceiling of 50% of the price of the property. They’re also ready give loans – at a price – to borrowers the banks turn down.
The big three of the business are Blender, Tarya and Homei, two of whom are pure-play mortgage lenders. What they have in common is that they raise their capital from small investors and make loans online.
They’re not only outside the regulatory purview of the Bank of Israel, recent reforms aimed at breaking the big banks’ grip on consumer credit by encouraging nonbanking lenders have made P2P mortgage lenders’ jobs easier; for instance, by the new government-managed credit database.
“There are a lot of good clients who for various reasons can’t get a mortgage from a bank,” said Asher Lugosi, who is head of underwriting at Homei. “For instance, those who can’t get life insurance or who earn their income overseas or had financial problems in the past and live with the stain. All these people will still get a good [credit] rating from us. More problematic clients will get a lower one.”
Although prices have moderated in the past year, homes remain very expensive in Israel after a decade of sharply rising prices, and many experts foresee a new surge as the number of construction starts falls.
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Finance Minister Moshe Kahlon undertook a host of measures to contain the increases, most notably the Machir L’Mishtaken program to sell land cheaply to builders. Before that the Bank of Israel lowered the maximum a mortgage bank can lend from 75% to 50% of the home’s value.
The central bank did that to cool prices by making it harder to finance a home purchase, but it was also done out of concern that such high leveraging could put banks and borrowers at risk in the event of an economic downturn.
Asked about P2P lenders, the Finance Ministry declined to comment. The Bank of Israel and the Capital Market, Insurance and Saving Authority didn’t respond by press time.
In any case, the P2P lenders who spoke to TheMarker for most part have no such qualms. Executives say that compared to consumer loans, mortgages are safer because they come with the collateral of the real estate being bought.
“Financing at that level in my opinion isn’t going to create a bubble,” said Lugosi, who worked at Israel Discount Bank’s mortgage unit from 2006 to 2011. “For that to be a problem for the lender, the price of the asset would have to fall by half. The banks, for example, are giving up to 90% in Machir L’Mishtaken. In the past they would give 95% at low interest rates, but we’re far from there.”
Tarya, on the other hand, abides by the 50% rule even though Bank of Israel directives don’t apply to it.
“We’ve adopted a conservative policy. Financing of 75% or more would inflate a dangerous bubble,” said Eyal Elhayany, the company’s co-founder and CEO.
“In the Bank of Israel’s worst-case scenario, home prices could fall 35%, in which case anyone who provided a loan at rates like that [75%] is exposed dramatically. I think that’s irresponsible,” he said.
Tarya was formed in 2014, originally as a consumer lender. It expanded into mortgages last year and today about 50% of its 2.4 billion shekel ($670 million) is in various kinds of real estate loans, including loans to apartment purchasing groups and bridge loans.
Despite a cooling off of the residential real estate market, mortgage lending is a huge business. About 6,000 new loans are made every month and annual lending is in the range of 50 billion shekels ($14 billion).
The P2P lenders are small players. Tarya has only 700 million shekels of mortgages on its books. Blender has just a few single millions of shekels but says it has several tens of millions of applications awaiting approval.
Blender, also formed in 2014, has a 500-million-shekel loan portfolio, the lion’s share on consumer loans. It offers mortgages on average at 4.9% tied to the prime rate of interest. Thanks to the higher rates on consumer loans, Blender’s investors get a return of 5.5% after fees.
Apart from their willingness to lend more and to borrowers who can’t get a bank loan, the P2P lenders enjoy lower overhead.
“Most of our systems are automated, including a large part of the underwriting,” Elhayany said.
“For the same reason, we process mortgages a lot faster. A borrower gets approval in principle in 24 hours. If he has all the paperwork he can get the loan inside of three days.”