South Korean Mortgages – The Slow Motion Sound of S*** Hitting A Fan?

Fan Death?

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.

Meanwhile, The US will halt junk home loans that fed the mortgage crisis to begin with.

  • wangkon936


    With all due respect, you left out a few key paragraphs:

    “Covered bonds bear many similarities to the mortgage-backed securities that were made notorious in 2007 when the U.S. housing bubble burst, but with an important difference: the mortgages backing the bonds stay on the issuing bank’s balance sheet. That means the bank takes a loss if a homeowner defaults. And if the bank defaults on its bonds, the bondholders get the mortgages and can sue the bank for damages.”

    CDS’s (“Credit Default Swaps”) in the states were off balance sheet liabilities, which made it a devil to figure out just how far the rabbit hole went.  It will be less of a problem if the covered bonds must be on the balance sheets.

    Also another problem with the comparison between the covered bonds and CDS comparison is that the most problematic CDS’s in 2007-08 where the ones to subprime lenders.  These CDS’s allowed lenders in the U.S. to lend to people with horrible credit and very smoke and mirrors exotic loan structures such as ARMs with huge balloon payments, 40 year amortized loans, 5 year interest only loans, etc.

    What the FSC wants are not exotic subprime loans to people who can’t afford them.  It’s more traditional fixed rate loans with lower monthly payments to help people get back on their feet and live with the debt they have rather than default on it because of the higher payments of their older loans.  Thus, the structure of these debt instruments should only have a passing similarity to CDS’s, but not the same (or even similar) danger.

    This is explained in another paragraph you forgot to mention from the article:

    Instead of being able to make risky subprime loans and pass them on to investors like the U.S. mortgage industry did, therefore, Korean banks selling covered bonds would in theory have to make sure their borrowers remained healthy.

    I love the vast majority of your posts, but I can’t say I’m a huge fan of your economics related posts.

  • Sperwer

    I think that Korea’s home mortgage loan situation is worse than most analysts are willing to admit, and I’m less sanguine about the prospects for a meaningful fix, but this os good work WangKon, correcting Elgin’s typical hysteria.

  • Adams-awry

    I have to agree with Wangkon, I find some of your posts a little hysterical.

  • Jinu4ever

    GS is running away from the Korean market. They probably aren’t game enough to screw over with Koreans. Korean market is safe

  • R. elgin

    That’s alright though because I rely upon you to come behind me and point out any details that need emphasis or correction.  I, like Sperwer, feel this whole thing is far worse than what is in media, however and I really do not trust politicians or “analysts” very much.  Especially after what we have seen in America, I do not trust them.

    Korean banks selling covered bonds would in theory have to make sure their borrowers remained healthy.

    ummmmm . . .

    As a side-note, I had an interesting, short conversation with a minor government official, who shall remain anonymous and he – for the first time ever – was calling me about doing business.  Instead of me petitioning him for business, it was the other way around.  Very odd it was and a more true sign of just how bad the economy has become.

  • feld_dog

    I find it weird that prices still seem to be sky-high despite the stagnant market.  Has anybody noticed housing prices starting to come down, anywhere in Korea?  Just anecdotally, I know people who have made reasonable offers on units less than the asking price, even if the apartment complex is at a miniscule occupancy rate, and the individual unit has been on the market for a long time–only to have the offer rejected.  Owners seem to want to sit on empty units rather than lower prices.

  • RElgin

    Also, Wangkon, just how many SMEs do you think are borrowed out to the max, with a mortgage loan somewhere in the mix?

  • ZenKimchi

    And then there are those of us who are living within our means waiting for the apartment prices to get affordable if some of these jokers would just go ahead and default and live with their greedy mistakes.

  • SomeguyinKorea

    Something you aren’t considering: mortgage rates are already high (and very much fixed) in South Korea. Most banks offer a rate of 7%. You’d have to be very well connected to get a rate of less than 6%.

  • Brendon Carr

    Elgin’s final link reports the first great achievement of the Consumer Financial Protection Bureau: A new rule requiring banks to adopt income- and repayment ability-based prudential lending standards, as if the banks abandoned such standards of their own volition rather than having been forced to do so by the Community Reinvestment Act.

  • feld_dog

    Oh please.  While I do not doubt that the Community Reinvestment Act played some small part in the overall lending orgy, the sheer amount of money that EVERYONE in finance, insurance, and real-estate was making shoveling shit loans made the whole monster too difficult to tame.  It was classic bubble mentality.  The banks DID voluntarily abandon due diligence–along with the investment houses, rating agencies, Federal Reserve, and yes, home buyers.  

  • RElgin

    I think this is because so many have invested in apartments and they do not want to take a loss, however, no one has money now, so the market is stagnant, thus they are stuck and the banks have more mortgage defaults. Because of this, I wonder if the banks can really guarantee that “their borrowers remain healthy”.  I hope that they can.

  • SomeguyinKorea

     Stagnant?  Depends where.  I’ve made 15% on one of my investments in the last month and a half and 25% on another over the last 12 months.

  • weiguk

     Is it rather strange that despite an over supply.. and no one buying that the prices are still so high. I think it’s mostly a seoul thing as it seems the prices in other cities and areas are much more reasonable .