Since 2008 housing prices in Israel have risen by 39% according to Housing and Construction Ministry figures. This means it now takes 128 average monthly salaries to buy an average home, compared to 103 in 2008. This could explain Israelis' growing dependence on mortgages to finance their housing.

The head of retail banking at Mizrahi-Tefahot, Israel Engel, noted in an interview with TheMarker that according to unofficial figures for most of this year, Israelis borrowed around NIS 47 billion in mortgages in 2012, compared to NIS 45 billion in all of 2011 and NIS 47.2 billion in 2010.

"In my opinion, total mortgage activity in 2013 will decline by 5% to 10%, but that was also my assessment at the end of 2011 and in fact we saw the market behave otherwise," Engel said. Mizrahi-Tefahot is Israel's mortgage leader, with about 35% of the market, and this year its mortgage business grew at more than double the pace of its competitors. "In keeping with our strategic plan, our policy is to continue growth at an accelerated pace," Engel said, adding, "We believe we can continue to increase our market share."

Engel's message may be directed at its closest competitor, Bank Leumi Mortgage Bank, which is in the process of merging with its parent company and is considering expanding its mortgage business and the number of branches out of which it operates.

When asked whether he was concerned that Israel's housing bubble was in danger of bursting, Engel said Mizrahi always checks the borrower's ability to repay before it approves the mortgage loan. "That's our first line of defense," Engel said, adding, "Our second line is the home itself." He said that his bank does not issue mortgages to customers judged incapable of meeting their payments, even when the mortgage is for a relatively small part of the purchase price. "I won't give someone even 40% financing if he can't meet his payments," Engel said, "so even if housing prices fall, it's only relevant regarding someone whose repayment capacity has begun to be disrupted."

Large, old portfolio

"You have to remember that we have a very large and old mortgage portfolio. Most of the credit we provided before the rise in prices, so we have a very significant margin of safety there," Engel continued. "Our exposure is only with regard to people who took out mortgages when prices were at their height, who financed a very high proportion of the [purchase price] and fail to meet their debt obligations."

When asked how his bank would deal with the projected rise in unemployment next year, which could coincide with efforts to cool down the housing market, Engel said Mizrahi-Tefahot is looking at extreme scenarios such as decreasing home prices, rising unemployment and higher interest rates in combination with other factors. "All the extreme scenarios indicate that we have a lot of staying power," he said, "but let's take the more realistic scenario of an increase in unemployment, as in the early years of the previous decade. That was a period when high-tech workers were very enthusiastic about their jobs and rushed to take out mortgages and buy homes. The tech bubble burst just after that, and we asked ourselves what we should do," Engel related.

"We provided grace periods of six months to a year, during which we lowered their monthly payments until the borrowers returned to the labor force. So instead of there being a glut of homes, we addressed it with the grace period, helping both the customer and the bank. There is no reason to lower the ax immediately," Engel said.

TheMarker asked Engel whether the rise in mortgages reflected a failure by the Bank of Israel to cool down the market. In response, he approvingly cited recent curbs on financing introduced by the central bank, including a mortgage ceiling of 75% of the purchase price for first-time home buyers and 50% for homes purchased as an investment. Since the directives did not apply to mortgage applications already in the pipeline, their impact will only really be felt starting next month, Engel said.

Prior curbs didn't work

"All the prior directives - limiting variable-rate mortgages, requiring the banks to set aside capital for borrowers leveraging more than 75% [of a property's value], requiring higher capital set-asides for credit to purchase groups - did not curb mortgage activity. They sought to make it more expensive for the bank to make loans, and as a byproduct, it made it more expensive for the public to get mortgages," Engel said. "But at the same time, the interest rate went down and balanced out all the regulatory directives."

When it comes to the new directive, capping the percentage of the purchase price that can be financed with a mortgage, Engel said its affect on his bank would be marginal, "certainly not enough to affect our financial results." He said the only group that is anticipated to be affected is people buying property for investment purposes, who frequently try to leverage their purchases as much as possible and will now be limited to 50% mortgage financing. But this represents just 10% to 20% of Mizrahi-Tefahot's business, he said. He said many investors will now draw on available capital that they preferred not to tap in the past.

There are three types of buyers of residential investment property, Engel said. "One group is people who live abroad and visit Israel over the holidays and for vacation and want to have a home in Israel. They make up about 20% of the total. The second [group] move up the timing of the purchase of a home for their children. They do it because they are conservative, because interest on deposits is low and out of a sense that housing prices are on the way up." So they buy now and in the interim, before their children grow up and are in a position to use the housing, they rent it out.

The third group, Engel says, are people with spare funds who buy residential property in order to profit from renting it out. He said mortgage activity from all three groups is expected to drop as a result of the mortgage ceiling. Developers also expect the limitations to lower demand, Engel said, and therefore are already building less. "The result could be shrinking supply and rising prices. I don't expect them to lower prices."

Fees charged by lawyers assigned to delinquent mortgages can reach 6% to 8% of the home's value, a heavy burden that could put borrowers even deeper in the financial hole, and without a home, asserts a report by Yedid, the Association for Community Empowerment.

"The fees of bank-appointed lawyers and receivers managing mortgage collection files at the state Enforcement and Collection Authority (Hotza'a Lafo'al ), which are paid by the borrower or debtor, are one of the biggest obstacles facing those trying to settle their debts," according to the reports' authors, Yedid attorneys Vardit Dameri Madar and Shani Rabinowitz.

"Our study shows that these fees are triple or more those of lawyers carrying out similar duties in other fields," they said.

Under regulations issued in 2002, a receiver selling a foreclosed home is entitled to 6% to 8% of its selling price. This compares with 0.5% to 1.5% of property value charged for representing one side in a normal sale.

Perhaps the receiver's role is more complicated than that of lawyers working in other areas, but the report didn't find that to be the case.

Rabinowitz added that the high fee could influence the receiver's actions.

"We would say there's a built-in conflict of interest in the law as it stands now," she explained. "To get the fee, the receiver needs to make the sale, which could lead to the property being sold hastily without waiting for the best offer.

"Also, from the moment a receiver is appointed all communications between the borrower and the bank go through the receiver," she said. "There are cases where borrowers want to reach a settlement with the bank but the receiver simply doesn't pass along their proposals. ."

The claims are "absolutely unfounded," the National Bar Association's collection enforcement committee said in a response.

It said the 2002 reform was designed to make it easier for debtors. Expropriations of every other kind are used to pay off the entire debt immediately on default, and all associated costs are taken as a percentage of the entire debt. By contrast, the 2002 reform requires foreclosure proceedings to begin before collecting the delinquent debt, letting debtors resume making regular payments if they are able.

"The reform also established time periods for this and even provided debtors with a timeframe to sell [the property] themselves and avoid foreclosure," the Bar Association said.

Foreclosure fees are fixed by regulations; the fee in the initial stages is based on the size of the payment in arrears and cannot exceed NIS 10,000, in 2002 shekels, to be adjusted to subsequent inflation.