What should the Bank of Israel do to lower mortgage prices?

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A few weeks ago, the Bank of Israel announced Cancellation of some of the restrictions imposed about a decade ago on mortgage arrangements. From now on, there is no difference between a loan with interest that changes every five years and a loan whose interest changes more than once every five years, typically with prime.

The public mistakenly received the impression that this was a significant benefit created by the Bank of Israel due to the corona pandemic. The Bank of Israel's announcement spoke of "relief for borrowers." If, in the Bank of Israel's opinion, this is indeed relief, it is appropriate to ask why Israeli citizens have not been granted relief until now. In a world without corona, should the Bank of Israel impose restrictions that burden bank customers? In the years 2012-2014, the Bank of Israel effectively confiscated the banks' ability to determine the duration of mortgages, the types of plans banks could offer to different borrowers, and how banks should manage housing loan risks. According to the then Governor of the Bank of Israel, David Zaken, the reason for this was that due to the huge increase in mortgage sales by banks, there was a concern for their stability in case of economic changes. For example, if many people took out loans with a significant variable interest rate component and the interest rate rose, those people would be unable to repay the debt. Many borrowers unable to repay their debt would eventually cause problems for the stability of the banks and, consequently, a national problem. Between the lines, the Bank of Israel essentially said that it did not trust the banks' management to manage their risks well. The Bank of Israel had good reason for this concern. Only a few years prior, the management of major global banks had shown that, in light of short-term performance-based personal compensation, they were certainly willing to take long-term risks. Risks that, in hindsight, led to the collapse of the global economy in what became known as during the subprime crisis.

Well, if the move is intended to protect the financial health of customers and banks, how is it possible that Bank of Israel is canceling a sort of insurance against future payment increases precisely during the Corona crisis? It would be understandable if they had offered relief to existing customers or those who have already signed a property purchase agreement and cannot back out of it. But to give people the feeling as if it's advisable for them to enter into a new transaction now because there is "relief" is illogical.

In practice, it appears that the Bank of Israel is being dragged into populism by wanting to be part of the group distributing benefits to the public during this difficult time. Firstly, reducing insurance in the form of a fixed interest rate against future interest rate hikes cannot be considered relief. This is similar to a situation where the Ministry of Transport would cancel the requirement for mandatory car insurance. Yes, each person would save, say, 1500 shekels per year. On the other hand, it is clear that the risk in case of an accident will increase significantly. This is "relief" only for those who themselves are not injured, or others are not injured in an accident, and this can only be verified in hindsight many years later.

Secondly, the Bank of Israel did not initiate the move to ease the burden on the public. For a long time, several Knesset members have been threatening the Bank of Israel that if it does not reduce the restrictions on mortgage loans, they will do so through a bill. A draft of the Bank of Israel's announcement that mentioned Knesset members Dr. Karai, Yair Lapid, and Mickey Levy hinted at this.

So, after a regulation was canceled, which we now know was unnecessary even when it was imposed, the public got the impression that there was an opportunity here and rushed to take advantage of the possibility to take on riskier loans as a big prize. The banks, for their part, did what any trader does when there's a sudden demand for a certain product – they raise its price. And indeed, the prices of variable-interest loans went up.

Once again, the Bank of Israel has resorted to populism, and the Supervisor of Banks announced that if the benefit is not passed on to customers, Bank of Israel "will take action." The fact that the Bank of Israel presumes to dictate to banks the composition and price of loans gives the impression that in Israel, there is actually only one bank with several brands, such as Poalim Mortgages, Leumi Mortgages, Tefahot, etc. Nothing good can come of this situation. It is always worth remembering the beginning of the Corona crisis when a mask cost 10 shekels. The Minister of Economy at that time, Eli Cohen, wanted in April 2020 to impose price controls on masks and determined that the 'correct" price for a mask was 3.3 shekels. If his proposal had been accepted, we would today be paying more than 10 times the price set by the market – about twenty agorot per mask.

The dream of banks is for the Bank of Israel to set the courses and prices for all their products. It's much easier to negotiate with the Bank of Israel than with millions of customers. It's usually also more profitable.

What should the Bank of Israel do

If the Bank of Israel truly wants to improve the situation of bank customers, it shouldn't represent them and impose restrictions, regulations, and more restrictions, which prevents new banking entities from entering the country from abroad or being created here. Instead, the Bank of Israel should do something much simpler. Show the public how much they are paying.

Food Law This allows anyone to know through the internet how much a bottle of cola costs at any branch of Rami Levy, Super-Sol, or any other chain. This way, the consumer can make a decision about where to do their shopping. The chains are required to publish a machine-readable database with the prices of all the products they sell by branch, thus Different entrepreneurs can process this information and make it accessible to the public. .

The Bank of Israel collects data on all mortgages processed by banks. If the Bank of Israel wants to encourage competition, it will publish this data to the general public, of course, without customer-identifying details. This way, we can know which bank offers cheaper loans on which track and for which customer characteristics. We can know, for example, that high-tech employees receive better terms at Bank X, while teaching staff receive better terms at Bank Y. We can know if there are differences between branches in a particular bank. We can know if a secular doctor receives better terms than an Arab doctor or an ultra-Orthodox female doctor, while all have the same salary. In the United States, the publication of this database revealed that a black engineer would receive a less favorable mortgage than a white engineer with the same salary.

Such a move will improve mortgage conditions for borrowers much more than any threat, regulation, rule, or procedure published by the Bank of Israel.

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