Loophole that will get you a flat
Young couples who don't have personal capital to make down payment on home take loans from several banks, credit companies to accrue initial capital needed for mortgage. Result: Loans with inflated interest rates, high default risks
Now, despite the social protests, ownership of a home remains out of reach for most young couples. The down payment is so precipitous that possibilities are narrowed to property in a handful of periphery areas.
Calcalist's inquiry reveals that a loophole in the banks' regulations turned a previously relatively marginal phenomenon to an all-out trend among young couples who cannot afford a large down payment.
The system goes as follows: A couple seeking to purchase a flat applies for a loan for general purposes – a standard procedure in most banks which is easy to qualify for if the couple has a reasonable income. The couple can apply to several banks for such loans which will all be transferred to one account accruing as much as NIS 300,000 (roughly $80,500).
Next, they can apply to another bank for a mortgage and on the basis of the money in their account, can get a mortgage of about $1 million (approximately 70%).
Ostensibly, this is a very creative method of financing a home but in the meantime, a worrying phenomenon is gaining speed in which the banks unwittingly are funding these couple without weighing the other repayments, and the couples on their part are putting their neck on the line with high chances of default due to exorbitant interest rates.
Calcalist's inquiry revels that the trend was born when the public began realizing the loophole that enables them to take a loan of up to NIS 200,000 ($53,700) from banks for any purpose without having to neither pledge securities nor present proof to their ability to repay the loan.
This turn of events is surprising in light of the Bank of Israel's concerns over the deterioration in the economy and on the backdrop of the current global crisis which would seem to warrant tougher mortgage prerequisites to prevent young couples from financial collapse.
Deputy Chairman of the Real Estate Appraisers Association Haim Mesilati says that recently he has seen growing numbers of couples who under the current circumstances, are opting for this method of financing.
"Many times, the desire to own a home beats other considerations. A buyer must come to the bank with 30%-40% of the property's value and with property prices as high as they are, this is not easy to achieve, so they go out and get the money is other ways and the banks are not in sync enough to curb this phenomenon."
He adds, "This is an underestimated loophole. Everyone involved, including the borrowers, are well aware that this is a problematic funding rout with steep interest rates."
No questions asked about money
In an interview to Calcalist, a senior official at one of Israel's leading banks corroborated that there is no way to determine whether the money comes from loans at other banks.
"When clients show the bank that they have NIS 300,000 ($80,500) and apply for a NIS 600,000 ($161,000) mortgage, the bank doesn't ask questions about where the money came from. If the client is categorized as a problematic client, the supposition is that he wouldn’t be able to come up with the funds.
"It's true that banks are not very strict when it comes to handing out loans; however, when the sums are over NIS 50,00 ($13,500) the bank does inquire into the client's ability to repay the loan, if his salary is transferred to an account at the bank and if he has additional securities. If the client is problematic, I don't believe he can qualify for such a loan."
These couples fall into two categories: Those who will be able to make the payments and those who unfortunately will fall into dire straits and default on the debt.
Young couples with high incomes, no children and relatively low expenses are likely candidates for the first category. When such a couple takes a short term loan, it will meet the payments despite high interest rates.
"The biggest issue with such loans is the obvious question of why not to do it and the answer of course is because one might default on the payments," explains Amit Kaminsky, CEO of AMG mortgage company.
Kaminsky says that when a client applies for a loan, the banks verify that only a third of his disposable income is allotted for repayment thus when couples decide on their own volition to exceed the threshold the bank sets, they are taking a risk.
"Such couples are stretching their financial limits to the max and in such a situation, any unexpected expense might send them spinning into debt for which they might take more loans and eventually default on the payments. This would be an unfortunate beginning for the young couple in their new flat."
The perils of this method of financing do not deter real estate investor and lecturer Chaim Zuloun from teaching his real estate investments students at the Cash Flow academy how to buy a home without personal capital.
He claims that many of the students who take his class either have no personal capital or have insufficient funds and he helps them reach their goal of buying a flat.
He says, "This method works for young couples who have a job and can make the payments on time."
Zuloun explains that a 32-year mortgage means a monthly payment of about NIS 440 ($118) for each NIS 1,000 ($270), which means that a NIS 600,000 ($161,000) loan will have an annual payment of NIS 2,500 ($671).
On the other hand, if a couple takes a NIS 800,000 ($215,000) bank loan, it will have to pay about NIS 6,500 ($1,750) per month.
'Comprehensive validation'
As to the question of how ethical such loans are, Zuloun replies, "Banks sell you money. If I were to go to two banks and tell them the truth about needing the money in order to produce personal capital, they won't say no."
Once the risk issue is examined, two possible scenarios come to mind: Risk to banks and risks to borrowers. It would take a deep financial crisis in order for banks to be exposed to risk from this kind of lending, wherein a large number of clients default on their debt and the banks have to sell off assets.
The general assumption is that even in the worst case scenario banks would not sustain damages they could not endure.
Kaminsky says that it would probably be the couples that would bear the main part of the brunt if payments are not met since in addition to the mortgage, they have short term loans with high interest rates.
The Bank of Israel said in response that "the banks conduct comprehensive inquires as part of their mortgage procedures. The bank checks the client's disposable income, earning capability and sources of personal capital.
"Despite the rigorous inquires, there will be cases such as you mentioned however, it would be farfetched to call this a phenomenon."
Click here to read this report in Hebrew
