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In the mid-1990s the treasury started a process of reducing the commissions it pays mortgage banks for their handling of individuals eligible for housing benefits from the Housing and Construction Ministry.

For years, the banks charged the Finance Ministry hundreds of millions of shekels a year for handling the loans taken by Israelis who are entitled to state-sponsored housing aid. The treasury realized the banks were generating very handsome profits from their work of handling the loans of such individuals.

First, the fact that the mortgage banks were entrusted with handling the affairs of these citizens saved the banks the costs of recruiting customers. Second, the mortgage banks successfully marketed supplementary loans to these borrowers. And third, the banks' profits were boosted by selling life insurance and insurance to the borrowers who bought apartments..

Somewhat belatedly, the Finance Ministry began to reduce the commission rates it paid to the mortgage banks. But fret not - today, even after a significant reduction in the commissions, the mortgage banks are still getting a fat check of NIS 400 million from the treasury every year. Had the commissions not been reduced, the treasury would be paying NIS 1 billion to the mortgage banks today.

In June this year, the agreement between the mortgage banks and the Finance Ministry will be reopened for discussion, and one can safely assume that the banks will again reiterate their threats to cease handling the affairs of citizens eligible for state-sponsored housing aid if the commissions are reduced further.

But there's no need to get excited; the benefits the mortgage banks derive from handling such individuals is so great that it is difficult to foresee them turning away the customers the treasury so generously sends to their various branches.

For years, the mortgage business was an island of stability in the banking sector for a number of reasons - financing profits that stemmed from the use of tricky interest-rate formulas, fat commissions from the Finance Ministry for the handling of the affairs of those eligible for housing aid, and revenues from the sale of insurance at high rates.

These three factors have been dealt with by the treasury and the Bank of Israel. The commissions have been reduced; competition has been introduced into the sphere of the sale of insurance policies to mortgage takers; and recently, the treasury's supervisor of banks set out new regulations with regard to loans with fluctuating interest rates that prejudiced the borrowers.

These measures have gnawed away at the profits of the mortgage banks, but have not brought a single one to its knees. Even the severe recession, which undermined the repayment capabilities of many borrowers, failed to cause the mortgage banks to go from profits to losses.

These are two reasons for this. First, past profits are large enough to compensate for the threats of the present. Second, competition among mortgage banks focuses only on new borrowers who enter the market, and has no effect on those individuals who took loans five or 10 years ago.

The ability of veteran borrowers to benefit from changes in interest rates is limited because of the fines imposed by the banks for the early repayment of loans, as well as because of the restrictions imposed by the Bank of Israel in the classification of such borrowers.

The mortgage banks know all too well if a customer has taken a loan, in most cases he or she is theirs for 20 years. For the regulatory handling of the mortgage sector to be complete, there is a need to set up mechanisms that would allow borrowers to free themselves more easily from their loans and exploit market conditions to their benefit - the norm in the United States.