Payments have been suspended on some 24% of mortgages in Israel as of the end of April, in the wake of the economic crisis caused by the coronavirus pandemic.
Thus, the banks’ decade-long profit engine may be coming to an end – in 2020, mortgages were responsible for 56% of Israeli banks’ net profits, or 431 million shekels ($124 million) in total.
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The crisis comes at a time when a record 1 million people have registered as unemployed.
Some of the people who asked to freeze their mortgage payments did so as a precaution and not necessarily because they couldn’t afford it, said Tal Bar-El, head of mortgages at Bank Leumi.
“It will take a while until we know how many can’t afford to make their mortgage payments,” he said.
Some 92.4 billion shekels in mortgages are now frozen for three to six months. Up until now, an average of 10 billion shekels in mortgages, or 3%, was typically frozen at any given time.
The banks’ loan write-offs due to mortgage activity totaled 162 million shekels in the first quarter of 2020, four times the figure of the parallel quarter in 2019. However, this is only 7% of all credit-related losses, which totaled 2.3 billion shekels.
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Most losses stemmed from sectors considered to be riskier, such as business and household loans.
Due to the increase in loan-related write offs, the banks reported a 2.7% decease in net profit versus the first quarter of 2019.
As of the end of April, some 3.1 billion shekels in mortgages were more than 90 days overdue, or 0.81% of the total, the highest level in the past five years.
However, Mizrahi Tefahot bank, which holds the largest share of Israel’s mortgage market, at 35%, believes that the risk to banks is relatively low, since 98% of loans are for less than 75% of the asset’s value.
This means the banks can withstand up to a 25% drop in home prices while still recouping the full value of their loan.
In the first quarter of the year, the banks issued some 21.4 billion shekels in new mortgage loans, a 35.4% increase from the parallel period in 2019.
Mizrahi Tefahot, Israel’s largest mortgage bank with 35% of the market, issued some 7.4 billion shekels in new mortgages, a 32% increase, followed by Hapoalm and Leumi.
The main reason for the jump in new mortgage lending was the sharp increase in borrowing in March – nine billion shekels in new mortgages in total – as the public rushed to take out mortgages amid concerns that mortgage interest rates would rise.
Indeed, as markets fell and workers were put on unpaid leave in the second half of the month, bond yields increased, thus making the banks’ main source of funding more expensive and risky.
Ultimately the banks’ increased cost of borrowing was pushed off onto the banks’ own mortgage customers.
The five big banks had 1.18 billion shekels in mortgage revenues for the first quarter, a 15% increase from the parallel quarter in 2019. As of the end of March, the banks’ total mortgage portfolios equaled 383.2 billion shekels, a 8.2% increase from the end of March 2019.
In April, the public took out some 4.9 billion shekels in mortgages, a 43% decrease from March. Sector sources say the drop is due to the Passover holiday and Independence Day, which decreased the number of workdays that month.
Despite the current increase in unemployment banks still believe that their customers will do their utmost to pay off their mortgages and not lose their homes.