The Bank of Israel's Financial Stability Report for the first half of 2020 contains an especially worrying figure: 50,000 young couples in Israel are believed to be having difficulty in making their monthly mortgage repayments. According to the report, in the case of about 40% of all mortgages, the borrowers are making monthly repayments that are higher than 30% of their monthly income. A fall of 20% in household income is liable to cause growing difficulty in meeting mortgage repayments.
"According to figures released by the Ministry of Finance, in nearly a quarter of households that bought a first home between the start of 2015 and April 2020 (inclusive), at least one of the couple is out of work because of the coronavirus pandemic," the report states. "On the basis of the number of transactions for the purchase of a first home only in this period, it is possible to estimate the number of households with at least one person out of work, and that therefore are experiencing difficulty in repaying their mortgages, at between 49,000 and 55,000."
The compilers of the report attempt to estimate to what extent households are at general risk because of the coronavirus crisis, and to what extent this endangers the financial system. "The burden of mortgage repayments is the main element of financial risk for households. Layoffs, unpaid leave, or pay cuts cause a decline in household income and are liable to jeopardize households' financial strength, and hence the financial stability of the banking system. The main financial risk is in housing credit, because of the size of the balance. The decline in household income will raise the proportion of income accounted for by mortgage repayments and make it difficult for some mortgagors to service their debt," the report states.
The findings should be cause for considerable concern: the central bank finds that in the case of 60% of mortgage loans taken, mortgage repayments account for less than 30% of household income, so that even if the income of these households falls by 20%, repayments should not on average exceed the level set by the Bank of Israel Supervision of Bank Department as indicating high risk. This, however, leaves 40% of mortgages the repayments on which are higher than 30% of household income, leading to a more delicate situation. A fall in the income of the households concerned could cause growing difficult in meeting repayments.
The Bank of Israel devotes special attention to young couples who have bought their first homes. As mentioned, the Ministry of Finance estimates that in about a quarter of the households that bought first homes in the past five years, numbering some 50,000, at least one breadwinner is out of work, while the official statistics on the number of people returning to the workforce are still low, raising the fear that the high unemployment rate is here to stay for a long time. "According to the Employment Service, only 206,500 jobseekers out of those who registered in May reported that they had returned to work. The actual figure should, however, be higher, since there is no obligation to report, and the June figure for those returning to work could be higher," the report states.
The basic question, though, is what next? How will the labor market behave? The situation is not cause for optimism. According to the Bank of Israel Research Department, in the basic scenario, the unemployment rate in the 25-64 age range will be 9.0% at the end of 2020 and 6% at the end of 2021. The more pessimistic scenario has an 11% unemployment rate at the end of 2020, and 9% at the end of 2021, far from the situation that prevailed before the coronavirus outbreak.
Deferred mortgage payments quadruple
So far, the Bank of Israel has acted through deferment of mortgage loan and consumer loan repayments, in the hope that in the coming months the employment situation will stabilize. The central bank is also acting on the interest rate front. At present, lower interest rates are helping those with mortgages based on the prime on the "prime plus" track (the prime rate is the Bank of Israel rate plus 1.5%), but deferring payments means higher repayments in the future.
The tactic adopted by the banks, taking their cue from the Bank of Israel, is deferment. They are allowing borrowers to freeze their monthly repayments for several months, to make things easier for them during this period. Payments have been deferred on between a fifth and a quarter of total mortgage debt taken by the public. The situation improved a little in June, as some borrowers decided to go pack to repaying their mortgages normally, but it is still worrying, as deferred mortgage payments are generally at about a quarter of the present level.
Last week, "Globes" interviewed senior people in the banks' mortgage divisions, and on the whole they tried to dispel the fears. They based themselves on Bank of Israel figures according to which mortgage taking reached NIS 6 billion in June, similar to the levels seen in January and February, before the crisis, and they estimated that the number of mortgages on which repayments are deferred - 150,000 at the end of June - would fall in time. They even said that their internal findings indicated that so far the mortgage market had managed to avoid the shock waves of the economic crisis, that people were still working, and even those on unpaid leave were continuing to apply for loans, and in any event would "do everything to preserve their homes." According to them, after the first wave, most of those who froze their mortgage repayments have gone back to paying. They also undertook that whatever happened, the banks would not rush to throw people out of their homes, even if they failed to make their mortgage repayments.
Buyer Fixed Price program highly leveraged
When it comes to young couples, the position of many of those who bought homes in the Buyer Fixed Price program is especially worrying, since former minister of finance Moshe Kahlon and the Bank of Israel arrived at an arrangement whereby they could borrow up to 90% of the value of the property. There is some small comfort in the fact that Israel is far from the situation the US was in ten years ago, and the system is much more flexible.
In Israel, people still recall the mortgage crisis of the 1990s, with the wave of immigration from the countries of the former Soviet Union. New immigrants were channeled towards buying cheap apartments in the periphery with mortgages, grants and supplementary loans that reached 90% or more of the value of the homes. When prices started to fall, their debt was higher than the property values. Since they had invested almost no equity in the properties, in a number of case apartment owners abandoned their homes of their own accord and left them for the banks to deal with. The banks derived no benefit, and struggled to sell the apartments, which became "toxic assets".
Bankers with whom "Globes" spoke said that today's situation was completely different. Mortgage tracks are much more flexible, the banks will do all they can not to oust people from their homes, and ultimately they are obliged by law to find alternative accommodation for anyone whose home is repossessed - no small headache. All this is before any mention of the negative publicity, which will soon reach the Knesset. If the worst comes to the worst, the banks will try to persuade homeowners to sell their homes themselves.
Published by Globes, Israel business news - en.globes.co.il - on August 2, 2020
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