Bethel Finance news:
Banking sources believe that the Bank of Israel's next step to rein in the mortgage market will be to cap the loan-to-value (LTV) ratio on new mortgages at 60%. This will force homebuyers to provide at least 40% of the equity to buy a home, which will affect an estimated one-third of borrowers.
The Bank of Israel will examine the effect of its latest directives on the market over the coming months, and in September, it will decide whether to institute more measures, and if so, which ones.
Supervisor of Banks David Zaken declined to comment on the report.
The current average LTV in Israel, which is less than 60%, is conservative by international comparison. Leumi Mortgage Bank, Israel's second largest mortgage bank, had an average LTV of 57% in 2010. The average LTV of Hapoalim Mishkan Mortgage Bank was 49%, and the average LTV of Mizrahi Tefahot Bank (TASE:MZTF) is also of the same order.
Until now, the Bank of Israel has not limited the mortgage banks' LTV, but last year, the Banking Supervision Department sent a clear message that it did not want the banks to grant loans at an LTV higher than 60%. In July 2010, the Bank of Israel issued a directive stating that if a bank that granted a loan at an LTV above 60%, the bank would pay a penalty of 0.75% of the loan by making an immediate provision for doubtful debts in this amount.
Limiting the LTV is controversial. The main concern, shared by the Bank of Israel, is that such an aggressive measure is liable to drive out of the market borrowers lacking the necessary 40% of the equity of a home. This will reduce housing demand to a degree that could cause home prices to drop sharply and affect the values and liens held by the banks.
Another weapon in the Bank of Israel's arsenal is to require the banks to create a safety cushion in case of an increase in the insolvency rate of borrowers, in view of the Bank of Israel's growing worries about the mortgage market. Earlier this week, Governor of the Bank of Israel Prof. Stanley Fischer told the Knesset Finance Committee, "It's enough for 0.5% of borrowers to become insolvent and banks will begin to lose money."
To prepare for such an eventuality, the Bank of Israel can order the banks to increase their provisions for doubtful debts as a percentage of their credit portfolios. The provision is not against any specific mortgage loan, but a general provision to hedge against the rising risk in the overall mortgage portfolio, and as a hedge against a future deterioration of the economy. The Bank of Israel took this action in 2002 and considered doing so during the financial crisis of 2008.
A special additional provision would hurt the banks' profits, and would give them an incentive to reduce their mortgage portfolios. The Bank of Israel will reportedly demand a provision of 0.5-1% of the banks' mortgage credit. The banks' aggregate mortgage portfolio is NIS 200 billion, so such a provision would amount to NIS 1-2 billion. In such a case, the Bank of Israel would allow the banks to spread the provision over several quarters.
another option is to order the banks to gradually raise their core capital adequacy ratio threshold from 7.5% to 8%. This would create a safety cushion of surplus capital, which could be used in the event of a real estate crash. The banks' current average core capital adequacy ratio is 7.95%, and each 0.1% increase in the ratio means an addition NIS 900 million in capital.
Raising the capital adequacy ratio would greatly affect the banks' ability to distribute dividends. However, the Bank of Israel is reportedly not considering banning dividends, as it did in 2008-10.
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