Rapid Inflation Pushes Costs Down : Home Mortgages Are Still a Bargain in Israel

At a time when millions of Americans are making mortgage payments of more than $1,000 a month, Jerry Cheslow is paying what sounds like a joke.

For a condominium in central Jerusalem worth about $30,000, he pays the equivalent of 8 cents a month, and the payment is declining regularly.

He could pay off the entire mortgage for about $5, but he says he would rather drag the payments out until the summer of 1994, when the note finally falls due.

“It just gives me a kick to be paying 8 cents,” Cheslow says with a chuckle. “It’s my window on the mad Israeli economic system. And it reminds me every day that, on at least one deal that I’ve made, I’ve shafted the government.”

Situation Not Unique

Much to the government’s chagrin, Cheslow is far from unique. As many as 50,000 Israelis are believed to be in a similar situation, paying pennies a month on government-backed mortgages written between 1967 and 1979.

The key to their good fortune is a concept known as “linkage.” For several years, almost every financial arrangement in Israel, from wages to bank accounts, has been linked either to the value of the U.S. dollar or to the cost of living, both of which have risen sharply in relation to the Israeli currency.

But home mortgages written in the 1967-79 period are an exception, and the result has been that, as rapidly as Israel’s rampant inflation--it was 444.9% last year--has pushed wages and prices upward, the “real” cost of the unlinked home loans has gone down.

Take the case of Cheslow, a journalist and New Jersey native who emigrated to Israel in 1973. He bought his condominium in the summer of 1979, taking out an unlinked mortgage for 48,000 Israeli pounds--$8,000 at the exchange rate then in effect, six pounds to the dollar. His monthly payments were 580 pounds, or slightly less than $100.

A year later, Israel changed its currency--10 pounds became one shekel--and Cheslow’s monthly payment became 58 shekels.

His payment has stayed the same, 58 shekels, but the value of the shekel has plummeted. Today, the exchange rate is more than 700 shekels to the dollar, and that makes Cheslow’s monthly mortgage payment equal to 8 American cents.

His bank makes the payment automatically, and it costs him four times the amount of the payment in service charges, but he says that is a small price to pay for what he regards as an edge on the system.

Oded Eitan, manager of the Jerusalem branch of Bank Tefahot, says that, in many cases, keeping track of such loans now costs the bank more than the loan payments bring in. Bank Tefahot, which handles about half of all the mortgage loans in Israel, has 25,000 unlinked mortgages still on its books, he said.

Last year, the bank offered all of its customers with unlinked loans a 75% discount if they would pay them off immediately. But only about 15,000 did so. Why not the rest?

According to Eitan: “They love to . . . go wait in line, smile at the teller and pay their 50 shekels.”

Last December, two other Israeli financial institutions, Bank Leumi and Discount Bank, canceled “a few million shekels” worth of unlinked student loans made between 1973 and 1982 after their value had been almost completely eroded by inflation.

It has not done the same thing with unlinked mortgage loans, a Bank Leumi spokesman said, because the number of such loans--and their value--is much greater than was the case with the student loans. He refused to give specific figures but said unlinked loans still account for 2% to 3% of the value of all the bank’s outstanding mortgages.

Mortgage loans outstanding in Israel at the end of last year were worth the equivalent of nearly $750 million.

Government Loses

The big loser on Israel’s unlinked mortgages is not the banks; it is the government, which guaranteed them as part of its continuing policy to subsidize, at least partially, housing costs for new immigrants, young couples and others considered needy.

Until the early 1960s, Israeli mortgages were linked to the value of the dollar. But then there was a major devaluation of the Israeli currency, driving up the real cost of loans and causing a public outcry.

So, in 1967, mortgages were unlinked. The government indirectly subsidized housing costs by offsetting any erosion of the value of the bank loans as a result of inflation.

The system was relatively painless as long as the inflation rate was low. But by the late 1970s, inflation spurted, as did the cost of this indirect government subsidy. And in the summer of 1979, just after Jerry Cheslow got his loan, mortgages were again linked.

According to a Bank of Israel official, unlinked mortgages cost the government as much as $300 million a year. If anybody knows how much they have cost the government altogether--and, ultimately, the Israeli taxpayer--he or she is not saying.

But financial experts say inadequate control over government spending is a major reason behind Israel’s current economic crisis.

The government is not as generous as it used to be, but it gives favorable mortgage terms to many borrowers. Couples considered to be the neediest under a complicated point scheme can get a partially unlinked loan of up to 17 million shekels--about $24,000 at the current rate of exchange. Half of the loan is adjusted quarterly according to the cost of living, but the other half is unlinked and carries an annual interest rate of only 1%.

The monthly payment on such a loan is 58,000 shekels, or about $83 at the current exchange rate, Eitan, the Bank Tefahot official, said.

The average monthly wage in Israel was about 300,000 shekels, or about $428.50, at the end of last year.

Meanwhile, Housing Minister David Levy has said that a team of experts has been appointed to re-examine the mortgage question. He made the announcement after a member of the Knesset, Mordechai Virshubski, pointed out that, with the erosion of buying power under a government austerity program, many couples now spend more than half of their wages on their linked mortgages.