A Guide to Mortgages in Israel

A Guide to Mortgages in Israel

Part I

What is the essence of a mortgage?  What are the obligations of the borrower?  What are the obligations of the bank?  What happens when the loan is not repaid properly?  Can the loan be repaid in advance?  These important topics as well as others shall be discussed in this guide.

Introduction

In Israel 2012, almost every person who wishes to purchase real-estate, finds himself at one point or another, entering into a loan agreement and mortgage with a bank or another financial institution.  The day the loan agreement and mortgage documents are signed is considered a small victory to the individual as this is the final stage in the process of purchasing a home or other real estate.

However, one must remember that this is a long term agreement, usually 20-30 years, during which the bankers who created the agreement will change numerous times, the socio-economic situation of the family will likely change, children will be born, spouses will change work places, the world economy will change and the person who took the mortgage will find himself dealing with countless considerations and changes which can influence his obligations in the loan agreement attached to the mortgage bill.

What is a Mortgage?

According to the Real Estate Law, a mortgage is a pledge on real estate.  In fact, a mortgage is a long term loan granted for the purpose of purchasing real estate, while the property is mortgaged to the bank and the bank has a lien on the property to insure the repayment of the loan.  In the event the loan is not repaid, the bank is entitled to act in accordance with the manner prescribed in the Real Estate Law to execute on the property in order to repay the remainder of the debt.

Mortgage vs. Lien

The Lien Law defines a lien as an encumbrance on a property, which is not registered in The Land Registry Office, for the purpose of guaranteeing the repayment of a debt.  The rights of the party receiving the lien are solely contractual rights (as opposed to property rights) and will be registered with The Liens and Mortgages Registrar as opposed to The Land Registrar.

A mortgage, as detailed supra, is a filed lien on real estate, which entitles its owner to a proprietary right in the property.  The bank therefore has a proprietary right in the property registered in The Land Registry Office which has a mortgage on it.

Determining whether the encumbrance placed is a lien or a mortgage, has great significance on the manner in which the legal procedure will be handled in the event of a problem, along with the type of proceeding the bank or the lender may initiate in the event of a breach of the agreement.

The Mortgage Agreement

The mortgage agreement is the contract between the bank and the borrower which includes all of the terms of the loan.  The mortgage agreement is a standard contract drafted by the bank, in a one sided manner, while the possibility of making any amendments to it is very limited.

In 2009 The Court for Standard Contracts canceled tens of clauses from the standard mortgage agreement and amended many other clauses.  It was determined that the agreement submitted to clients until that date was inappropriate and included many prejudicial and inequitable clauses and therefore the time had come for the banks to be obligated to a fair and appropriate contract.

The Honorable Judge Miriam Mizrachi ruled[1]: “The wording of the standard contract in question has significant meaning to a wide range of population of borrowers in Israel… We therefore see it as our responsibility to do all we can to remove the overreaching clauses from the contract presented for our examination as soon as possible.  We therefore have decided to rule that in any situation in which we were of the opinion that the wording of the contract was over reaching, not only did we void the existing clause, but we supplied the bank with the proper wording to be used.”

The court deliberated on tens of clauses, including the extent of additional payments charged to the borrower, the discretion of the bank in determining the rates and dates of the loan, the declaration of the guarantors that they have read the loan agreement, the circumstances in which the bank may determine the loan due for immediate repayment, the discretion of the bank in amending the interest rate and the bank secrecy obligation.

For example, it was ruled that the clause that determines that the loan shall be granted to the borrower in rates and dates as decided by the bank, is an offensive clause based on the fact that it grants the bank the unlimited right to amend on its own discretion and after signing a contract, significant obligations in the agreement.  It was ruled that the verdict will apply also to agreements entered into prior to the date of the ruling but which have yet to be executed in full.  As a result of this ruling, the standard mortgage agreement has been amended completely.

Mortgage Bill- Essence, Form and Content

The mortgage bill is a bill signed by the land owner or lessee for the purpose of actually registering the mortgage on real estate registered in the Land Registry Office (aka “Tabu”) and used as guarantees for loans in the bank.  As a condition for receiving the mortgage, the borrower must have the bill stamped in the Land Registry Office.

Upon signing the mortgage bill and having it approved by an attorney or The Land Registrar, the bank has a propriety right which means the right to execute the property in the event of non-repayment of the loan as described.

The Form of the Bill

The bill includes a formal form which has details to fill in, such as the amount of the loan, details of borrower and lender, which Land Registry Office governs the property, exact details of the property for registry purposes, all liens and pledges placed on the property until the date of signing the bill, etc.  The borrower as well as the lender (i.e. the bank) are to sign the bill and their signatures are to be verified by an attorney or The Land Registrar.

