Securities backed by mortgages made in Israel may be the next investment products to hit the secondary market.
Several Israeli banks and mortgage companies have expressed interest in securitizing loans, said Jill M. Zelter, managing director at the rating agency Fitch IBCA. Last week Fitch issued a report detailing a model for determining the risk of these loans.
The country has roughly $13.9 billion of mortgage loans outstanding, Fitch said, and the market has been growing steadily for seven years. But drastic differences exist between the U.S. and Israeli mortgage markets, Ms. Zelter said.
"For one, the country is constantly faced with the threat of war," she said. "Properties that are over the green line could lose value in times of political turmoil," she added in reference to a disputed zone.
Many mortgages in Israel include both a government loan and a bank loan, which could make securitization difficult. The government loans are to higher-risk borrowers such as young couples and new immigrants, Fitch said.
Ms. Zelter said legislation is being proposed that would let lenders sell their portion of a loan. Government money made up 39% of total mortgage volume last year, down from 63% in 1991, Fitch said.
Israel's per capita gross domestic product of $16,699, Fitch said, is substantially less than the $30,000 for the United States. The unemployment rate, averaging 7.7% for the past five years, is noticeably higher than that in the United States.
Strict laws govern the publishing of borrowers' payment history, Fitch said, making it difficult to gauge creditworthiness.
Additional differences are that loans in Israel may be backed by more than one property and that they can be transferred from property to property if the borrower moves.
The market has some distinctive positive characteristics, Fitch said. For one, the divorce rate is substantially lower than in the United States.
Borrowers also are required by law to make mortgage payments by direct debit of bank accounts. Payments are generally timed to come due soon after the borrower's paycheck is directly deposited.
This practice is common in many markets outside the United States, Ms. Zelter noted, including Japan and Hong Kong, where banks require borrowers to sign up for direct debit before they get a loan.
Courts in Israel will let lenders seize a borrower's wages, up to a limit, and all other property during foreclosure, Fitch said, which should lessen the probability of default or the severity of loss.
Israelis tend to move less, Fitch said, because while living in most areas of the small country they are reasonably close to their work, even if they change jobs.