Mortgage loan

Mortgage loans (주택담보 대출) are widely used when Korean citizens wish to buy homes and apartments. They used to apply for mortgage loans from the banks, savings banks and insurance companies, which have calculated the loanable amount based on DTI (debt to income) and LTV (loan to value) ratios since July 2007.

In the midst of global financial crises, the Korean financial system maintained stability as compared to the situation of foreign countries thanks to such financial ratios as DTI and LTV, which blocked over-exposure of Korean banks to mortgage loans.

Key words
mortgage loan, syndicated loan, delinquency rate, default, class action

DTI and LTV Guidelines
In 2007, the Financial Supervisory Service (FSS) implemented the DTI standard to rein in speculative real estate investment and soaring apartment prices. At first, the Koreans' favorite apartments in some areas were target.

The DTI ratio is calculated by dividing borrowers’ monthly liabilities by their monthly income, requiring would-be loan applicants to consider their debt repayment capabilities before visiting a bank.

On the other hand, the LTV ratio has set the ceiling of home loans to such applicants. 50 percent of LTV means the applicants may borrow as much as 50 percent of the price of a home or apartment to be granted as mortgage.

According to FSS, domestic commercial banks and foreign banks have applied the debt guideline to purchases of apartments, single-family houses and multi-family houses in all regions nationwide regardless of housing prices starting July 2007. Most of financial institutions except some savings banks, which extended huge amounts in project financing, survived the financial crises since then.

Soaring Household Debt at risk
Now the situation is quite different from the global financial crisis in 2008. While household debt has already hit the astronomically high figure of 900 trillion won ($766 billion) in May 2012, the high delinquency rate of syndicated real-estate loans is surfacing as a new threat.

Syndicated loans are parceled out to a number of lenders but often administrated by a single commercial bank. As they are more easily approved, they are commonly used for purchases of newly built apartments. FSS said the overdue payment rate of syndicated loans has been on an upward trajectory for the first four months of 2012, growing from 1.35 percent at the end of December 2011 to 1.84 percent as of April 2012.

Financial supervisory authorities as well as the banking industry are worried a domino-like effect as it spills over to mortgages, where late payment have risen from 0.76 percent of the total in March 2012 to 0.79 percent in April 2012. Meanwhile the overdue rate for household loans climbed from 0.84 percent to 0.89 percent over the same period.

Market observers predict the problem will come when the rising rate of insolvent loans spreads to banks that made huge group loans in the mid-2000s. Homeowners are becoming increasingly embittered and reluctant to repay what they see as unfairly high loan terms as housing prices are falling disproportionately fast, causing many to suffer huge losses.

Being disappointed in the current prices of new apartments falling down below the purchase prices, those borrowers, called "House Poor", are complaining they were misled as construction companies promised new infrastructure projects, such as subway stations, would be built nearby to bump up the value of their properties, but these failed to materialize.

Nationwide Class Action expected
Now more and more homeowners are refusing to move into their properties and pay off their mortgages as they insist the value of their real estate has dropped and they have been left in a hole. Banks expanded their syndicated loans from 2006 to 2008 as the real estate market heated up and prices surged to exceptional levels before the global credit crunch hit. Market observers say the bigger problem lies with mid-term payments, or the lump sum that those who take out syndicated loans must pay when they move in to the property. This usually accounts for 50 percent of the total loan. Commercial banks are responding by reducing the number of new loans, but this is considered a temporary band-aid at best. As a result, household debt growth including purchases made on credit, slowed to 7 percent in the first quarter of 2012. This is down from 8 percent in previous quarters.

Financial regulators are now assessing the situation to prevent it from worsening as related law suits pile up. The authorities fear commission-hunting lawyers are stoking the fire.

It is estimated that homeowners who have taken out syndicated loans are currently seeking legal action in about 90 apartment complexes nationwide. Most of the cases are kind of class-action suits. However, in those cases where the court sides with the construction company the borrowers are left high and dry, saddled with huge debts and overdue interest payments.

Others claims the financial authorities should the DTI and LTV regulations to help real estate market recover sooner or later.

Prospects
Falling apartment price is a problem that is unlikely to be solved anytime soon, so overdue payments are likely to keep snowballing. The government seems to have a grip on the situation and will not just stand by and wait for the market to crash.

In terms of LTV, the solution could be difficult to find out. As the value of apartment is falling down, the loanable amount also decreases. So the home owners who borrowed mortgage loans on the basis of LTV cannot have such loans refinanced or rescheduled unless they repay in part a considerable amount of outstanding loans in as much as the decrease of apartment prices. Otherwise, they may lose their apartments as the lenders decide to enforce the mortgage in the event of default. However, this situation would cause the additional decrease of overall apartment prices, triggering a vicious cycle in the real estate market.

The financial regulators have been preparing against insolvency in the financial market since 2011, including improving the soundness of local banks and restructuring savings banks. But external factors including the Euro zone fiscal crises have not yet been under control, and happen to be aggravating in the years to come.