The first public residential mortgage-backed securities (RMBS) transaction in Israel closed in August 2024. This followed the Bank of Israel's approval of a memorandum on the country's new securitization law the month before. The proposed law for regulating securitization transactions was then published on Feb. 18, 2025, in the Official Gazette of the State of Israel. S&P Global Ratings believes that the new law will support the development of the Israeli RMBS market, and we expect to see further transactions in due course. In this Credit FAQ, we answer questions we have received since we rated this landmark transaction about the nature of the market and our analysis of RMBS in Israel.

Frequently Asked Questions

What are the main characteristics of the Israeli mortgage market?

The Bank of Israel regulates the Israeli financial sector closely. It ensures that financial entities maintain a strong financial position in line with Basel III standards, including tight underwriting regulation.

Two important limits on underwriting are a maximum originating loan-to-value ratio of 75% for first-lien loans granted to Israeli residents acquiring their first homes and a maximum price-to-income ratio of 50%, alongside a 30-year maximum term. However, Israeli mortgages tend to be below these regulatory caps, as the average originating loan-to-value ratio is 53% and the average price-to-income ratio is 29%.

Five major banking groups represent 95% of the Israeli financial market by assets, and we estimate that they have a similar dominant share of the residential mortgage market. However, nonbank lenders have recently entered the Israeli mortgage market.

Historically, the mortgage market has performed well, with low defaults despite the volatile geopolitical environment.

Does the market have any notable features that are specific to Israel?

In particular, in Israel, it is common to divide mortgages into fixed- and floating-rate parts, allowing borrowers to spread their risk accordingly. In particular:

• Floating-rate loans are typically linked to the prime rate, which the Bank of Israel determines.
• Fixed-rate loans must represent at least 33% of the total loan amount according to Bank of Israel regulation.
• Fixed-rate reset loans are also available, whereby the fixed interest rate is updated periodically.
• Index-linked mortgages reflect the Israeli cost-of-living index, which is adjusted monthly to reflect inflation. Borrowers' appetite for CPI-indexed loans has been decreasing over time.

According to data from the Bank of Israel, two-thirds of outstanding mortgages in Israel are not linked to inflation and one-third are inflation-linked. Similarly, about 40% of the outstanding mortgages have a fixed interest rate and 60% have a variable interest rate (see chart 1).

Chart 1

Historically, inflation-linked mortgages were most popular in the Israeli market, accounting for more than two-thirds of the total origination volume in 2000. However, the appetite for this type of mortgage has decreased over time, and they now represent about one-third of the banking system's new origination.

Other notable features of the market are foreign-currency loans, typically denominated in euros or U.S. dollars, on which borrowers make repayments in local currency. This typically benefits borrowers with foreign income. Interest-only loans with an initial interest-only period are also available. Interest-only loans for life are uncommon in Israel.

How are nonbank mortgage lenders regulated?

Nonbank lenders are regulated by the Capital Markets and Insurance Authority. These lenders are increasing their share of corporate and retail lending. As financial institutions' exposure to real estate and construction is close to regulatory limits, borrowers have started to approach nonbank lenders for financing, considering the strong demand for residential real estate. Borrowers perceived to be higher risk are also approaching nonbank lenders despite their higher interest rates.

While there is cooperation between the Bank of Israel and the Capital Markets and Insurance Authority, approaches differ, and this can create financial risks. As well as differences in financial regulation, lending criteria also differ between bank and nonbank lenders.

How have Israeli house prices performed and what have the main drivers been?

Israel's housing market has proved resilient and has not experienced any major house price bubbles in the past three decades, with housing supply lagging behind strong demand from a growing population. We expect that uncertain economic conditions could dampen activity in the real estate market by slowing demand and delaying supply.

Growth of the Israeli house price index has been stable since 2008, albeit with slowdowns in periods of increased uncertainty, such as in 2018 and 2023 (see chart 2).

Chart 2

As a consequence of the ongoing Israeli-Palestinian conflict, particularly the political and security tensions in the West Bank, we believe that a real estate transaction in this area carries higher risk. While market participants note that there are no significant differences in repossession procedures or enforceability from an Israeli regulatory perspective, the uncertainty and potential escalation of disputes over the territory could affect property values. Although borrowers and financial institutions have not reported any operational issues to date, the risk of further political instability or shifts in governance may lead to a decline in the security and valuation of properties in the region.

How does S&P Global Ratings incorporate geopolitical factors into its analysis of RMBS transactions in Israel?

