As Israel’s housing market has surged, so too has the demand for mortgage brokers, who act as middlemen for borrowers – most of whom get lost in the sea of diverse mortgage offerings. Even people with financial experience tend to use a broker, who sorts through the offers for them and chooses the best, although not necessarily the cheapest.
Currently 40 percent of borrowers use a mortgage broker, who generally charge between 5,000 and 7,000 shekels ($1,500 to $2,200). With the expansion of the field – which already has a turnover of hundreds of millions of shekels a year – more and more people want a slice of this growing pie, leading to a proliferation of mortgage brokers. Like other personal service industries, this is a market comprised of small companies, usually one person who employs a small number of assistants and interns. Past attempts to bring large companies and chains into the industry have been unsuccessful.
A year ago, Bernard Raskin, the franchiser of the international real estate brokerage chain Remax in Israel, announced the establishment of a new franchise for mortgage brokers. Munhi Israel is not changing the industry’s structure, but it offers mortgage brokers the option of a brand that is familiar to the public. In return for computerized infrastructure and professional guidance and work methods, the brokers pay a fee to join and a commission on every transaction. To date, 23 mortgage brokers have signed up with the new franchise.
The announcement of the new venture was met with some skepticism. After all, the galloping housing market has doubled Raskin’s business and income. Owner and CEO Raskin needed another important component: a representative from the mortgage industry who would bring authority and clout to the venture. He found what he was looking for in Amir Lazar, who recently announced his retirement as head of the mortgage department at Bank Leumi. Lazar is considered a prominent figure in the mortgage industry, and his forecasts in internal discussions and in his few media interviews eventually turned out to be quite accurate.
Lazar’s transition to chairman of a company that advises customers seeking mortgages looks almost like a transition to the other side of the table, even if doing so is common in the industry. Many mortgage brokers are employees of the mortgage departments at large banks; some are even former employees of the system managed by Lazar himself.
In an interview, Lazar says he is betting that Israel’s mortgage market, which has been breaking records on a monthly basis, will continue to be overheated. But he was critical of the government’s new Mehir Matara (Target Price) program, which is replacing the Mehir Lamishtaken program (Buyer’s Price) now being phased out. Both programs attempt to offer discounted new homes to a small number of eligible first-time buyers.
“Due to the strength of the real estate market, demand continues to be very intense, and I don’t expect a lull in the near future. I see what’s happening now in the Mehir Matara lotteries: If 90,000 people are competing for 10,000 apartments, it’s clear that due to the pressure in the market those 80,000 who don’t win will rush to look for apartments, out of fear that the prices will continue to rise.
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“These lotteries only heat up the market and cause pressure. Those who don’t win the lottery are frustrated, and return to the market with even greater demand. This story of Mehir Matara and Mehir Lamishtaken isn’t a medium- and long-term solution. It assuages the immediate fears of a small population. It doesn’t solve the problem and it isn’t a real solution for an entire generation that is worried about whether it can buy an apartment.”
Here and there we hear a longing for the big housing lotteries held during Moshe Kahlon’s term as finance minister, but you criticized him too.
“He also caused a temporary lull in the markets, and clearly that wasn’t the solution. There’s no substitute for making land available for construction at a rate of 100,000 to 150,000 residential units a year, in order to address the shortage. At the same time, every year we have new demand for 60,000 to 70,000 residential units.
“We have to shorten the procedures for issuing permits, because the timetable for approving plans and issuing construction permits is illogical and irrational. We have to invest in infrastructure, because there’s no point in offering lots for construction without infrastructure, without roads, bridges and sewage plants. The target was to make urban renewal account for 40 percent of all building starts. In fact, we’re barely at 18 percent, and even this pace was slowed due to the uncertainty caused by the government regarding Tama 38 (a national master plan in which contractors make improvements to an older building including earthquake reinforcement, in exchange for the right to build and sell additional apartments). They didn’t address the supply of rental housing.”
The government started the Dira Lehaskir (Apartment for Rent) company using an archaic model, but it still seems as though the area of long-term rental is waking up.
“They’ve done almost nothing in the rental market. In Israel 38 percent of the population lives in rental properties, but most of them are from the lower deciles. Only 10,000 rental apartments are currently under construction, and almost no institutional investors have entered the field. That indicates that the government didn’t provide enough support and didn’t give tools to institutional investors looking for a long-term return to create and build rental housing.
“If someone were to take charge and declare the housing crisis a central issue to be dealt with, and also reassure buyers, it would be possible to stabilize the market and to create long-term solutions, but at present the buyers are nervous, and rightly so.”
This year there was a dramatic increase in the future supply of apartments – mainly in building starts and the sale of land – and the government expected price increases to slow down, but the opposite happened. At the same time, we saw even sharper price increases in countries that don’t suffer from the ills of our market. Maybe we’re making a mistake in our analysis and handling of the crisis?
“That’s an interesting idea and I often ask myself these questions. There’s no doubt that interest rates affect demand, mainly via the investors who are usually looking for retirement investments in the absence of interest in the capital market. The situation of the market is not only a financial phenomenon, but also a psychological one. People started to fear that they could find themselves without a roof over their heads.
“I’ll go back to the problem of the young couples. If at a given moment there are 100,000 or 120,000 people who lack housing, and at the moment there aren’t enough apartments at reasonable prices for those couples, and they get up every morning and ask themselves: Would it help us to wait and to postpone buying the apartment? They tell themselves that prices will probably continue to rise, and then rush to the market and increase the demand.
