Private College Student Loan

Mortgages an interest rate land mine

Summary: Banks have been rashly increasing household loans In the long run such reckless behavior could be the cause of major financial insolvency Mr Lee is 37 Many of his friends have their eyes glued to the movement of their stock market investments but not Lee He keeps a careful eye on the central bank A couple of years ago I took out loans worth 170 million won $150 000 at a variable rate to buy an apartment Lee said Thanks to the low interest policy my interest payment burden has been light as I pay around 500 000 won every month But if the central bank plans to raise the rate I expect the burden to be heavier especially since my wife and I are expecting a baby this July With an additional family member to feed and the interest burden I expect our family budget will get tighter The key rate known here as the base rate has been kept at 2 percent a historic low for 15 months That combined with an economic recovery already in full swing has Koreans rushing to banks to take out cheap loans Yet those burgeoning household loans have become a topic for concern as pressure on the Bank of Korea to raise the rate mounts Before completing his four year term in April Bank of Korea Governor Lee Seong tae said what he was most concerned about was rising household debt which could later become a burden on the Korean economy According to Kim Jong chang head of the Financial Supervisory Service though household debt is high the risk is low because the overdue payment rate is only 0 4 percent But that could change Even as global economies restart debt still lingers ready to plunge them back into crisis if regulators make a false move Enormous corporate debt exacerbated the Asian financial crisis in 1997 and 1998 tearing apart major Korean conglomerates and putting thousands out of work The global financial crisis of late 2008 started with a real estate bubble in the United States built on household debt The ongoing debt crisis now developing in southern Europe is fallout from Greek debt Although Korea s debt situation has not yet reached such a critical point studies show that it is edging closer The subprime mortgage crisis that shook the U S economy prior to the bankruptcy of Lehman Brothers didn t affect the Korean economy as severely because of the government s tight restrictions on mortgage loans put in place during the Roh Moo hyun administration in an attempt to cool speculation These real estate loan regulations continue to help keep the local financial market stable The economy s rapid recovery from the global economic downturn has also proceeded much more quickly than anticipated and more Koreans are now investing in financial assets At the same time experts say the Korean government must closely monitor the situation because a debt crisis is like high blood pressure symptoms seem minor until a catastrophic heart attack Already there are signs of lending growing at an alarming rate far more quickly than borrowers ability to pay Today even compared to other countries Korea s household debt is high Last year Korea saw household debt as a percentage of GDP rise to 80 9 percent according to the Hyundai Research Institute That was much higher than the 78 3 percent recorded in 2008 indicating Korea s household debt is increasing faster than the size of its economy The figure is still smaller than that of Britain or the U S at 102 3 percent and 97 1 percent respectively as of the third quarter of last year However Korea s debt relative to GDP is higher than the average 64 4 percent of OECD member countries as of 2008 Even more alarming is the rate at which household debt is increasing While developing countries such as Britain and the U S have been busy deleveraging particularly since the 2008 2009 global economic crisis Korean borrowers have been moving in the opposite direction thanks to low interest rates The recent BOK study showed Korea s ratio of household debt to disposable income was 1 43 and has been rising rapidly since 2004 whereas the U S debt to disposable income ratio fell from 1 29 in 2008 to 1 26 last year Even Japan has seen its debt to disposable income ratio retreat from 1 10 in 2008 to 1 08 in 2009 The biggest threat to Korea s economy is the real estate market which has been on the retreat despite the economic recovery Kim Hyun jeong head of the macroeconomics team at the Institute for Monetary and Economic Research said during a forum on Korea s household debt last week that the impact of falling real estate values will be substantial Households whose mortgage debt is more than 50 percent the value of the corresponding real estate or whose loan interest payments account for more than 40 percent of their income are considered high risk Kim explained and in 2008 14 9 percent of Korean household debt fell into this category If real estate values were to drop 10 percent according to Kim the proportion of high risk outstanding loans would increase to 19 percent A 20 percent drop would mean 22 6 percent of loans in the red zone Korean household loans are particularly vulnerable to drops in real estate values as the loans are heavily dependent on real assets particularly for high income families Kim said As more than 40 percent of the loans are supposed to be returned all at once the financial burden will be tremendous when debt repayments start Adding to Kim s fears