Taking Stock / The Mortgage Monster

The Bank of Israel this week reported accrued defaults on mortgage payments breaking records in June at NIS 1.6 billion. That is 23 percent more than in the same month last year and the amount overdue has been steadily increasing since then.

Today, no less than 94 percent of the amount is defined as "seriously overdue". That means that 1.83 percent of the total credit extended by mortgage banks to the public is over 180 days late.

The figures are not surprising. After three years of intense recession, constantly expanding unemployment and eroding real wages, it's no wonder that each month, hundreds of households join the thousands already unable to meet their mortgage payments. The only surprise is that the figure is so low, at a mere NIS 1.6 billion.

If we had tried to estimate five or seven years ago how much would be in arrears, under the economic conditions that have developed in Israel, we'd have reached a much higher figure. Advertisements by the mortgage banks tend to be particularly gauzy and romantic. Mortgages are marketed as a symbol of a new start, a jump in the standard of living, independence, family, and a whole host of attractive values.

The reality in Israel is entirely different. Most borrowers in recent years made bad deals. Their situation is strikingly akin to that of investors in American stocks during the 1990s. A whole generation of Americans grew up thinking stocks can only rise. They did not grasp that stocks could lose ground, over a long period of time.

Nor did Israel's home buyers factor in a decline in the value of their asset. In practice, throughout most of Israel, apartment prices that had soared during the first half of the 1990s, stopped rising. In some places they plunged, in real terms, by tens of percent.

When prices stop rising, many of the mortgage deals turn out to have been particularly bad, as real interest rates have been running sky-high. Derivative rates on mortgages have been running at 5-7 percent over the last decade. While real wages are on the rise, and housing prices too, one can live with it.

But with salaries eroding and housing prices stuck fast, and people losing their jobs left, right and center, a mortgage linked to the CPI, bearing 6 percent interest, turns into a monster wreaking havoc on the families' standard of living.

The financial press has reported ad infinitum on the leverage of the business sector, on tycoons who borrowed billions and who now have trouble paying interest, let along repaying the principal. Meanwhile, the value of the assets they bought have been plummeting. Much the same is true of mortgages.

Home buyers who borrowed up to 90 percent of the cost of their home find that without rising wages, they have trouble servicing the loans. Moreover, all too many discover that after forking over tremendous sums for interest and principal, after 5 to 7 years, the principal is frighteningly identical to the original sum. People who want to get rid of the apartment, and the mortgage, find the real price of the asset is about the same as what they paid, or less.

In retrospect, many understand that when asset prices do not rise, and real interest rates are high - it can be better to rent an asset, not buy it. We may assume that in the years to come, we will see a not-slow process of households grasping the risks inherent in buying homes using heavy loans.

Home buyers will have to think carefully when it makes sense to buy an asset versus renting it, how much they can sensibly borrow - and what kind of economic conditions must prevail to make a mortgage linked to the CPI and bearing real interest of 5-6 percent a year, a sensible deal.