I must give Se Young Lee and Umesh Desai (Reuters) much credit for succinctly summarizing financial danger in the least amount of words:
Eager to dig homeowners out from under a $374 billion mortgage mountain, South Korea is moving to let its banks start selling securities similar to those at the centre of the 2007 U.S. housing crisis
You remember the Subprime mortgage crisis and the ongoing economic mayhem this has created? The master crooks that perpetrated this disaster have largely escaped accountability in the US but, now, the Financial Services Commission, South Korea’s financial regulator, wants to submit a bill to the parliament that would allow banks to sell “covered bonds,” or bonds backed by a bank’s mortgage loans. This is similar sort of financial manipulation that lead to the American subprime mortgage crisis.
As per the thoughts of Kim Pyung-seb, the general manager of credit services and foreign exchange at the Korea Federation of Banks:
… for banks to issue the longer-term, fixed-rate mortgages that the FSC wants in order to deal with household debt, there needs to be stronger long-term funding methods for the lenders. The FSC and the banks believe covered bonds will meet that need.”
There is a difference between what happened in the US and the conditions here in South Korea, however.
First there has been an ever increasing number of households that are running out of money, who are referred to as being “house poor” due to a contraction in the real economy and an increase in overdue mortgage payments. This refers to people who are living beyond their means because they spend such a large share of their income on mortgage payments, property taxes and other home-ownership costs, leaving them with barely enough to get by (cite)
Many older Koreans would take out loans, in the past, to buy new apartments, which they then turn around and sell for a profit. This strategy, however, has failed horribly because the demand for apartments has collapsed and now many are in dire straits to pay off loans and mortgages:
“We haven’t had any calls asking if there are any apartments for sale since the turn of the year,” said a realtor in Jamsil, southeastern Seoul. “We were getting calls from potential buyers until Dec. 31 as they had high hopes that the tax benefits would be extended. But now we’re only fielding inquiries about rentals.”
In hope of revitalizing the market and easing the situation for those considered “house poor,” the government unveiled numerous tax benefits in early fall, including exemptions on capital gains taxes for apartments bought last year and lower acquisition taxes. (cite)
Despite these terrible problems, Financial Services Commission Chairman Kim Seok-dong believes that the household debt problem is manageable. Chairman Kim believes that the government can “raise public funds of 18 trillion won ($16.95 billion) to write off debt for heavily-indebted people and help the so-called “house-poor” by introducing a “stake-sale” system. This refers to people who are effectively living beyond their means because they are forced to spend such a large share of their income on mortgage payments, property taxes and other home-ownership costs, leaving them with barely enough discretionary income to get by. The situation is compounded by Korea’s long-stagnant property market.
The stake-sale system aims to let public institutions purchase stakes in their homes, helping reduce the interest payments on their mortgages. ” (cite)
Despite these problems, “neither policymakers nor analysts think South Korea is due for a housing crash” and some foreign foreign investment banks, like Goldman Sachs, believe that Korea’s household debts are manageable (?) but then, if you remember who Goldman Sachs is (cite, cite, cite), and consider the game being played by analysts here in Korea, this is not very comforting.