Korean real estate does seem to be losing value Even in the so called seven bubble neighborhoods areas in Seoul where apartment values are notoriously high asset values are shrinking One possible solution would be to change the structure of loan maturity so that people could repay their debt over the long term Most mortgage loans in Korea have a maturity less than 10 years said Park Chang kyun a business administration professor at Chung Ang University Moreover our debt repayment is structured to have all of the principal loans be returned all at once and for that reason even the smallest change could lead households to collapse The professor said if banks refused to extend loan maturity a vicious cycle of bankrupt borrowers and liquidated apartments would ensue He called for stronger regulation of mortgages and for maturity periods to be extended to more than 15 years Banks have been recklessly increasing household loans without securing the means that would keep credit solid as the government has been easing regulations regarding sales practices said Seoh Geun woo an adviser at the Korea Institute of Finance In the long run such reckless behavior could be the cause of massive financial insolvency Jun Sung in an economics professor at Hongik University said financial institutions need to redirect borrowers toward loans with a fixed rate or long term returns and away from short term loans with a variable rate sensitive to policy changes Even a small shift could mean a major increase in payments According to the Bank of Korea and the Korea Finance Institute when the rate is raised 0 25 percentage points the interest burden on households is expected to increase 1 25 trillion won Among the 553 2 trillion won in outstanding household loans at financial institutions at the end of April 498 trillion won were based on variable rates which indicates that most households are vulnerable to a rising base rate A rise of 1 percentage point in loan interest rates would mean 5 trillion won in additional payments or 360 000 won per year per borrowing family in Korea It s not only the households that are vulnerable to the mounting debt interest payment once the rate goes up Outstanding loans to small and midsize firms as of the end of April stood at 601 1 trillion won 70 percent of it at variable rates A base rate increase of 0 25 percentage point would mean over 1 trillion won in additional annual interest payments for them according to the Bank of Korea while a hike of 1 percentage point in the second half would raise the burden by 4 2 trillion won The debate on whether the key rate should be raised to contain possible inflation and asset bubbles continues but the pressure to do so is growing Current BOK Governor Kim Choong soo kept the rate at its current level this month but during a press conference he dropped hints indicating that Korea may be headed toward an exit strategy Over the weekend the Korea Development Institute suggested pre emptive steps to normalize the low rate policy in order to control inflation pressure and bubbles The market seems to expect the central bank to raise the base rate as early as the third quarter of this year Already there are signs that the loan burden has been increasing Loan interest was low in the first two months of this year but has been rising since March In the first quarter of 2010 the average loan interest rate was 5 54 percent up from 5 39 percent a year earlier In a study by the Samsung Economic Research Institute the interest burden in the first half of this year was expected to reach 12 3 trillion won which is a 20 percent increase from the 10 1 trillion won posted in the first six months of last year To contain the interest burden the government has said since last year that it would direct lenders to recommend fixed rate products but to little effect The number of variable rate mortgages continued to rise and the number of borrowers opting for a fixed rate continued to drop At Shinhan Bank alone 86 percent of outstanding household loans as of the end of April were at a variable rate That was a 1 5 percentage point increase from March In order to prevent household debt from expanding further the role of the financial oversight agencies needs to be larger pre emptively managing risk by monitoring the sales practices of financial companies said Seoh the Korea Institute of Finance adviser Joo Jae seong FSS deputy governor on banking supervision said the government is planning to strengthen regulations on banks loan to deposit ratios which would lead to a reduction in household loans However he said there was a limit to how much household loans could be regulated since they are closely connected to the real economy and consumer spending In a report last month the Bank of Korea said that even if the base rate is raised the chances that households and small or midsize companies will default on their loans en masse are slim as the economy is in recovery with GDP expected to post more than 5 percent growth this year and the soundness of financial companies is improving The central bank also sees a higher base rate as an opportunity for households and small and midsize businesses to restructure any debt that they have accumulated during the days of the low rate policy therefore preventing any anxiety on the financial market in the future By Lee Ho jeong ojlee82 joongang co kr Copyrights ⓒ JoongangIlbo Joins com All rights