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12% of Housing Loans Rated Subprime
South Korea's high-risk mortgages similar to U.S. subprime loans are estimated to reach 34 trillion won ($36.5 billion), accounting for 12.3 percent of outstanding housing loans extended by banks and other financial institutions.
The Bank of Korea (BOK) said in a report Wednesday that it classified mortgage borrowers based on their credit records provided by credit rating agencies and found domestic banks extended about 19 trillion won in mortgages to people with poor credit records as of the end of last year, accounting for 9 percent of 217 trillion won in lenders' outstanding mortgages.
Also, insurers, savings banks and other non-banking financial companies extended 15 trillion won in housing loans, or 25.1 percent of the total 59 trillion won, to those who have a higher probability of loan payment defaults because of unstable job status or high liabilities.
"It is difficult to directly compare the extent of Korea's high-risk home-backed loans to those of the U.S. as local mortgage lenders mostly look into borrowers' home values, not their credit records, when deciding to give loans or not. But our estimates suggest that the country also has a substantial amount of housing loans extended to homeowners with poor credit histories who could default on mortgage payments," the central bank said.
It said the outstanding U.S. subprime loans reached $1.4 trillion late last year, accounting for 14 percent of the total, higher than Korea's 12.3 percent.
Freddie Mac and other U.S. mortgage lenders had aggressively extended mortgages even to homebuyers with poor credit ratings for years, betting on a continued boom in the housing market. However, home prices declined sharply since the beginning of the year, hitting mortgage borrowers hard, particularly those who took out loans at higher interest.
With falling home prices, a growing number of subprime loan borrowers have failed to pay interests as mortgage rates have surged amid liquidity shortage in the market. Many high-risk loan takers have faced foreclosure and rising defaults on subprime loans are putting pressure on mortgage lenders.
Also, financial services companies, including UBS and Citigroup, who purchased mortgage-backed securities for higher returns on the once red-hot housing sector, incurred huge losses and were forced to write off such losses from the U.S. subprime lending market, which worsened their bottom line.
The central bank said housing loan rates have increased at a fast pace over the past year, putting greater burden on households who borrowed mortgages and other loans. "Variable-rate loans account for over 90 percent of the country's outstanding mortgages. If interest rates continue to rise at the current pace, borrowers will have to pay higher interest, which could also worsen households' ability to pay loan principals."
It also said if a massive number of borrowers default on loan payments, it could destabilize the entire financial market, suggesting the government asks banks and other financial institutions to place a cap on mortgage interest rates and encourages homebuyers to take out fixed-rate loans.
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