Palestinians are up to ears in debt

Reporting from Ramallah, West Bank—

Ayman and Rahma abu Hussein can't help but feel they are moving up in the world.

The database engineer and his wife just bought their first home, and it's large enough for both of their children to have their own rooms. There's a Hyundai parked outside and a flat-panel TV hangs in the living room, one of many new appliances decking out the place.

But the Abu Husseins are up to their ears in debt. Their upward mobility, like that of thousands of other Palestinians, came tied to something that was once rare in the West Bank: mortgages and consumer credit.

In recent years, the increased availability of mortgages and consumer loans instead of cash for the middle class has caused personal debt to balloon in the Palestinian territories. It more than doubled, to about $750 million, from 2008 to the end of 2011 and rose 40% over the last year alone, according to figures from the Palestinian Authority.

Most of the increase came from a surge in home loans, which were once available only to the rich or those who could find three people to cosign for them.

Ayman abu Hussein, 38, said he is spending about 60% of the family's combined income on loans, even with his wife working as a teacher and him moonlighting for a local newspaper. That's double what he paid as a renter and nearly twice what experts consider a manageable level of personal debt.

Yet he says he feels better off.

"I may be poorer in my wallet, but psychologically I feel I have more," he said.

Economists say the availability of consumer credit has been one of the drivers of the West Bank's economic growth over the last couple of years, along with improved security and some easing by Israel's military in the number of checkpoints it operates in the occupied territory.

"You can look around and see the impact of credit on the streets," said Basim Makhool, head of the economic consulting firm Creative Business Solutions. "All the cars are new. There's so much construction. The mortgages have had a good social impact because they are empowering people to improve their living conditions."

But some also see risk. Although average Palestinian debt levels are still low compared with others' and average default rates are a relatively low 2%, the West Bank economy is heavily reliant on international donations and tax transfers from Israel, experts said.

Those sources of funding were temporarily suspended last fall over political uncertainty about a proposed unity government between the West Bank-based Fatah and the Gaza Strip-based Hamas, which Israel and the U.S. consider to be a terrorist group.

Likewise in 2006, the economy collapsed when the international community and Israel refused to forward money to the Palestinian Authority after Hamas, which refuses to recognize Israel, won Palestinian elections. The Palestinian economy is mostly fueled by government salaries, which was a factor in the collapse.

If something like that happened again, thousands of new mortgage holders and the banks that hold their loans could be at risk.

"Many of the big banks would be bankrupt," Makhool said. The Palestinian Monetary Authority "has done stress tests about this and many banks didn't pass," he said.

Nidal Barghouti, general manager of Palestine Islamic Bank, where mortgage lending has risen to $40 million from nothing five years ago, said he worries because some banks are being aggressive about attracting customers to their retail business and many people are not used to debt.

"Borrowers don't care as much when it's easy money," he said.

The Abu Husseins and others recently got a taste of the difficulties that may lie ahead if the Palestinian Authority has money problems. In November, the first month of the Abu Husseins' new mortgage, the authority did not pay workers' salaries because Israel temporarily stopped forwarding about $100 million in monthly Palestinian tax revenue collected at Israeli ports.

Since they both work for the authority, the couple missed their first mortgage payment. Eventually, Israel resumed the tax payments and the bank did not charge any late fees. But the experience left Ayman abu Hussein uneasy about the prospect of future political upheaval.

"Now that I have all this responsibility on me, my main concern is stability," he said. "I don't want to see anything happen that might stop my paychecks."

Many bankers are betting that a credit collapse is unlikely because the international community would not allow the authority to run out of money because of concern that it would lead to political chaos and insecurity.

Foreclosures and evictions are virtually nonexistent in the West Bank because cultural pressure makes it difficult for lenders to repossess property in the close-knit Palestinian society. Large extended families support one another in times of financial need and lenders would be criticized for tossing borrowers out on the street, particularly if the default was caused by unpaid salaries during a Palestinian Authority crisis.

Banks, therefore, are forging ahead and pushing their products.

"She wants a house," is the advertising slogan on one poster plastered around Ramallah, picturing a beaming young Palestinian couple.

Last year, the authority, with U.S. help, launched a $500-million mortgage-guarantee program in the West Bank that is expected to double the number of families who can qualify for home loans.

First-time homeowner Muhannad Qaraden, 40, said competition among lenders helped him obtain a mortgage with just a 15% down payment and no cosigners. One aggressive loan officer even offered to appraise his house at an inflated price so Qaraden could borrow enough to avoid putting any of his own money down. Such practices are illegal.

"It didn't seem right and, anyway, I was happy with the deal I eventually got," Qaraden said. "Before, when I was renting, it felt like I was throwing my money away. Now I'm investing in something that's my own."