Banks sell 2.4 billion NIS of mortgages to Institutional buyers – Are we setting ourselves up for another subprime crisis?
The cooperation between Israel’s banks and Institutional investors is not new; these two industries have held hands on many occasions and in various fields of activity, effectively blocking out competition from abroad.
Over the past few months this collaboration has strengthened with the purchase of 2.4b shekels worth of mortgages by institutions. Some of us will reminisce how this trend was one of the major features behind the subprime crisis of 2008. When banks assume that they are not entering a long term loan contract with their borrower, they automatically take higher lending risks. Although currently the banks are cautious and highly regulated, if this trend of developing a secondary market continues, as expected, we will embark on a long slippery slope towards a fall. And since the blind buyers of these products are our hard working citizens pension plans, this fall will affect us all.
Why is this happening? Why now?
The reason is that the product currently suits both sides of this equation. Banks have long ceased to profit from mortgages. The main income used to be from the government mortgages which do longer exist. The meager spreads on mortgage is money not well spent for banks, which have turned mortgages into loss leaders in order to gain the client by means of giving a mortgage. Thus we saw mortgage banks merge into their parent companies, and borrowers practically forced to transfer banking activity. By giving, and then selling the loan, the bank keeps “the fat” and releases the commitment.
Once the regulator raised equity ratios on mortgage portfolios, this portfolio became more cumbersome for the bank, encouraging selling out.
The Institutions need shekel based fixed income product to meet and hedge obligations. In this everlasting low interest environment, they turned to income producing properties, bringing yields down by 2% in 3 years. Finding themselves overexposed to real estate, they turn to any sort of product which provides cash-flow. Although the returns of mortgage portfolios are low in Israel, the risk is equally low and there is a diverse set of borrowers reducing risk.
Where will it go? I expect the banks to sell another 12b NIS by the end of 2016; Brexit has set back any sign of recovery in European economies, promising a continued spell of low interest. This is turn keeps the demand high for Israeli real estate, and the ongoing demand for new mortgages will need to be met. No bank can afford to stop providing mortgages, and so the old will be sold to make room for the new.
This short term solution should be replaced by a long term one. The banking market in general, and mortgage market in particular, needs new players. To-date, the regulator has made it virtually impossible for overseas financial institutions to enter the retail market. Maybe, with the assistance of online platforms and P2P type platforms, the Israeli public will benefit from a competitive market, reducing prices and coercing the banking industry to provide the service that customers deserve. The alternative, a repeat of 2008, is far less enticing.