By Moshe Wilshinsky
Your earnings are one of the most critical factors for your mortgage qualification. How much you earn annually is not the only factor; how it’s documented is just as important. The Israeli Mortgage banks use your net income—after all taxes have been paid—to define how much you earn. Additionally, they will not just look at your most recent three months of income; they will look at your total income for the current year as well annual income for the previous two calendar years.
You may be asking, “Why does it matter how my income is documented? My banker has known me for years, and I have been banking at the same branch for 15 years; they even know my parents, etc. My bank knows my income even without documentation because they see deposits.”
To answer this, allow me to very briefly review the history of the development of international financial regulation and the mortgage market in the US. This will give you the context to understand that no matter how well your banker knows you, they will still need to consider what I mention above.
Going back to the 1800s, a majority of borrowers received bank mortgages that often needed to be paid back after five years. It was common for a banker to give a borrower a mortgage because of their long-term relationship. There was a growing trend at that time that wealthy families in New York used agents (aka mortgage brokers) in places like California (remember the Gold Rush), who found good borrowers to loan to. “Good” in this context meant that the probability of the borrower paying later than expected—or not at all—was minimal to none. (We will refer to this as “risk of default.”) These New York families did not even know the borrower personally; they only knew what they were told by their agent or read in the borrower’s file.
As the world evolved over the next century, and investing and finance was internationalized, we saw the development of treaty organizations and industry-specific not-for-profit organizations. In short, these organizations tried to create guidelines for standardizing how various financial metrics are measured and expressed. This trend of establishing standard metrics and methods for calculating (among other things) perceived risk of mortgage default accelerated. So today we have an “alphabet soup” of organizations, committees and accords, such as the FAF, GAAP, FASB, BCSB and Basel (I, II and III). The Bank for International Settlements (BIS) (set up post WWI) issued Basel III, a regulatory framework, in response to the financial markets crash of 2007. Basel III updated or replaced its predecessor (you guessed it) Basel II, which similarly updated or replaced the original Basel Capital Accord, enacted in 1988. One of the objectives of Basel III (and its predecessors) was establishing a common method for the international banking community to measure and represent risk (including risk of default of consumer mortgages) on a financial institution’s balance sheet and profit and loss statement.
To understand why this was important, think of the well-known principle in investing “the higher the risk, the higher the return”. This means you will loan the US government money for 10 years for only a few percent return annually, but when you look at investing in a startup, you expect double digit percentage return. With that in mind, understand your mortgage is an investment in the eyes of the bank that gave it to you.
In accordance with the Basel III regulatory framework, the Bank of Israel (BOI) issued new Israeli Mortgage regulation how banks need to document, measure and offset the risk of default for each mortgage borrower.
Now you can start to understand that even though your banker may know you well enough to know that you would never default on your mortgage, it’s not your bankers money—he has a boss to answer to as does his boss and so on. Since on a practical basis, those responsible on one level or another for the sources of mortgage capital can’t possibly have a personal relationship with each borrower or even the borrower’s banker, the need for an objective method to define and measure risk brought about the creation of the Basel regulations. That is the answer to why regardless of how close a relationship you have with your banker, the amount of income you earn, how it is documented, your profession, how much you earned annually in the past and many other factors, are all variables that dictate many aspects of the mortgage you can get from an Israeli bank.
Whether or not you enjoy a bit of basil in your soup, your mortgage qualification process has definitely been flavored by the Basel III accord.
Moshe Wilshinsky is the CEO of Moville Mortgage & Finance Ltd.
Moville Mortgages can found on the web at www.movillefinance.com. They can be reached at 073-796-2226 ext. 711. In the US, dial 201-377-3418; in the UK, dial 208-596-4501.