“It’s true that the market is growing as a result of surplus demand. A regulated policy of flooding the market with apartments would show the public that there is genuine activity that is putting a brake on prices, and then people will calm down and the prices will calm down, maybe we’ll even see declines.”
And what is the role of the banks or the Bank of Israel in inflating the prices?
“Eight years ago during an interview I mentioned that the average mortgage was 550,000 shekels ($172,000), and lo and behold: The years went by and now the average mortgage is more than 1 million shekels ($312,000). And I ask myself where did another 550,000 shekels per family come from? Have Israelis become so much wealthier? The money comes from loans that constitute an additional burden on the public, which may have missed the opportunity to buy an apartment at a lower price. The government must act to solve the problem, which is not only economic, but mainly social.”
You also said that the increase in loan repayments is also financed at the expense of the families’ consumption – so maybe the potential of increasing credit has been exhausted?
“That could happen, but it’s not clear when the price increases will end. The correct solution to the problem is an option for long-term rental at stable prices, which doesn’t force families to constantly increase their mortgage repayments, and demand will fall. But currently rental rates are also increasing sharply, and if the couples don’t buy an apartment by increasing their mortgage and reducing consumption, they’ll do the same thing with rentals.
Meanwhile the government tried to moderate prices by taxing investors – but what worked to some extent six years ago is not really working now.
“Ultimately taxation didn’t do a thing, and perhaps even achieved just the opposite. The more difficulties they impose on investors, the more investors will find other ways of buying properties, and rents will increase and we’ll find ourselves with rental inflation. Dealing with investors isn’t the main solution. It could be part of the solution. In my opinion there was no justification for raising the tax on investors, because that raises the cost of renting and actually harms the lower deciles who are the majority of renters.”
You’re one of those who say that there’s great competition among the banks. So why do the gaps between the cost of money paid by the bank and the interest charged by the bank keep increasing?
“The gaps are increasing because that’s the market situation and the costs of raising money are declining. But I can attest that there’s strong competition among the banks that keeps increasing, because the banks understand that they can use mortgages to recruit or keep banking customers. The banks are planning for the entrance of new lenders into the market and in the end there’s a war here to win over the customer. Of course every bank is willing to lower prices up to a certain point, but the competition exists. The market is fully competitive because we know that almost every customer turns to a number of banks and receives competing offers. It’s free and healthy competition.”
In any case it’s not competition among hungry contenders. The banks can’t cope with the surplus of customers and no bank will suffer if a dissatisfied customer switches to the other bank. And they behave accordingly.
“There’s no question that when there’s an increase in demand, appetite is reduced to some degree. That’s human nature, not only in the mortgage market. But there’s still competition and the broker steps in as the person who is supposed to examine the prices [interest rates] on behalf of the customer, based on familiarity with the competitors in the industry, comparing prices and getting the best offer for the customer. This is actually where the broker has to create competitive tension among the various lenders.”
Should brokers be subject to regulation?
“I confess that I believe less in regulation and in tests and legal tools. In the end the market has its say. A good broker has a reputation both within the banking system and among the customers. Customers usually come to brokers based on recommendations. And recommendations are given based on the broker’s level of service and professionalism, and not based on regulation or a test.
“We have a survey that indicates that client satisfaction with mortgage brokers is very high. We saw that 80 percent of those who want a mortgage consider hiring a broker. Only 40 percent actually do so. That’s an indication of the potential.”
Were you involved in discussions about the transparency reform being introduced by the Bank of Israel in the mortgage market? (The reform consists of a series of measures intended to make it easier for borrowers taking out a mortgage, including making the information more transparent, simplifying the documentation and making the process more efficient.)
“I wasn’t involved, but the idea is a good one. But it won’t solve the main problem, namely that a mortgage is a complex product that’s very difficult for a customer lacking a financial background to understand. Soon additional competitors will also enter the industry, and customers will be faced with a large number of offers, and someone will have to sort things out for them.”
How would you explain the technological backwardness of banking services? Our digital service lags behind developing countries in Africa, and only one bank, Leumi, lets you take out a fully digital mortgage. Could that be deliberate?
“That’s an excellent question. I don’t know why the banks are still not offering full digital service. I know that at least some of the banks are planning to do so. I’m still involved in digitization because at least some of the customers want to complete the entire process digitally, with the bank or the mortgage broker. We have to give customers both the full digital option and the option of an in-person meeting with the bank. We’re working very hard to connect digitally to all the banks, because the speed of the response is a winning component in the process of taking out a mortgage. It won’t be long before a large percentage of customers will get a mortgage from their living room.
It is said that the Israeli mortgage is the most complex product, with all the types of linkages, the fixed and variable interest, as well as the exit.
“Over the years a very large number of tracks have been constructed, and we have to think about simplifying the products because ultimately the customer is looking for simplicity and a product that is easy to understand. I don’t recall any discussions in the bank about simplifying the product in the sense of doing away with the tracks, but there was a great effort to translate the product into a language that the customer can understand. We mustn’t forget that the variety of products addresses the differing needs of customers with different salary levels, a different willingness to be exposed to risk and varied needs, and we have to find the most suitable option for each customer.”
Is the increase in interest rates likely to change the picture?
“Higher interest rates makes it more difficult to get long-term credit, in other words, the mortgage market. The question is what will take precedence. The desire to own an apartment and the fear of a price increase, or dealing with interest rates – and the decisions aren’t always rational. There’s no question that a significant increase in interest will reduce demand on the part of both investors and apartment buyers, who will start struggling to pay.