BoI: 5% of mortgage takers would struggle in recession

In a recession like the one that occurred in 2002, 5% of the mortgage takers in the past decade, amounting to 23,000 households, would have difficulty making their mortgage payments, in addition to the usual average of 1% in arrears, according to an extreme scenario tested by the Bank of Israel Banking Supervision Department.

"Such a situation would have serious social consequences," the Banking Supervision Department wrote in its annual report, published today.

The test is based on figures from the 2002 recession, and included an even more extreme scenario with Bank of Israel interest rate reaching 6.7%, the unemployment rate reaching 11.7%, and a 20% drop in apartment prices. The Bank of Israel notes that it had run the test for every loan, not on the average figures for the mortgage portfolio, since the average conceals the risks at the margins.

Additional findings from the test:

* Higher unemployment would have more effect on the probability of difficulties in paying mortgages than an interest rate hike.

* Since the extreme test was performed individually for each mortgage instead for the average figures for the portfolio, the Bank of Israel was able to estimate which borrowers were exposed to repayment difficulties in a recession. The most sensitive population consisted of borrowers with a monthly payment amounting to over 40% of their income.

"The default rate in this group is higher than for other borrowers," the Bank of Israel wrote.

Published by Globes [online], Israel business news - www.globes-online.com - on July 1, 2014

BoI: 5% of mortgage takers would struggle in recession

The Bank of Israel sees 23,000 mortgage takers being at risk in a recession.