Mortgage Debt Pushed as Crisis Remedy Not Disease: Korea Markets
In Korea, mortgage-backed securities that triggered the global financial crisis in 2008 are being touted as a way of preventing defaults on household debt.
Korea Housing Finance Corp., which provides mortgages to low- to middle-income families, issued 22.7 trillion won ($21.4 billion) of such debt this year, 12 percent more than in 2012 and the most since its establishment in 2004, spurred by government efforts to promote fixed-rate, long-term home loans. Investors are also keen on the notes because they pay an average yield 30 basis points higher than government debt.
South Korean household debt totaled 81 percent of gross domestic product in 2010, higher than the 73 percent-average of Organization of Economic Cooperation & Development member nations. In 2011, the financial regulator urged banks to increase fixed-cost mortgages to lower the risk to borrowers of a surge in rates. KHFC has been buying these loans and repackaging them into securities.
“South Korea has avoided the worst scenario for its household debt crisis,” said Heakyu Chang, a Seoul-based director at Fitch Ratings Ltd. While the huge scale of the burden makes it vital to monitor, “the government’s moves helped lower vulnerability to a sudden hike in rates,” he said.
Seoul-based KHFC’s MBS are backed or securitized by loans issued under its own Bogeumjari brand, as well as those mortgages KHFC buys from domestic lenders that have fixed-rates that last for more than 10 years. Moody’s Investors Service rates KHFC’s long-term foreign currency notes, which come with a government guarantee, at Aa3, on par with South Korean government debt. Its MBS are rated AAA by the three domestic ratings companies, Korea Ratings Corp., Korea Investors Service, and NICE Investors Service Co.
The weighted-average interest rate of KHFC’s MBS dropped to 3.25 percent this year from 3.44 percent in 2012 and 4.30 percent in 2011, KHFC data show. The average spread over five-year government bonds narrowed to 30 basis points, or 0.3 percentage points, in 2013, the least since 2007.
“Our MBS have the same creditworthiness as Korean government notes but with a higher spread,” said Choi Hyuk Soon, a general manager in KHFC’s securitization department. “Because we’re selling notes with maturities as long as 20 years, we’re attracting investors with longer-term investment horizons. In this low-rate environment, investors want maximum yield for minimum risk, and our MBS fit that criteria.”
KHFC plans to issue about 24 trillion won of the debt in 2014, although the final amount hasn’t been decided, Choi said.
Some 4.3 trillion won of MBS sold by KHFC this year, or 19 percent of its total 2013 sales of the debt, have a maturity of more than 10 years, the company’s data show. Notes which mature in one to three years accounted for 41 percent while those with five- to seven-year tenors made up 40 percent.
“Demand for mortgage-backed securities is outstripping supply,” said Moon Hong Cheol, a fixed-income strategist at Dongbu Securities Co. in Seoul. “Investors such as insurers favor them because they come in a variety of maturities and offer higher yields with lower risk due to KHFC’s payment guarantee.”
South Korea’s Financial Services Commission said in June 2011 it would encourage banks to reduce the amount of floating-rate loans, because record household debt was posing a risk to the economy. Banks were told to lift the proportion of fixed-rate mortgages to 30 percent from the then 5 percent by 2016, and increase amortizing loans because the bulk of household loans at the time were interest-only.
By the end of June this year, the proportion of fixed-rate mortgages had risen to 17 percent of banks’ total mortgage loan books, Korea’s Financial Supervisory Service said on Oct. 1. Amortizing loans, where both the interest and principal are paid in installments, rose to 17 percent from 7.7 percent at the end of 2011. Banks will be encouraged to push on until they meet the 30 percent target.
Already those measures have helped improve the structure of household debt and reduce systematic risks posed to the South Korean economy, the FSC said on Oct. 2. KHFC’s mortgage-backed issuance more than doubled to 20.3 trillion won in 2012 from 10.1 trillion won in 2011.
“The government promoting fixed-rate, long-term mortgages was a key driver that spurred sales,” Dongbu Securities’ Moon said.
South Korea’s household debt, which includes loans and purchases on credit, rose 5.4 percent from a year earlier to record 991.7 trillion won as of Sept. 30, the Bank of Korea said on Nov. 21. Debt levels increased 5.2 percent in 2012, the slowest pace in eight years, BOK data show.
Ten-year government notes yield 3.620 percent, down 13 basis points from a high this year of 3.750 percent on Dec. 5, according to Korea Financial Investment Association data. The won, which has appreciated just 0.5 percent against the dollar this year, led declines in Asian currencies today after the Federal Reserve said it will reduce stimulus which has fueled demand for emerging-market assets. It fell 0.8 percent to 1,059.77 per dollar as of 11:55 a.m. in Seoul.
Asia’s fourth-largest economy will have the oldest population in the world in 2050, with the elderly, defined as anyone over 65, making up 38.2 percent of the total, according to data from Statistics Korea.
Pension funds and insurance companies have bought 47 percent of total mortgage-backed sales this year, KHFC data show, while banks accounted for a further 30 percent.
“Buying MBS can be a good solution for pension funds or insurers,” said Kim Eun Gie, a Seoul-based credit analyst at Hanwha Investment & Securities Co. “Amid an aging population, those money managers need to seek longer-term notes as their assets grow.”