Since the beginning of the conflict in October 2023, the macroeconomic environment in Israel has deteriorated significantly, and we have lowered our sovereign rating on Israel to 'A' with a negative outlook from 'AA-' with a stable outlook over this period. However, the recent ceasefire agreement between Israel and Hamas that took effect on Jan. 19, 2025, could lead to de-escalation of the conflict in Gaza and a permanent end to the 15 months of fighting (see "Israel-Hamas Ceasefire Deal Could Face Implementation Risks," published Jan. 21, 2025).

We expect real GDP to expand by a low 2.2% in 2025, after stagnating in 2024. However, we anticipate widening fiscal deficits in both the short and medium term as defense-related spending increases further.

The Bank of Israel has implemented a series of measures to protect borrowers who are economically affected by the conflict. These measures include mortgage repayment deferrals, among others.

We have considered the macroeconomic forecast in our analysis by calibrating the base foreclosure frequency at each rating category. In particular, we have considered higher stresses at the lower rating categories by increasing their base foreclosure frequencies.

What prompted the recent launch of the public RMBS market?

In July 2024, the Bank of Israel approved a memorandum on the securitization law after more than two decades of discussions. Subsequently, on Feb. 18, 2025, the proposed law for regulating securitization transactions was published in the Official Gazette of the State of Israel. The law is expected to be in place within the next nine months, although it can be delayed by six additional months if necessary. The law will enable financial institutions to release capital and raise financing more efficiently in line with many advanced economies. We expect this regulation to stimulate the development of the Israeli securitization market in the near term, reducing the financial system's cost of funds.

Structured finance transactions such as RMBS provide an alternative funding source to financial institutions, lowering their credit costs. While the traditional Israeli banking sector benefits from a strong funding profile, its funding source is typically deposits. Expanding funding sources through RMBS issuances is not only critical for the banking system to maintain financial stability and take advantage of capital relief benefits, but it is also beneficial for institutional investors.

Nonbank lenders are also entering the Israeli financial market. These players have been highly active in the retail market, offering mortgages, car loans, and loans for general purposes. However, their funding sources rely on institutional investors, limiting their potential market growth. Securitization in the public market has given them an alternative funding source, increasing their lending capacity and creating competitive pressure to reduce credit costs for borrowers.

We recently rated the first public RMBS transaction in Israel, but private transactions had taken place in the Israeli market before that, as banks used private portfolio sales as an exit strategy. That said, the public market usually provides better financing conditions for issuers.

Finally, the Israeli debt market is highly correlated with sovereign risk, particularly for highly rated issuances. Local governments, together with various public entities, directly or indirectly support the majority of the debt market in Israel. Public RMBS transactions are therefore attractive for investors seeking exposure to nongovernmental debt issuances, diversifying their risk exposure while increasing the depth and liquidity of the Israeli securitization market. However, despite not being issued by public entities, securitization issuances still exhibit a degree of correlation with sovereign risk.

What are the main features of the new securitization law?

The law will simplify the legal and commercial framework in Israel for securitization, increasing interest among various market participants to originate and invest in this product. This will benefit the Israeli RMBS market, reducing the cost of funding for the various participants, as well as increasing the debt supply for local investors.

The memorandum contains four key elements for securitization transactions:

• Ensuring the true sale of the underlying assets;
• Regulating the public offering of notes issued by a special-purpose vehicle (SPV) that adheres to this framework;
• Allowing SPVs to purchase and hold a portfolio of loans or related obligations while issuing public bonds, as well as allowing the SPVs to acquire loan portfolios from entities that are not banking corporations.
• Establishing a tax framework for securitization transactions.

In particular, the current legal environment does not permit financial entities to sell loan portfolios and related rights to an SPV. We therefore expect the new law to support securitization and the development of this market once it is passed.

What does S&P Global Ratings expect for this market in the future?

Following the issuance of the first public RMBS transaction in Israel in August 2024, we have seen various participants express interest in the market. We therefore expect to see additional transactions that support its development.

Securitization will also allow the banking system to clear capital, potentially allocating funds to other business lines, such as small and midsize companies, and securitizing their loan portfolios. This will not only increase banks' business volumes, but also improve the financing conditions for a wider range of borrowers.

Nonbank lenders can also specialize in different business lines, increasing competition in the mortgage market. In addition, securitization has served as a successful exit strategy for nonbank lenders. This could give comfort to warehouse providers and may make more warehouse financing available for nonbank lenders. We also expect the main banking institutions to enter the securitization market in the near term, particularly once the new securitization law is approved.

We expect a wider range of product types in the RMBS market, including prime mortgages, all-purpose loans, and second-lien loans. This will increase the depth of market supply, suit a wider range of investors, and tighten the spreads on the notes. In this way, the market will become more competitive. Other product types, such as auto loans or consumer loans, may follow, increasing market supply in the future.

