Kwon Hyouk-se, governor of the Financial Supervisory Service, has recently warned of a new financial crisis, which may be triggered by household debt. The warning reflects the possibility of delinquencies soaring in home-backed loans if home prices continue to fall as they do now.
But it is not the home-backed loans alone that are posing a threat to the financial industry. A similar threat is coming from loans secured by commercial properties whose prices are also dropping.
Currently, homeowners are allowed to borrow up to 50 percent of the value of their homes in Seoul’s metropolitan area and 60 percent in other areas. But an increasing number of mortgages have exceeded the loan-to-value ratios as home prices continue to drop. At the end of March, the home-backed debt in excess of the 60 percent limit stood at 44 trillion won ($38.8 billion), up 2.6 trillion won from year-end.
The Financial Supervisory Service is urging banks not to immediately withdraw the debts exceeding the loan-to-value limit. Instead, it is calling on them to allow the loan terms to be renegotiated in favor of the borrowers. Such measures, if taken, will ease much of the borrowers’ repayment burden. They will also ease the fear of another financial crisis.
But it is not just mortgages alone that are exposed to an increasing risk of delinquency. Commercial property-backed loans have become risky too ― even more unsafe than home-backed ones, as the prices of stores and offices are continuing to fall as well. According to a report from the Bank of Korea, which looked into loans secured by commercial properties, the delinquency rate jumped from 0.97 percent at year-end to 1.44 percent at the end of May. The rate for home-backed loans was 0.93 percent.
Much of the blame lies with banks, which, blinded by their pursuit of profits, have not applied strict restrictions on commercial property-backed loans. When stores were offered as collateral, the banks mostly loaned amounts equal to 70 percent of the value or more. Combined quarterly net earnings from such loans reportedly ranged from 4 trillion won to 5 trillion won last year.
The last thing the banks should have to do in the face of soaring delinquencies is compete in withdrawing the loans against one another. That could prove suicidal. Instead, they would do well to allow delinquent borrowers to renegotiate their debts and even reduce them if necessary.