A closer look at ‘House Poor’

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Hi! Do you guys remember the articles I wrote on the topic of LTV and DTI regulations? Today, I am back with an article that is so closely related to these topics. I wonder if you guys have heard about ‘House Poor.’ It is a term referring to households having their own houses but regarded as being poor. Then, why are they poor even if they have their own houses? This is because those people purchase their houses with excessive mortgage loans at low interest rates, when the housing prices skyrocket. However, once those houses are purchased by the households with huge mortgage burdens, the interest rate begins to go up. Housing prices are suddenly falling, leaving those home buyers with irrecoverable debts. Those households might seem ‘middle-class’ with their own houses, but the reality is? With huge burdens of debt payment for housing, their purchasing powers are getting deteriorated.

In this article, I will introduce you guys the policy measures by Korean financial authorities to help those house poor. The policy measures are designed in an active cooperation with financial and banking industries. Let’s find out how the financial authorities have mapped their plans!

Few days ago, Korea’s Financial Supervisory Service (FSS) announced its press release about helping the house poor. It would take a while for the measures to be actually effective, but it seems that the plans are all set up now and just waiting for the last stage of review. The plans are as follows.

 

 

  1. The government will allow ‘Free Workout Policy’ for mortgage loans. Actually, this policy was particularly designed for short term delinquent debt. However, when free work out is allowed for mortgage loans, households applying for mortgage loans can be benefited from free workout policy. However, you should be a bit more careful about this policy, since it does not ‘cut off’ your debt burden but rather ‘reschedules or postpones’ the deadline for debt payment.
  2. FSS, in cooperation with Financial Services Commission (FSC) and some other financial entities, have decided to enlarge the ‘auction postponement system’ up to non-banking institutions too.
  3. Lastly, the plan includes cross-checking LTY (Loan to Value) and DTI (Debt to Income) ratios of collateral loans at a nation-wide scale. For those house poor who have loans from both banking and non-banking institutions do not have to worry about this, as they have a method of calculating the combined LTVs from both institutions.

Woori Financial Group, the largest financial group by assets in Korea, has announced a policy to save the house poor. Their policy is called ‘Trust and Lease Back’. It is aimed at supporting people who are having a hard time paying back the principal and interest for their mortgages. How does it work? Very briefly speaking, the financial institution will take control of the house and let the house poor live in the house by paying rental fees. “This policy can’t work with an effort of just one financial company. For a successful implementation, there should be cooperation between financial institutions along with FSS’s full support and guidelines”, said the president of FSS at a conference. Indeed, Financial Services Commission (FSC) has a little different opinion from FSS. FSC holds a view that it is too early at the moment to adopt such a measure introduced by FSS, considering that the overall housing price in average has not yet dropped from the high mark. Despite the views by FSS and FSC being a bit different, their rationale and ultimate policy goal are the same. That is, fully supporting the house poor by providing adequate aids.

All these policies look very outstanding and interesting. However, these policies would not work out well as intended, if financial sectors do not take collective actions harmoniously. For an active cooperation, FSS formed a T/F team composed of professionals from various institutions, on 20th of September. Korean economy is currently experiencing economic growth, as shown from its sovereign credit rating being upgraded. However, for further improvement, more careful attention should be paid to deal with domestic matters such as house poor problem. I personally hope that the government along with numerous banking and financial institutions work in cooperation to lead to the best result possible.

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