Address the housing problem

The prolonged stagnation in the real estate market and slump in housing prices may increase the burdens for Koreans struggling with mortgage payments. According to the Financial Supervisory Service, of the 282 trillion won ($250 billion) in mortgage loans, borrowing from banks that exceeds the ratio of loan to value totaled 44 trillion won as of March. The loans are lent based on the value of housing properties to assess borrowers for mortgage qualifications. The ceiling is set to protect lenders from the risk of default. When loans exceed the valuation ratio of the insured mortgage, they are considered risky.

Lenders could deny rollover or extension of maturity in the proportion of loans that exceed the threshold. Such risky debt takes up 15 percent of the total of mortgage-backed loans. Homeowners who are struggling to pay interest rates on their mortgages can hardly be expected to pay principal on the risky portion of their loans. When they fail in loan obligation, they can face foreclosure on their mortgaged properties.

Depreciation of housing values due to the prolonged real estate market slump is blamed for the phenomenon. At the time of the purchase, home buyers’ loans were safe within the loan-to-value requirement, but they exceeded the ratio because their home values fell from the initiation of the loan. Default-risk loans will increase if housing prices fall further. If lenders attempt to recover mortgage loans amid signs of an increase in risky debt, borrowers would have to sell their houses at cheap prices, and the surge in supplies would further depreciate housing prices.

Authorities have been encouraging banks to be more flexible in LTV applications and help borrowers shift their risky debts to other instalment loans. But these measures can only provide temporary relief. What is necessary is a fundamental solution to the housing market through long-term stabilization measures and economic recovery that can help increase household incomes and ability to meet loan obligations. In the short term, authorities should seek a soft landing of the housing market by spreading out risky mortgage loans.

In the worst-case scenario, the government could consider purchasing the secured properties on conditional terms. In any case, financial authorities should understand the danger of the phenomenon and address the problem.