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The directive differentiates between loans granted to investors, those upgrading their home, and first-time homebuyers


Supervisor of Banks David Zaken today published a draft directive limiting the loan-to-value (LTV) ratio in housing loans, which will apply to loans approved in principal from November 1, 2012, and onward. The new directive is a continuation of previous measures taken by the Banking Supervision Department in the housing credit market.
The directive establishes that a banking corporation may not approve a housing loan (mortgage) with an LTV of greater than 70 percent—excluding a housing loan granted for the purpose of the borrower acquiring a first home, for which a maximum LTV of 75 percent will apply. In addition, the directive establishes that a banking corporation may not approve a loan to a borrower, for the purpose of purchasing an investment apartment, with an LTV above 50 percent. For this matter, an investment home is defined in accordance with reports to the tax authority (a second home), including a home acquired by a nonresident. The directive will go into effect after discussion in the Advisory Committee on Banking Matters.
In recent years we have seen negative developments in the housing market and the housing credit market. The draft directive has been published against the background of the marked increase in recent years in the balance of housing credit (Figure 1) and the increase in home prices in Israel (Figure 2). Recent trends in the housing market indicate an increased number of transactions, an increase in the monthly level of mortgages granted (Figure 3) and an increase in investors' volume of activity, among other things against the background of the low interest rate environment in mortgages.
These developments impact on the risk level inherent in the banks' credit portfolio—the accelerated increase in the housing credit portfolio on banks' balance sheets (Figure 4) is liable to include risks to the stability of the banking system, primarily in light of the correlation between the housing credit portfolio and the construction and real estate credit portfolio. These represent, as of June 30, 2012, about 40 percent of total balance sheet credit risk.
The Bank of Israel notes that many financial crises which took place in various countries began with the granting of housing credit at terms that did not reflect the risks developing in that market. The new directive is intended to reduce the significant effects of the realization of a crisis in the real estate market, by reducing the risk inherent in the housing credit portfolio and reducing the risk inherent in taking out a housing loan with a high loan-to-value ratio.
The progressive directive places, as noted, more stringent regulations on investors and takes into account the population of first-time homebuyers.