This week, on 5/21/2018, I had the honor of representing the public as a delegate of the Association of Housing Finance Advisors (Mortgage Advisors) at the Knesset's Economics Committee. The discussion revolved around a bill to cancel this commission. It should be noted that the professional committee of the Association of Mortgage Advisors assisted Dr. Shlomo Krai from Bar-Ilan University and Knesset Member Kisch in drafting the bill and its justifications.

In this article, I will explain this commission, why you shouldn't be afraid of it, and why it needs to be abolished.

First, regarding my words in the committee (those who benefited can watch the full discussion) –

A bit of history. Early repayment fees haven’t always been around. Until the 1980s, they didn’t exist at all. This fee was established in 1981. Back then, the banking system operated in such a way that, for every mortgage loan a customer took out, the bank borrowed money from other sources (usually pension funds). Thus, the customer paid, say, 20% interest (!) while the bank took out a loan at 18% interest. The bank profited from the spread—the difference between the interest it paid to its lenders and the interest it charged its customers. Concerns arose that if many customers were to switch, for example, from a loan with a 20% interest rate to one with only a 10% interest rate, while the bank would be obligated to continue paying 18% interest, it would go bankrupt. During those years, all banks except for the International Bank were government-owned after being nationalized following Bank stock manipulation case.

To Protect the banks A mechanism has been established whereby early repayment of a loan incurs an early repayment fee, also known as a discounting fee or, colloquially, an early repayment penalty. This fee is determined by law. One should not underestimate the fact that a fee is determined by law. Israel's operating capitalist economic system dictates that competition among various suppliers on the price and quality of products will ultimately lead to good service at a low price. Product suppliers who coordinate prices commit a criminal offense and are subject to prosecution. Recently, owners of bakeries who coordinated bread prices were prosecuted for precisely this offense. They were prosecuted For a year in prison. Accepted competitive principles dictate that even if banks want to set a certain fee, each bank should set its fee as it wishes. If this fee is high, customers will choose another bank, and thus the first bank will reduce the fee. Setting a fee amount through legislation is an anti-competitive action and should only be done in exceptional cases. Such a case was likely when the law was enacted in the 1980s. The fear of bank collapse was greater than the fear of weakened competition. This was also because the owners of all the banks were essentially the public through the state, which had nationalized them.

Now that the fear of bank collapse is no longer present, the thought that we must continue with a law that sets a fee amount is, in my opinion, unnecessary. It is a display of banking hypocrisy to try, on the one hand, to preserve a law that increases their income, and on the other hand, to speak on every platform about burdensome regulation and that market conditions alone should determine the prices of various services.

Currently, banks do not raise capital for mortgage loans. 90% The funds used by the bank to grant mortgages come from independent sources or from deposits. The bank pays interest on the deposit, for example

0.011% per year, and on the mortgage he charges at least 1.11% on the prime rate track and much higher interest rates on other tracks. If a furniture store owner bought a chair for 50 shekels and sold it for 5,500 shekels, I think people would be skeptical of his claims about "economic losses.".

In the banking system, it seems logical to us that the bank would pay 0.011% on a deposit and charge 41% on a loan (resulting in a 400-fold profit margin) and then talk about a "risk of collapse" or "economic damage" when the customer asks to reduce the payment from 400 times the bank’s cost of money to just 300 times, if they refinance the loan and lower the interest rate from 4% to 3%.

So there will be those who say that deposits are not the only channel through which a bank raises money and there are more expensive channels. etc. Possibly. A similar inquiry was made a few years ago regarding the cost of living in general and the high cost of dairy products in particular. It was claimed that cottage cheese is sold in Israel at an excessively high price. The supermarket owners claimed they were not the 'guilty party' but rather bought the products from the dairies (Tnuva, Strauss) at a high price. The latter claimed they bought expensively from the farmers. An inquiry was carried out in which each market player revealed their costs and profitability. The banks claim losses and damages but refuse to disclose their real capital costs. It is appropriate that the Bank of Israel would require banks to provide appropriate transparency and ask them to disclose their true funding costs.

