Supervisor of Banks David Zaken believes that Israeli banks are entering the current global crisis in better shape than they were in at the start of the 2008 crisis. However, he is worried about the real estate market following the sharp rise in apartment prices and the amount of mortgages granted over the last few years. In an interview with the Association of Banks in Israel's "Banking" magazine, to be published this week, Zaken admits that the sharp rise in mortgage value is partly due to low interest rates set by the Bank of Israel.
"The amount of mortgages rose sharply and quickly over the last few years," Zaken said in his first interview since starting in his position. "The growth is partly due to low interest rates, which brought about a rise in the level of leverage, and partly due to a rise in apartment prices. Other factors include yield considerations compared with alternatives, and more lenient underwriting processes for mortgages."
Zaken said that the Bank of Israel has noticed that people were taking out mortgages with high leverage, and that banks are willing to grant mortgages even at a loss. "Some banks announced that they view mortgages as an anchor product, and that they would be willing to grant mortgages even at a loss. We are seeing mortgages granted at a high Loan to Value ratio to people who have a low repayment ability - in other words, the ratio between the amount of the monthly payment and their available monthly income is high.
"They advised their clients to spread their mortgage over 25 or 30 years in order to reduce the Loan to Value ratio. Banks do not have the resources to withstand such long periods, and therefore they grant mortgages at floating interest rates, while promising clients that they can switch to a different track at any time. In theory this is true, but there is a risk that clients would want to move to a fixed interest rate when rates are high, and when the bank might not have such long-term funds available."
Zaken believes that the Bank of Israel's worst case scenario is a situation in which thousands of mortgage owners would not be able to pay their monthly mortgage payments: "From the point of view of the client that took out a mortgage, the worst case scenario is a failure to make his monthly payments, and not a decrease in his apartment's value. Even if the value of his apartment declines, he will most likely want to continue living there, and continue paying his mortgage. But in the case of loss of income due to being fired from a job, or a decrease in salary - the family's ability to support itself is seriously harmed. We do not want to see thousands of people are unable to pay their mortgage. It will change from a banking problem to a public problem, and we do not want to find ourselves in this situation. We are watching the mortgage market and housing prices in order to see what developments occur in the market.
Zaken also said that he would make it difficult for banks to distribute dividends, as part of the demand to strengthen them with additional capital: "We have not yet decided the amounts, but the direction is clear - a rise in the level of capital, as well as in the quality of the capital. We are in a better starting position than we were in 2007, just before the global crisis, in light of the banking system's level of capital adequacy. However, it is important to stress that following the crisis, banks overseas strengthened their core capital, and they are preparing faster for Basel III, and Israeli banks must pick up the pace.
Published by Globes [online], Israel business news - www.globes-online.com - on September 18, 2011
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