The specific terms of the mortgaging institution are also attached to the bill and signed separately.  These terms are actually the specific agreement between the borrower and the bank regarding the specific mortgage.

Financing Percentage

The percentage of the loan is derived from the value of the property.  The bank is entitled to grant a loan only on the specific percent of the value of the property, while the financing percentage is determined also in accordance with the specific circumstances of the borrower, inter alia, the bank will examine his financial situation, previous obligations and additional loans and liens existing on the property.

Insurance

One of the criteria to receive a mortgage is to obtain mortgage insurance which covers both the lender and borrower.  The bank requires this in order to prevent situations in which due to death or other damage pertaining to property, the borrower is no longer able to repay the mortgage or the value of the property has diminished significantly.

Property insurance is insurance on the mortgaged property which is intended to secure the value of the real estate, in such manner that in the event the property is damaged, whether by natural causes or by damages in the infrastructure, etc. the insurance will cover the damages.

Life insurance is insurance for the borrower which is intended to protect the bank’s right to receive its money in the event of a pre mature death of the borrower.  The bank is the beneficiary of the insurance death benefit so as to repay the mortgage loan.

Warning Notice

An additional criterion usually necessary prior to receiving a loan in form of a mortgage, is registering a warning notice in favor of the bank.  The warning notice is intended to put the public on notice that the property owner has an obligation towards the bank and the bank has rights in the property.  By registering such note, the bank protects itself in case the borrower engages in a transaction with the property with a third party during the period from when the loan money is transferred by the bank and until the mortgage is registered.

Additional Guarantees

Guarantee

The bank sometimes is not satisfied with the mortgaged property as a guarantee for loan repayment and will therefore request guarantors for the loan as well.

A guarantor is a person who signs a bill of guarantee according to which, under specific circumstances in which the borrower does not repay the loan, the guarantor commits to repay the loan in lieu of the borrower.

The Guarantor may guarantee any amount of the loan, an unlimited guarantee, or a specified amount, while in the latter situation according to The Guarantee Law, he will have to repay the loan, in the event the borrower does not, only up to the amount specified in the bill.

The guarantor’s obligation is towards the bank, however, according to The Guarantee Law, the bank is not entitled to approach the guarantor with request prior to exhausting all proceedings against the borrower.

The bank’s duty of full disclosure is applicable to the guarantor as well, in such manner that it must inform the guarantor in the event the borrower does not repay the loan.  Put another way, after the bank attempted to retrieve the money from the borrower, unsuccessfully, the bank is entitled to turn to the guarantor.  However, the bank must keep the guarantor apprised in a timely fashion of any problems encountered in collection and the possibility that it may seek recourse against the guarantor[2].

There was a ruling made by The Court for Standard Contracts in 2009[3] which as mentioned supra, changed the face of the standard mortgage contract and voided and amended many of its terms, including those pertaining to guarantors.  For example, it was ruled that the representations given by the guarantors according to which they have read the agreement and accept its terms, is not realistic as it is a long, detailed and complicated agreement which the guarantor cannot actually read and understand completely.

Adding an Additional Borrower

Another option for action taken by the banks when requiring an additional guarantee beyond the property, is adding an additional borrower to the loan.  For example, a young couple who wishes to get a mortgage but whose income is too low, is sometimes asked to add one of their parents or other family member who is of a higher and stable income, in order to justify granting the mortgage.

There have been contradicting rulings regarding the courts’ definition of an “additional borrower” as well as the position of said additional borrower against the bank in the event the main borrowers do not comply with the repayment of mortgage[4].

The Honorable Judge Wasreckrog of the District Court in Haifa ruled that an agreement between the bank and an additional borrower must be recognized, as the basis for this is that parents or other family members who wish to help a young couple purchase a home must be allowed to do so as additional borrowers, insofar as they understand the legal and actual ramifications behind such commitment:

“It can be determined, that factually, the existence of an agreement between the bank and an additional borrower is not fictional.  Parents or other relatives who wish to help the young couple purchase a home, should be allowed to do so.  In the event the family member does not have a real estate asset that can be mortgaged, or is not requested to mortgage such due to the value of the property being purchased, and they wish to receive a loan towards the purchase, they should be allowed to do so as borrowers, to mortgage the house intended to be purchased and to be responsible for the monthly mortgage payments, jointly and severely with the purchasers, as additional borrowers.  This is correct insofar as they have fully understood the actual legal ramification behind such a commitment.  The test must be on a factual level and the test must be specific”.

