Main points of a talk given today by Dr. Meir Sokoler, Acting Governor of the Bank of Israel: Two examples of how a sophisticated capital market can help the needy

31.3.2005

   Main points of a talk given today by Dr. Meir Sokoler, Acting Governor of the Bank of Israel, at the Ramat-Gan College:

        Two examples of how a sophisticated capital market can help the needy

	It is important that social policy, which has to deal with ethical issues such as poverty and the just distribution of income, recruit the financial markets to help the weaker sections of the population. This is shown by the experience of countries with highly developed capital markets. The development of a sophisticated capital market alongside a sound banking system is important not only for the efficient allocation of savings in the economy and for its increased robustness against shocks; it is important also for the realization of its great potential to help solve social problems. This is another key reason to ensure for the rapid completion of the legislation that will enable the implementation of the recommendations of the Bachar Committee, one of the main purposes of which is to turn Israel's capital market into a highly developed one.
	One way in which an advanced capital market can help solve social problems is by mortgage securitization, in other words, by mortgage banks issuing bonds for the public against housing mortgage loans granted (i.e., the mortgage serves as collateral for the bond). This is a type of transaction that does not exist at present in Israel, but one that may be expected to develop in a sufficiently sophisticated capital market. Experience in the US and other countries with developed capital markets has shown the tremendous potential that such bonded mortgages have to help solve the housing distress of the weaker sections of the population, the young as well as the aging. Mortgage securitization, i.e., financing mortgages in this way, enables mortgage banks to lower the interest that house purchasers will have to pay for the loans, because the risk confronting the mortgage banks in mortgage loans is divided between them and the buyers of the bonds. This is of special significance for young couples without a solid financial base or those generally less capable who purchase apartments. In some cases, such mortgages are granted under a government guarantee.
	Another way in which a developed capital market can help to solve social problems is an "reverse" mortgage. This is an arrangement whereby an aging population can obtain a loan in the form of periodic payments against the apartment they own; the principal and interest are generally repaid after their death by their heirs or executors. This arrangement enables the home-owning section of the population to obtain a regular cash flow against it without detracting from their right to continue living in it. Such a scheme creates an important source of funding for the aging population, including the poorer part of that population, who often have to spend a large part of their money on dealing with health problems, and on carrying out alterations in their homes in accordance with their requirements, which change as they grow older, etc. The cost of this arrangement can be reduced by securitizing the loans given under the reverse mortgage system (as described above, issuing bonds for the public against reverse mortgage loans). The reverse mortgage arrangement has been growing in the US and other countries in the last few years, but has not developed yet in Israel despite the fact that the need for it has grown. The reverse mortgage scheme could provide a reasonable solution for about 20 percent of Israel's senior citizens who are below the poverty line, about 61 percent of whom are home owners. Developing the capital markets will help the creation of the financial infrastructure required to promote the reverse mortgage scheme.