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Here's some unexpected news for developers: Demand for housing units in Israel has not decreased over the past decade; in fact, it has remained stable and even shown a slight rise. The dramatic decline in housing starts, which recently settled at 22,000 units per year (as compared to 50,000 in the mid-'90s), is a factor contributing to the large supply of apartments in the market. These surprising figures are offered by Discount Mortgage Bank CEO Anat Keinan.

"Our data from the past decade indicate a drastic decline in the number of housing starts," she says. "Nevertheless, the scope of transactions in the mortgage market has not dropped. In fact, it has increased. This means that there was no decline in demand, but merely a glut of housing starts. So in my opinion, it would be wrong to assess the real-estate market solely by the yardstick of housing starts," she explains.

Keinan became the bank's CEO in April 2003 after having served as CEO of Mifal Hapayis, the state lottery, and prior to that as treasurer of the Tel Aviv Municipality. Veteran real-estate industry insiders say that Keinan walked into a somnolent bank - a non-player in the mortgage sector. Discount Mortgage was technologically backward, and lacked a service mentality. She threw herself into the job, and succeeded in increasing the bank's share of the mortgage market from 6.3 percent in 2003 to 7.5 percent in 2004, and then to 9 percent in 2005. The bank claims that it now issues about 11,000 mortgages a month, through its 280 employees at 44 branches.

In the past two years, the hottest item in the mortgage sector has been refinanced mortgages. Do you think this trend will persist?

"There are no actual data on the scope of refinanced mortgages. There have been reports in newspapers that it was on the order of 50 percent, but I estimate that it was less than that, somewhere between 30 and 35 percent. In any event, the refinancing wave is over. Anyone who reads the newspapers realized that the interest rates were low and already refinanced."

So we will inevitably see a decline in the scope of mortgages issued in 2006.

"The overall total will decline in 2006. At the same time, there might be a slight gain in the real mortgage market - that is, loans for financing new purchases, and not refinanced mortgages - as opposed to the inertness that has characterized this market in the past few years."

What will trigger the increase? An upsurge of apartment purchases?

"There will be changes in apartment purchases in several niches and while each individual one is insufficient, taken together they create a critical mass. The first niche is luxury housing. This market is boiling hot, as reflected in both a rise in prices and in the number of new projects. This stems from the sense of security, of growth."

Foreign buyers have been a great help to the luxury market, no?

"No. Most of the French buyers are going for standard apartments in Ashdod and Netanya. Only a minority are buying luxury housing in Jerusalem. But that has no effect on the market."

"The second niche is linked to an awakening of the market in specific locales in the periphery, like Hadera, the Krayot (the towns between Haifa and Acre), Ramle in the area by Matzliah, and Ashkelon. These places have unfinished skeletons of buildings that have been standing for five or six years, and all of a sudden we're seeing cranes. It may only be a drop in the bucket, but until now there was no activity to speak of."

How is it reflected? Do you feel an increase in the scope of transactions?

"In Hadera, for instance, until six months ago we issued mortgages amounting to NIS 2 million a month. Suddenly in the past six months we've gone to NIS 8 million a month.

"The third niche is an initial resurgence of the small commercial real estate sector. I'm not talking about 1000-square-meter offices, but about 150 square meters, mainly for the renter's own use. This market was totally dead, but now we're seeing a surge of 20 to 30 percent in the scope of transactions - but I repeat, only in small businesses.

"The fourth niche is land. Until this year, there was barely any movement in land purchases, but that is changing. We had land that was being sold by court order in all sorts of out-of-the-way places, which the court officers advertised repeatedly but to no avail. And then suddenly, these plots began to sell.

"A fifth niche has been discernible in recent months, and that's the purchase of small apartments for investment purposes. It's worthwhile because the price of these apartments is relatively low, the dollar is low and interest rates are low. It's worthwhile, of course, mainly in areas where there is high demand.

"All of these niches together create a recovery trend; it is by all means very delicate, but if it has an effect, we can predict a 5 percent increase in the real mortgage market in 2006."

Could this also affect the rate at which mortgages are taken by buyers eligible for Housing and Construction Ministry loans?

"In the `eligible' market, the trend will be reversed, because the size of this market has declined. Specific-site grants have been abolished, and an entitlement of 1,000 points nets only NIS 70,000 in the purchase price, which is very little."

Mortgages issued to those with ministry eligibility declined in October below the 1,000-per-month level for the first time in 20 years. Only 850 people took advantage of their entitlement to mortgages. Does this indicate irrelevance of the Housing Ministry's financial aid system, or strong competition among the banks that leads to lower mortgage costs?

"The price of mortgages has most certainly declined because of the competition. About 10 years ago, the operating income (fees) of the retail banks usually covered 60 percent of operating expenses. In other words, in order to survive, the bank had to invest money from financing revenues to cover operating expenses, and therefore had to maintain a wide enough margin from finance operations to achieve profitability. The margins were about 2 percent.

"Conversely, the operating income of mortgage banks was traditionally 120 percent of operating expenses. Ten years ago, a price war broke out, which eroded the banks' profits. Along with the tougher conditions set by the treasury for fee payments, this reduced operating income, which currently amounts to 60 percent of expenses."

So now there will be a rise in mortgage prices?

"Yes. Since there is no longer any operating income, interest rates will rise. Besides the natural increase, the margin on mortgages will rise. It will be very gradual and slow."

And won't that strengthen the non-bank sources of financing? Do they in some way threaten the mortgage banks?

"They aren't getting off the ground. The banks will continue to control the mortgage market. You need a critical mass to survive in the market. Nevertheless, something has changed in the mortgage market. It used to be that an apartment buyer walked into a bank and accepted the conditions that were offered him, without argument and without understanding. Customers are more demanding now. Maybe they aren't approaching non-banking institutions, but they do know how to maneuver their way between the banks.

"One of the peculiar things that happened in the wake of the price war is that all attention is now focused on the size of the fees. Even though this may be the biggest transaction a private individual will make in his lifetime, he assesses the mortgage bank on the basis of the discount in fees the bank is prepared to offer him, which translates into NIS 10 or 20 a month.

"Essentially, mortgages have become a flat product, although in my opinion they are a round product. Which means that service over the lifetime of the mortgage is significant. Some banks will chase after the customer before he takes out a mortgage, but will ignore him afterward."

Can you give an example of the importance of service?

"It is reflected, for instance, when a client doesn't have the money to repay the mortgage. By law, after six months of nonpayment the bank can have the court order the seizure of assets. Before that, warnings are sent out. To avoid this situation, nine months ago we began a unique experiment in which we not only send warnings to a client who has not paid his mortgage for four months, but also call him on the phone, and do so again after five months. In the event that it is an isolated problem, we assist him as much as we can. Meaning that we take a long route on the way to a court-ordered seizure of assets. This has reduced the number of property owners whose cases are referred to the court by 10 percent."

There is a constant increase in the number of people who are unable to meet their mortgage payments, and are evicted from their homes. Why?

"The biggest mistake made by apartment buyers is buying above their means. This is expressed in two ways: one, an exaggerated estimate of their income. Sometimes they don't consider their available income, but their overall income, even thought some of it is attached by lien. Also, they exaggerate the value of the apartment."

What can we expect to see in the real-estate market in 2006?

"I project a rise in prices. It will begin in central Tel Aviv and the Sharon area, and will gradually extend to other areas, as well."