The Honorable Judge added that granting loans by the bank is not only part of its ordinary business but also a measure necessary for the public for the purpose of purchasing a home.  It was therefore ruled that the bank is entitled to act for the repayment also against the additional borrower, if such understood and knew that he had signed as a borrower[5].

On the other hand, in a case heard by the District Court in Tel Aviv[6], the Honorable Judge Eitan Orenstein ruled that the bank acted unlawfully when signing a woman as an additional borrower for a loan taken by her daughter and husband to purchase a home.

The Judge ruled that the mother’s status is as a guarantor and therefore exempted the mother from her obligations towards the bank and noted that the purpose of the amendment to The Guarantee Law which grants various protections to guarantors, is to minimize the risk of damage as a result of the borrowers not fulfilling their obligations, and accordingly the ruling according to which in circumstances in which loan agreements were made with a person who by essence is a guarantor, the protections in The Guarantee Law shall apply.

The Judge referred to the ruling of Judge Wasreckrog discussed above, but reached a different conclusion when he ruled that signing a third party who agrees to guarantee the repayment of the loan of others to purchase a property as an additional borrower is against the provisions of the law and even contradicts public policy.  Regarding Judge Wasreckrog’s ruling, Judge Orenstein ruled that in his opinion, the public policy is actually protection of family members and relatives who are coerced to sign as guarantors, and often find themselves in financial difficulties, of no fault of their own, and as public policy it cannot be permitted to bypass the law by signing said relatives as additional borrowers.

The Judge ruled that “due to all the listed principles, I have reached the conclusion that a “contract for an additional borrower” is an “improper fiction” designed to bypass a phenomenon that the legislature believed should be uprooted from the root, should not be authorized, should not be partnered with, and should not attempt a deception of legislature’s opinion”[7], and added that only in extraordinary circumstanced third party obligations as an additional borrower, will be enforced.

Repayment of Mortgage

As explained, a mortgage is a loan, usually of a large sum, and therefore spread upon a substantial number of years (usually up to 30 years).  There is an option to repay the loan prior to its maturity, subject to paying the interest difference that the bank would have received until the original date of loan repayment or up to six months from the date of repayment, the earlier of the two.

In the event the bank refuses to receive early repayment of the loan, the payment may be transferred to the Land Registrar who shall hold it and has the authority to relieve the borrower from his debt to the bank.  This is a dispositive condition, meaning that if the terms of the mortgage state otherwise, the terms of the mortgage shall rule.

The Bank’s rights in the Property Upon Signing the Loan Agreement

The bank has a right in the property immediately upon registration of the mortgage.  However, as a rule, the mortgaging of a house does not interfere with use of the property or executing transactions for it (subject of course to the terms of the mortgage), in such manner that the house can be sold and the mortgage can even be transferred to another.  However, it is important to study the terms of the mortgage carefully prior to signing a sale agreement, in order to insure that the bank did not put a stipulation on any of the terms listed in The Property Law, and what are the terms to execute the sale transaction (such as drag along of the mortgage and/or repayment of the mortgage by the loaning bank of the purchaser).

The Bank’s Obligations Towards the Borrower

The bank has a wide obligation to disclose towards the borrower.  Among others, it must comply with the following points, prior to granting the loan:

1. The loan is against a specific property which is used as a guarantee.
2. The value of the loan does not exceed the permissible percentage of financing.
3. The property is insured.
4. The borrower is insured by life insurance for the mortgage, in such manner that the insurance company shall repay the mortgage on his behalf.
5. As of his financial status today, the borrower can fulfill his obligations to the bank. The bank must verify that after making mortgage payments, the borrower remains with enough income to allow living in dignity.  The amount of the mortgage will therefore usually not exceed 1/3 of the borrower’s net income.
6. The bank has satisfied its obligations to full disclosure, good faith and duty of prudence based on The Banking Law and which have been expanded further by the courts[8].
7. The bank must disclose to the loan seekers as well as to the guarantors, all the relevant details for the loan, including the meaning, the borrower’s financial ability, repayment method, and specific terms of the specific bill and specifically those which contradict the law.

In the Martin case for example, the Honorable Judge Drora Pilpel ruled that when dealing with a married couple, the bank may not trust that one spouse notified the other of all the relevant information to the mortgage and the bank must disclose and give the information to all parties of the bill.

“The bank could not have “transferred” the obligation to disclose and give information, and rely on the husband to inform his wife/plaintiff of all details of the transaction.  This obligation is cast upon the banker who doubts, hesitates, wrinkles his forehead and I was saddened to hear that such a banker did not think the plaintiff was relevant to give notice of outstanding commitments or execution proceedings, but is relevant for collecting the debt from her.”

