Housing Finance Panel: KOREAs EMERGING NEW HOUSING FINANCE SYSTEM

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Housing Finance Panel KOREAs EMERGING NEW
HOUSING FINANCE SYSTEM

• Bertrand RENAUD
• BRenaud_at_cal.berkeley.edu

- Session E-5 - Joint AREUEA-AsRES International
Conference Seoul,KOREA, 4-6 July 2002. 
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Housing Price Affordability
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Housing Finance Affordability

• Low interest rate environment in 2001
• NHF mortgage rate 8.0
• Bank mortgage rate 7.02
• Government 3-year bond rate 5.93
• Corporate 3-year bond rate 7.11
• Annual inflation rate under 3
• NEW IMPORTANCE OF AGGREGATE DOMESTIC DEMAND
  HOUSING SECTOR

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HOUSING FINANCE WORLD TRENDS
International Finance Institutions (WB, others)
1. Treasury 2. Central Bank
Social housing fund
Secondary Mortgage Facility (Four main types)

• Capital Markets
• Institutional investors
• Individual investors

Funds
Various forms of social housing
Funding
Primary Market 1. Deposit banks 2. Finance
companies

• Term savings
• Pensions plans
• Life insurance
• Mutual funds

Secured Housing Loans
LOW INCOME HOUSEHOLDS
MAIN HOUSING MARKET
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Structural Issues in Korea

• Secondary mortgage market development
• Primary/retail market development
• Need for new social housing finance tools
• Mortgage insurance
• Financing of private rental housing
• Need for non-ownership programs
• Rental Housing
• Integrated safety net for poorest families

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Secondary Mortgage Market Current Issues

• Potential for reduced lending spreads not yet
  realized. Reduced spreads are the LT goal.
• Initial 1999 myopic approach to Komoco
• Tactical focus on instrument to refinance NHF.
• Need for a broader strategic view of HF system.
• Need for more flexible ABS and MBS laws
• Missing benchmark for sound pricing of all
  present and future mortgage instruments
  fundamental and urgent
• Both a retail and secondary mortgage markets
  issue
• See Dr. Man Chos plenary presentation for an
  initial illustration of a benchmark mortgage loan
  in Korea.

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Retail Mortgage Market Development Issues

• Monopolistic private retail market Kookmin Bank
  share of private bank lending 85.
• NHF too large (55). Monopoly distribution share
  by Kookmin of NFH private loans is now 91.
  Unsound!
• Current refinancing competition by other banks
  with little mortgage market expertise is cause
  for serious concern
• Very rapid and risky shift to very short-term
  bullet loans (see graph)
• Sound Competition? Or another version of Mexico
  1990-1994 story?
• Future of Chonsei system
• Chonseis LTV size is rising in low rate
  environment
• But the user cost of Chonsei versus loan
  financing is shifting
• Need for social mortgage insurance to lower risk
• Need for expanding financing of rental housing
• Need for social safety net for excluded very
  low-income families

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HOUSING MARKET SEGMENTS AND THEIR FINANCING
Type of Financing
Household Income Distribution
Loan
High Income D8 to D10 ?
Financial System
Private Mortgage insurance
Savings
Social Mortgage Insurance
Loan
Middle and modest income D3 to D7 ?
Financial System small budget assistance

Savings
Transparent FTO subsidies?
Subsidy?
Integrated safety net
Direct subsidies in kind and in
cash/through non-financial institutions
Low income families D1 to D3 ?
Social housing other forms of assistance
Neighborhood Upgrading
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Social Housing Issues

• Need for expanding financing of rental housing
  What new role and funding policies for NHF?
• Beyond housing finance
• Helping those who cannot be reached through the
  market (D1-D2)
• Integrated social safety net for excluded
  low-income families. It is more than a purely
  housing issue.