The early redemption fee causes two damages that are more significant than paying the fee itself.

 First Damage - Prevention of Profitable Mortgage Refinancing

A customer goes to the bank and wants to refinance his loan. The customer has no idea how much he’ll actually save by refinancing. He only knows that he’s currently paying 6.1% interest and that refinancing could lower it to 2.551%. How much is that in money? Let’s check with the bank. At the bank, the customer meets a teller who knows that, on the one hand, refinancing a mortgage involves a lot of hard work (which often doesn’t even get finished because the customer gives up halfway through) and, on the other hand, refinancing doesn’t help him meet his monthly sales targets at all. Moreover, reducing the bank’s profitability hurts the year-end bonus. What would you do if you were the bank clerk? But let’s assume our clerk is a childhood friend of the customer and truly has his best interests at heart. Even to this clerk, the bank does not disclose the projected profit from the refinancing. in shekels. Everything the clerk sees and what he tells the customer is: "I can lower the interest rate from 6% to 2.5%, but that It will cost you a commission of 50,000 shekels. 

A very large portion of customers give up recycling at this stage. Am I crazy? To pay 50,000 shekels? Who do they think they are?

For their part, the banks claim that presenting the fee to the customer is required as part of fair disclosure. This is a half-truth. The fee should be presented to the customer before they pay it, but true fair disclosure would show the customer that the 50,000 shekel fee they are required to pay is part of a 200,000 shekel saving, for example, if they perform the action.

Harm Two – Pushing Customers Towards Risky Paths

Many clients have heard about the dread of early redemption fees. They assume they will want to redeem or refinance the loan before its term. It also makes sense to initially purchase a small apartment and then upgrade (which requires a mortgage refinance).

The same clients hear at the bank that for variable-rate plans, the loan can be repaid at any interest rate change point without an early repayment fee. The client quickly puts two and two together, along with the banker, and takes plans with low exposure to future fees, meaning variable-rate plans. What was not clearly stated to the client is that these plans carry a greater risk than an early repayment fee – the risk of not meeting the mortgage payments. A variable interest rate at a time when the interest rate in the economy is at its lowest represents a risk of future interest rate hikes. For this reason, the Bank of Israel prevented clients from taking the entire loan at a variable interest rate but limited this rate to two-thirds of the loan.

In practice, from the customers who go to the bank without their own consultation, we see that the most common loan structure is a one-third, one-third, one-third split – one-third prime, one-third variable every five years, and one-third fixed. In other words, the customer takes on maximum risk. Absurdly, we see that the variable interest rate (which is expected to increase further in the future) is offered at a higher interest rate than the fixed interest rate. As mentioned, the customer has been convinced that the major risk is that dreaded fee, not default, and therefore agrees to such an absurd situation.

Summary

• In my opinion, the current format of a uniform commission set by law should be abolished immediately. Competition should be allowed to operate and we should see if banks will still set a uniform commission or if each bank will set something different, and the customer will be able to choose the bank that offers the best overall conditions, including exposure to commissions.
• The client should consider the exposure to commission on one hand, but no less importantly, the The profit he will make if he pays it In case of early repayment by the other party.

Two side notes

1. The "loss" incurred by the bank upon early loan repayment does not stem from the fact that it will no longer receive 6%. The loss stems primarily from the fact that, in order to make the repayment, the customer will redeem the deposit with a yield of 0.01%. The bank could do much more with this deposit than just one loan cycle, but that is a topic for another article.
2. At 37:40 of the video, Gali Kasperi from the Banks Association explains that today more clients are refinancing (and reducing their payments to the bank) due to the activities of private mortgage advisors. It made me proud.

The data I spoke about in the committee – the reports from "Moshe"

Mortgage Balance Report issued by Moshe In 2015 To check the feasibility of early repayment. Note that after 12 years of mortgage payments, the fee put his debt at a higher amount than the original sum. Moshe was convinced not to refinance.	In 2017 Moshe issued another balance report. This time through a mortgage advisor. Although the commission is lower than hourly, Moshe will now have to refinance at a higher interest rate.