More Long-term Financing such as MBS Needed
- Date 2009-03-05
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More Long-term Financing such as MBS Needed
To counter the real estate market triggered financial crisis, it is pointed out that financial institutions handling mortgage loans need to secure more financing through long-term bonds such as MBS (mortgage backed securities).
At the KHFC’s 5thanniversary seminar provided to institutional investors, Professor ManCho of Korea Development Institute asserted on March 5 that “Korea has a high percentage of adjustable rate mortgage loans and banks rely heavily on the short-term financing, increasing vulnerability to changing circumstances, for example, changes in the interest rate as well as the financial environment.”
In his lecture “Comparison between US and Korean Mortgage-MBS Markets and Prospects”, the professor said, “The percentage of adjustable rate mortgage loans in Korea is over 90% – much higher than the 20 – 25% seen in the US, Japan or the Netherlands.” He pointed out “if the benchmark interest rate or spread continues to rise in the future, it will result in a higher delinquency rate due to the heavier burden placed on the consumers.”
He said that “because of the LTV and DTI regulations, the housing finance market in Korea is not exposed to as much risk as the subprime mortgage market in the US had,” but, he emphasized that “the adjustable rate should be switched to a fixed rate while long-term financing should be promoted by issuing MBS to counter potential market risks.”
He went on to say, “As we saw in the subprime mortgage crisis, reduced liquidity can be a cause of uncertainties in the housing market during a recession. This is why there is a vital need for institutions that can provide adequate liquidity into the market regardless of the economic cycle.” He stressed that “KHFC should fulfill its role as the institution that stabilizes the market. We should also provide final mortgage financing by securing alternative financing channels such as overseas MBS, KHFC bonds and the Covered Bond issuance service.”
Executive Director Gang-yong Kim of KHFC requested institutional investors to increase their MBS investments, saying “MBS issued by KHFC is stable in its asset quality, and the payment is guaranteed 100% by KHFC. It is an excellent investment vehicle in terms of safety.” He added, “The BOK RP is risk weighted at 0%, making it more favorable in terms of liquidity and BIS ratio.”