reserved Banks have been rashly increasing household loans In the long run such reckless behavior could be the cause of major financial insolvency Mr Lee is 37 Many of his friends have their eyes glued to the movement of their stock market investments but not Lee He keeps a careful eye on the central bank A couple of years ago I took out loans worth 170 million won $150 000 at a variable rate to buy an apartment Lee said Thanks to the low interest policy my interest payment burden has been light as I pay around 500 000 won every month But if the central bank plans to raise the rate I expect the burden to be heavier especially since my wife and I are expecting a baby this July With an additional family member to feed and the interest burden I expect our family budget will get tighter The key rate known here as the base rate has been kept at 2 percent a historic low for 15 months That combined with an economic recovery already in full swing has Koreans rushing to banks to take out cheap loans Yet those burgeoning household loans have become a topic for concern as pressure on the Bank of Korea to raise the rate mounts Before completing his four year term in April Bank of Korea Governor Lee Seong tae said what he was most concerned about was rising household debt which could later become a burden on the Korean economy According to Kim Jong chang head of the Financial Supervisory Service though household debt is high the risk is low because the overdue payment rate is only 0 4 percent But that could change Even as global economies restart debt still lingers ready to plunge them back into crisis if regulators make a false move Enormous corporate debt exacerbated the Asian financial crisis in 1997 and 1998 tearing apart major Korean conglomerates and putting thousands out of work The global financial crisis of late 2008 started with a real estate bubble in the United States built on household debt The ongoing debt crisis now developing in southern Europe is fallout from Greek debt Although Korea s debt situation has not yet reached such a critical point studies show that it is edging closer The subprime mortgage crisis that shook the U S economy prior to the bankruptcy of Lehman Brothers didn t affect the Korean economy as severely because of the government s tight restrictions on mortgage loans put in place during the Roh Moo hyun administration in an attempt to cool speculation These real estate loan regulations continue to help keep the local financial market stable The economy s rapid recovery from the global economic downturn has also proceeded much more quickly than anticipated and more Koreans are now investing in financial assets At the same time experts say the Korean government must closely monitor the situation because a debt crisis is like high blood pressure symptoms seem minor until a catastrophic heart attack Already there are signs of lending growing at an alarming rate far more quickly than borrowers ability to pay Today even compared to other countries Korea s household debt is high Last year Korea saw household debt as a percentage of GDP rise to 80 9 percent according to the Hyundai Research Institute That was much higher than the 78 3 percent recorded in 2008 indicating Korea s household debt is increasing faster than the size of its economy The figure is still smaller than that of Britain or the U S at 102 3 percent and 97 1 percent respectively as of the third quarter of last year However Korea s debt relative to GDP is higher than the average 64 4 percent of OECD member countries as of 2008 Even more alarming is the rate at which household debt is increasing While developing countries such as Britain and the U S have been busy deleveraging particularly since the 2008 2009 global economic crisis Korean borrowers have been moving in the opposite direction thanks to low interest rates The recent BOK study showed Korea s ratio of household debt to disposable income was 1 43 and has been rising rapidly since 2004 whereas the U S debt to disposable income ratio fell from 1 29 in 2008 to 1 26 last year Even Japan has seen its debt to disposable income ratio retreat from 1 10 in 2008 to 1 08 in 2009 The biggest threat to Korea s economy is the real estate market which has been on the retreat despite the economic recovery Kim Hyun jeong head of the macroeconomics team at the Institute for Monetary and Economic Research said during a forum on Korea s household debt last week that the impact of falling real estate values will be substantial Households whose mortgage debt is more than 50 percent the value of the corresponding real estate or whose loan interest payments account for more than 40 percent of their income are considered high risk Kim explained and in 2008 14 9 percent of Korean household debt fell into this category If real estate values were to drop 10 percent according to Kim the proportion of high risk outstanding loans would increase to 19 percent A 20 percent drop would mean 22 6 percent of loans in the red zone Korean household loans are particularly vulnerable to drops in real estate values as the loans are heavily dependent on real assets particularly for high income families Kim said As more than 40 percent of the loans are supposed to be returned all at once the financial burden will be tremendous when debt repayments start Adding to Kim s fears Korean real estate does seem to be losing value Even in the so called