Housing Finance Panel: KOREA’s EMERGING NEW HOUSING FINANCE SYSTEM

1. Housing Finance Panel: KOREA’s EMERGING NEW HOUSING FINANCE SYSTEM Bertrand RENAUD BRenaud@cal.berkeley.edu - Session E-5 - Joint AREUEA-AsRES International Conference Seoul,KOREA, 4-6 July 2002.

2. Housing Price Affordability

3. 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

7. 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

8. 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

9. 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 Cho’s plenary presentation for an initial illustration of a benchmark mortgage loan in Korea.

10. 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: • Chonsei’s “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

12. HOUSING MARKET SEGMENTS AND THEIR FINANCING Type of Financing Household Income Distribution Loan High Income D8 to D10 ? Private Mortgage insurance Financial System 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

13. 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.