In this case it was ruled that since the bank had not informed the wife of the borrower, who had signed the bill, of her husband’s obligations and financial status at the time of signature, the mortgage bill will not be considered signed by her and will not be executed against her.

The Elishayov case[9] dealt with a married couple who signed a mortgage agreement.  The couple later discovered that the mortgage was registered also to secure the repayment of an additional loan, against other guarantees, which are not the property for which the mortgage was registered.  When the couple had financial difficulties, the bank wished to execute the mortgage on an amount which included the additional loan they were given.  The court canceled the mortgage bill by ruling that since the loan agreement included special terms, the bank should have detailed said terms to the borrowers and explain their meaning and the extent of the borrowers’ obligations towards the bank.  Since the bank did not act in this manner, it violated the broad obligation of full disclosure which applies.

“If this is the manner in which the banks act… this behavior must be uprooted, as it is a harsh and clear violation of the provisions of the Banking Law (Customer Service) and the court rulings which evolved and followed…”

Also in the Sultani case[10] it was ruled that the bank must describe to the borrowers the status of their obligations and financial standing prior to signing the bill.  “The bank has violated its disclosure obligation by not providing the deceased with information regarding the balance of the existing debt in the accounts pertaining to the mortgage.”  It was ruled in this case that violation of disclosure obligation resulted in cancelation of the bill completely.

The Honorable Judge Strassberg Cohen[11] summarized the broad obligation of disclosure by ruling: “The theory of trust became a main value in our banking laws.  If in the past the obligation for trust was recognized only towards bank customers, today there is a clear trend of expanding the obligation and applying it to additional entitled peoples, including those mortgaging an asset to insure debt of another… The trust principle produces a broad disclosure obligation which includes not only technical disclosure of facts and data, but also, and mainly, the obligation to explain to the mortgagor the full meaning of the transaction and its details, and the obligation to receive the mortgagor’s understanding to the information and explanations provided to him… I therefore agree with the court’s general ruling applying a broad disclosure obligation on the bank towards the mortgagor.”

The bank must carefully explain to the borrowers the stipulation which waives their protection under the Protected Tenant Law and the Execution Law, which does not permit evicting debtors from their only residence without providing them with an alternative residence (the essence and importance of these provisions will be detailed in part II of this guide).  This condition of waiver which is standard in mortgage contracts nowadays in all banks, is a condition which may be critical to the borrower since by waiving the protections in said laws, the borrower permits the bank to attach and execute on a property which is his residence and evict him from the house and leave him without a roof over his head.

On this matter, the Honorable Judge Drora Pilpel ruled[12]: “The defendant’s representatives who are taking into consideration the plaintiffs’ interests would have resulted in advance full disclosure, prior to purchasing the apartment, as part of the advice in which the terms of the financing of the future apartment were finalized, regarding the possibility of them finding themselves evicted from their homes if they do not repay the loan installments.

Conclusion

This is the first part of the guide to mortgages in Israel.

In the second part we will discuss the manner in which the property is foreclosed in the event the borrower does not meet the mortgage payments, as well as the special law that applies to foreclosure proceedings of mortgages on residential homes and the options to protect oneself from claims to foreclose the property.

[1]  8002/02 The Bank of Israel, Supervisor of Banks vs. The First International Bank for Mortgages.

[2] 6421/97 Bank HaPo’alim vs. Petel

[3] 8002/02 The Supervisor of the Banks vs. The First International Bank for Mortgages

[4] 4735/07 Bank Le’Umi for Mortgages vs. Badwai et al.  and 19136-01-10 Chaim vs. Bank Mizrachi Tfachot Ltd.

[5] 4735/07 Bank Le’Umi for Mortgages vs. Badwai et al.

[6] 19136-01-10 Bank Mizrachi Tfachot Ltd. vs. Kadmon

[7] 19136-01-10 Chaim vs. Bank Mizrachi Tfachot Ltd.

[8]  2374/04 Martin vs. Bank HaPo’alim (hereinafter: “the Martin case”); 5893/91 Tfachot Mortgage Bank of Israel Ltd. vs. Tzabach

[9] 564/08 Elishayov vs. Bank Mizrachi Tfachot

[10] 8564/06 Sa’eed Chassan Sultani vs. Bank Leumi Le’Israel Ltd.

[11] 1570/92 United Mizrachi Bank Ltd. vs. Prof. Tzigler

[12] 744-08 Warsaw vs. Bank Mizrachi