seven bubble neighborhoods areas in Seoul where apartment values are notoriously high asset values are shrinking One possible solution would be to change the structure of loan maturity so that people could repay their debt over the long term Most mortgage loans in Korea have a maturity less than 10 years said Park Chang kyun a business administration professor at Chung Ang University Moreover our debt repayment is structured to have all of the principal loans be returned all at once and for that reason even the smallest change could lead households to collapse The professor said if banks refused to extend loan maturity a vicious cycle of bankrupt borrowers and liquidated apartments would ensue He called for stronger regulation of mortgages and for maturity periods to be extended to more than 15 years Banks have been recklessly increasing household loans without securing the means that would keep credit solid as the government has been easing regulations regarding sales practices said Seoh Geun woo an adviser at the Korea Institute of Finance In the long run such reckless behavior could be the cause of massive financial insolvency Jun Sung in an economics professor at Hongik University said financial institutions need to redirect borrowers toward loans with a fixed rate or long term returns and away from short term loans with a variable rate sensitive to policy changes Even a small shift could mean a major increase in payments According to the Bank of Korea and the Korea Finance Institute when the rate is raised 0 25 percentage points the interest burden on households is expected to increase 1 25 trillion won Among the 553 2 trillion won in outstanding household loans at financial institutions at the end of April 498 trillion won were based on variable rates which indicates that most households are vulnerable to a rising base rate A rise of 1 percentage point in loan interest rates would mean 5 trillion won in additional payments or 360 000 won per year per borrowing family in Korea It s not only the households that are vulnerable to the mounting debt interest payment once the rate goes up Outstanding loans to small and midsize firms as of the end of April stood at 601 1 trillion won 70 percent of it at variable rates A base rate increase of 0 25 percentage point would mean over 1 trillion won in additional annual interest payments for them according to the Bank of Korea while a hike of 1 percentage point in the second half would raise the burden by 4 2 trillion won The debate on whether the key rate should be raised to contain possible inflation and asset bubbles continues but the pressure to do so is growing Current BOK Governor Kim Choong soo kept the rate at its current level this month but during a press conference he dropped hints indicating that Korea may be headed toward an exit strategy Over the weekend the Korea Development Institute suggested pre emptive steps to normalize the low rate policy in order to control inflation pressure and bubbles The market seems to expect the central bank to raise the base rate as early as the third quarter of this year Already there are signs that the loan burden has been increasing Loan interest was low in the first two months of this year but has been rising since March In the first quarter of 2010 the average loan interest rate was 5 54 percent up from 5 39 percent a year earlier In a study by the Samsung Economic Research Institute the interest burden in the first half of this year was expected to reach 12 3 trillion won which is a 20 percent increase from the 10 1 trillion won posted in the first six months of last year To contain the interest burden the government has said since last year that it would direct lenders to recommend fixed rate products but to little effect The number of variable rate mortgages continued to rise and the number of borrowers opting for a fixed rate continued to drop At Shinhan Bank alone 86 percent of outstanding household loans as of the end of April were at a variable rate That was a 1 5 percentage point increase from March In order to prevent household debt from expanding further the role of the financial oversight agencies needs to be larger pre emptively managing risk by monitoring the sales practices of financial companies said Seoh the Korea Institute of Finance adviser Joo Jae seong FSS deputy governor on banking supervision said the government is planning to strengthen regulations on banks loan to deposit ratios which would lead to a reduction in household loans However he said there was a limit to how much household loans could be regulated since they are closely connected to the real economy and consumer spending In a report last month the Bank of Korea said that even if the base rate is raised the chances that households and small or midsize companies will default on their loans en masse are slim as the economy is in recovery with GDP expected to post more than 5 percent growth this year and the soundness of financial companies is improving The central bank also sees a higher base rate as an opportunity for households and small and midsize businesses to restructure any debt that they have accumulated during the days of the low rate policy therefore preventing any anxiety on the financial market in the future By Lee Ho jeong ojlee82 joongang co kr Copyrights ⓒ JoongangIlbo Joins com All rights reserved

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