Subprime ―Korean style

Quick policy responses needed for soft landing

Alarm bells are ringing louder for the possible eruption of a Korean version of the subprime mortgage crisis. Without prompt action and durable solutions, the nation might face another devastating economic crisis.

According to the Financial Supervisory Service (FSS), mortgages that were offered in excess of the recent property auction rate of about 76 percent amounted to 13 trillion won as of the end of September, accounting for 3.3 percent of all home-backed loans extended by banks and other financial institutions. The number of borrowers with these possibly delinquent mortgages was estimated at 190,000, or 3.8 percent of the country’s 5.35 million mortgage holders.

These statistics are the first of their kind compiled by the financial regulator, covering all financial firms across the country, and are a good testament to the severity of the current household debt problems.

These underwater homeowners are those prone to default on their loans because they have already borrowed more money than their houses are worth and their properties are vulgarly called “empty can houses.’’

Our concern deepens further, considering that multiple borrowers who have taken out loans from more than three different non-banking financial institutions number more than 230,000 and their mortgages have reached a whopping 25.6 trillion won.

These default-prone homeowners overlap but at least 200,000 borrowers will gradually fail to repay their debt unless exit plans are made immediately.

The default risk among some indebted homeowners appears imminent, taking into account that the default rate on mortgages at financial firms jumped from 0.95 percent at the end of last year to 1.32 percent at the end of August this year. Furthermore, the number of homeowners who are in arrears with loans for more than one month has reached 40,000.

Given that home-backed loans with high default risks were the main triggers for the subprime mortgage crisis in the United States and Japan’s “ two lost decades,’’ it’s not too much to say that massive defaults on loans will cause many weak financial firms to become insolvent, which would in turn lead to a broad-based economic meltdown. We already feel the negative impact of excessive interest burden on households in the form of depressed consumer spending and business stagnation.

Needless to say, the government should place top priority on achieving a soft landing in tackling the mortgage crisis. Of course, it will not be easy to come up with the best policy responses, considering that estimates of negative equity in these empty can houses vary wildly because of difficulty in assessing their value.

As things stand now, the government should not hasten to decide on injecting public funds because a large portion of the underwater homeowners belong to the middle class or above and bought houses in anticipation of unearned income.

Therefore, banks need to allow homeowners to benefit from debt restructuring under the grand principle of sharing losses. More importantly, there must be fundamental measures to boost the market such as extending property acquisition tax cuts. <The Korea Times>