The United States has weathered a housing loan crisis. According to the Hankyoreh, Is South Korea next?

South Korea’s current mortgage structure appears to be more dangerous than that of developed nations that have experienced financial crises due to real estate bubbles.

In most developed nations, mortgages are either long-term, over 20 years, or amortizing mortgages in which the interest and principal are paid simultaneously. In South Korea, many people have balloon loans in which the principal is paid back all at once at the end of the loan, and even if the interest and principal is paid back simultaneously, it is usual for borrowers to pay only interest for three or more years.　

Moreover, in fact, most borrowers extend the deadline or term period when it runs out. According to data announced by the Financial Supervisory Commission (FSC), 95 percent of balloon loan borrowers receive extensions. When one considers the size of balloon loans, which range from tens of millions of Won to hundreds of millions of Won, if the house is not sold, they are difficult to pay back.

“60 to 70 percent of loan borrowers ask for extensions after the term is over,” said one commercial bank loan officer. “Many people are just paying interest until they can sell their house, since paying back the interest would be too great. Ultimately, both households who borrowed money with their home as collateral and the banks that make the loans are sitting on a big powder keg growing increasingly likely to blow.”

Of all mortgages, about 80 percent of the total are just receiving interest without repayment of the principal: this is a deformity that came about as a result of the meshing of needs of domestic commercial banks and households over the last decade.

And, just when I was about to put It’s a Wonderful Life into deep DVD storage for all that mawkish stuff about community banking and home ownership! I can’t recall the number of similar balloon loans held by home-owners in the US in 2008, but I have to think any percentage over 25% is bad news.

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Filed under: Business/Economy, Korea Tagged: balloon loans, banking, mortgage loans, rok, South Korea