Tighter bank regulations hit home buyer groups

The Bank of Israel has ordered the banks to tighten credit to buyers groups because of the inherent risk in their business.

The Bank of Israel has ordered banks to tighten credit to buyers groups because of the inherent risk in their business.

Supervisor of Banks Rony Hizkiyahu has ruled that bank credit to buyers groups will not be considered as housing credit to a single borrower like an ordinary mortgage loan, but as ordinary commercial credit given to a contractor. Only when a project is completed and the apartment keys are handed over to the buyer will the loan be reclassified as a housing loan.

Under Basel II - The New Basel Capital Accord of the Basel Committee on Banking Supervision, a capital allocation for a mortgage is 35% (the bank allocates NIS 0.35 for each shekel given as a loan), whereas the capital allocation for a loan to a company is 100%. The banks will therefore have to allocate almost three times as much capital for same sized loan to a buyers group, reducing the credit's feasibility, and raising the interest rate on the loan.

In a letter to bank managers, Hizkiyahu said, "The extraordinary increase in activity, the entry to the sector of organizers whose business model has not yet proven itself, and the lack of experience about large failures in a period of falling housing prices, create considerable concern about damage to the quality of credit and reputation of the bank."

In view of the higher risk, the Bank of Israel is lowering the economic feasibility of loans to buyers groups by essentially fining the banks through the allocation of capital for these loans, which will affect the banks' capital adequacy ratios.

Hizkiyahu also gives the banks until March 30 to establish procedures to deal with credit to projects of buyers groups. The banks will have to review the credit risk of a single borrower on the basis of his ability to repay, as well as a project's other risks.

Published by Globes [online], Israel business news - www.globes-online.com - on February 17, 2010

© Copyright of Globes Publisher Itonut (1983) Ltd. 2010

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