Initially, we expect a local investor base to support the Israeli RMBS market due to currency risk or the language barrier, as well as the volatile geopolitical conditions in the country. However, international investors could also support the development of the RMBS market in the medium-to-long term.

How does S&P Global Ratings capture the risk of the Israeli mortgage market in its analysis of residential mortgages?

We rate RMBS backed by Israeli mortgage loans using our "Global Methodology And Assumptions: Assessing Pools Of Residential Loans," published Jan. 25, 2019. Currently, we do not have specific published criteria for Israel. Please see "Credito IPOs Inc. Israeli RMBS Assigned 'ilAAA(sf)' Preliminary Local Scale Rating," published July 7, 2024, for further details on the assumptions we used in rating the first public RMBS transaction issued in Israel.

For further details on how we rate RMBS transactions in non-established markets, please see "How We Rate ABS And RMBS Transactions In Non-Established Markets," published Dec. 3, 2024.

What information does S&P Global Ratings need to rate an RMBS transaction in Israel?

Our analysis of an RMBS transaction reflects our analysis of the following five pillars:

• The credit quality of the securitized assets;
• Legal and regulatory risks;
• Operational and administrative risks;
• Counterparty risk; and
• The payment structure and cash flow mechanics.

For further details on each of these pillars, as well as our analysis of RMBS transactions in non-established markets in EMEA, see "How We Rate ABS And RMBS Transactions In Non-Established Markets," published Dec. 3, 2024.

Key elements that we use in our credit analysis of Israeli RMBS transactions are portfolio loan-level data describing the various characteristics of the pool; dynamic book data from the originator covering at least three years of performance; and an audit report on the securitized portfolio. In terms of the operational review, we hold a management meeting to understand the originator's policies and procedures at various stages, from loan underwriting to recovery.

We also analyze the transaction payment structure, building our cash flow model as it is described in the transaction documents. Finally, we use the transaction documentation in our counterparty and legal analysis, with the transaction's legal opinions supporting the latter (see "Structured Finance: Asset Isolation And Special-Purpose Entity Methodology," published March 29, 2017). Regarding transaction documentation and legal opinions, we are generally able to review the Hebrew versions.

Can S&P Global Ratings rate RMBS transactions issued in Israel up to 'AAA' on the global scale?

As per our sovereign criteria (see "Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions," published Jan. 30, 2019), we can grant local-currency transactions issued in Israel from two to six notches of uplift above the rating on the sovereign, depending on the sensitivity of the security to a sovereign default. Therefore, we could rate prime RMBS transactions in Israel 'AAA' on the global scale.

However, in our analysis we would also consider the other pillars that we mention above. In particular, our counterparty criteria stipulate the minimum rating requirements for the dependent counterparties in the transaction, typically bank account or swap providers (see "Counterparty Risk Framework: Methodology And Assumptions," published March 8, 2019). Considering our current ratings on financial institutions in Israel, the counterparty analysis makes it difficult to assign 'AAA' global scale ratings to Israeli transactions.

Our operational criteria may also cap the rating on the transactions (see "Global Framework For Assessing Operational Risk In Structured Finance Transactions," published Oct. 9, 2014). However, to date, we have not placed an operational cap on prime RMBS transactions in Israel. This reflects the nature and performance of the assets, as well as the likelihood of the key operational transaction counterparties, typically the servicers, being replaced.

While we have not assigned a global scale rating to an Israeli RMBS transaction, we have assigned an 'ilAAA' national scale rating to an RMBS transaction in Israel. A national scale credit rating is our opinion of an issuer or issue's creditworthiness relative to other issuers and issues in a given country (see "National And Regional Scale Credit Ratings Methodology," published June 8, 2023). As per table 7 of these criteria, global scale ratings of 'A-' or above are equivalent to an Israeli national scale rating of 'ilAAA'.

Related Research

• Banking Industry Country Risk Assessment: Israel, Jan. 27, 2025
• How We Rate ABS And RMBS Transactions In Non-Established Markets, Dec. 3, 2024
• Global Banks Outlook 2025: Cautiously Confident, Nov. 13, 2024
• Israel, Nov. 11, 2024
• Israel Long-Term Ratings Lowered To 'A' From 'A+' On Heightened Security Risk; Outlook Negative, Oct. 1, 2024
• Various Rating Actions Taken On Israeli Banks On Sovereign Downgrade; All Outlooks Negative, Oct. 9, 2024
• Credito IPOs Inc. Israeli RMBS Assigned 'ilAAA(sf)' Preliminary Local Scale Rating, July 7, 2024
• Data Requirements For Rating EMEA RMBS Transactions, Jan. 8, 2019
• How Much Is Enough? Information Quality Standards For The EMEA RMBS And ABS Rating Process, Jan. 8, 2019