The Banking Supervision Department announces a leniency in how the banks weight risk assets in respect of mortgages with a LTV of 60–75 percent

The Banking Supervision Department announces a change in its directives to the banks in the mortgage field, with the aim of enabling mortgage-taking customers who have the ability to repay to maximize their ability to purchase a dwelling with equity of 25 percent (or 30 percent for those improving their dwelling), and to prevent a situation where customers finance part of the equity through a complementary consumer credit loan, which is more expensive and less appropriate for financing the purchase of a dwelling.  The new directive is relevant only for loans for the purchase of a residential dwelling, and not for the purchase of an investment dwelling, and will come into force after comments from the Advisory Committee on Banking Business, on March 15, 2018.

 

Pursuant to the Banking Supervision Department directives, housing loans with an LTV of 60–75 percent are weighted by the bank at 75 percent for purposes of calculating the capital adequacy ratio, compared with a rate of 50 percent for loans with an LTV of 45-60 percent. These requirements have led to a situation where, in practice, many customers cannot maximize their entitlement to take out a mortgage with a 75 percent LTV (for first-time homebuyers) or 70 percent LTV (for those improving their dwelling).  Today, the Banking Supervision Department distributed a draft directive to the Advisory Committee on Banking Business, according to which a weighting of just 60 percent will apply to mortgages with an LTV of 60–75 percent.  It should be mentioned that pursuant to the Banking Supervision Department directives, purchasers of an investment dwelling cannot take out a mortgage with an LTV of more than 50 percent, so that the leniency is not relevant for investors.

 

According to Banking Supervision Department data, about one-quarter of customers take out mortgages at 60 percent or more of the value of the dwelling.  The rest bring equity of more than 40 percent of the value of the apartment.  About 10 percent of customers take out mortgages with LTVs of between 55 and 60 percent, mostly first-tie homebuyers (while a relatively small portion are improving their dwellings).  Apparently, the leniency will be relevant for at least some of them, who will now be able to more easily receive a mortgage with an LTV higher than 60 percent.

 

The leniency in capital requirements is in line with the international trend in regulation, which is reflected in the final recommendations of Basel 4, which focus on capital requirements in respect of credit risk.  The guidelines included, inter alia, lower capital confinement requirements in respect of mortgages, while increasing the sensitivity to the mortgages’ LTV rates.  It should be emphasized that even after this correction, the capital requirements of the Banking Supervision Department in Israel against mortgages will be significantly more strict than those elsewhere in the world.

  

Supervisor of Banks Dr. Hedva Ber said, “The measure in the mortgage field is intended to help customers that have the ability to repay but the equity they have accumulated does not allow them to purchase a dwelling with an LTV of less than 60 percent. Lowering the capital requirement from the banks will allow some of these customers to purchase a dwelling with lower equity, and customers who have taken out a complementary consumer loan from the banks or nonbank lenders will be able to take it out as a mortgage, which is less expensive and more appropriate for the purchase of a home.  This measure is being made possible due to the fact that the banks have accumulated large capital buffers against mortgage activities, and due to the decline in risk in the banks’ mortgage portfolios, in view of the many steps taken by the Banking Supervision Department in recent years.”​