BoI tightens mortgage lending rules

The banks will have to increase their provisions against mortgages, and classify them at a higher risk.

The Bank of Israel is worried about the growing risk in the housing market, and is imposing new restrictions on the banks. Supervisor of Banks David Zaken today issued a new draft directive requiring the banks to increase their provision for credit risk for all mortgages. The directive is liable to reduce mortgages in the market. The directive will apply retroactively to January 1, 2013, in other words, in the financial statements for the first quarter.

"In recent years, there has been rapid growth in the rise of loan portfolios with residential property as collateral, because of the sharp rise in home prices," states the directive's introduction. "These developments have resulted in higher potential risk in housing loan portfolios at banking corporations. At the same time, a new review has been carried out on the risk of guarantees under the Sale Law."

In view of the higher risk, the Bank of Israel has ordered the banks to increase the risk weighting of mortgages in their credit portfolios. Mortgages with a loan-to-value (LTV) ratio of up to 45% will be classified as having a risk weight of 35% in the banks' credit portfolios, the same as at present. Mortgages with an LTV of 45-60% will be classified as having a risk weight of 50%, up from the current weight of 35%. Mortgages with an LTV of over 60% will be classified as having a risk weight of 60%, up from the current weight of 35%.

The Bank of Israel also cancelled its previous directive from October 2010 to fully assign a risk weighting of 100% to laons greater than NIS 800,000 with an LTV of over 60% in which the mortgage's variable interest component was 25%. A weight of 75% will now be applied.

The Bank of Israel will require the banks to make a larger provision for credit losses on mortgages that they grant. Under the new directive, the coefficient between the balance of the group provision and the balance of housing loans will be a minimum of 0.35%, compared with an average of 0.22% in the third quarter of 2012.

The new directive also reduce the capital allocation required for Sale Law guarantees if an apartment has already been delivered to the buyer. These guarantees will be weighted using a conversion coefficient to credit of 10%, instead of 20%. The measure eases the capital allocation requirement, and the Bank of Israel believes that it may increase the supply of bank credit to the real estate and construction industry.

"The directives were drawn up in view of the rapid growth in housing credit in recent years (an increase of 76% in the past five years), paralleling the increase in housing prices, and their objective is to increase the capital cushions and provisions required for the rise in risk in the housing credit portfolio," states the Bank of Israel.

Published by Globes [online], Israel business news - - on February 19, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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