metadata: authors: 0: author: Chang,Soon Taek
count: Korea, Republic of
docna: 0: docna: Mortgage lending in Korea : an example of a
            countercyclical macroprudential approach
docty: Policy Research Working Paper
subtopic: Urban Housing and Land Settlements,Legal Institutions of the Market Economy,Urban Governance and Management,Urban Housing,Housing Finance,Capital Markets and Capital Flows,Non Bank Financial Institutions,Capital Flows,Macroeconomic Management,Municipal Management and Reform
teratopic: Finance and Financial Sector Development
abstracts: cdata!: Regulatory regimes are actively
            discussing macroprudential policy. Korea pursued a
            countercyclical macroprudential approach to prevent the
            overheating of mortgage lending and to minimize the risk of
            loan default. The Korean financial supervisory authority
            made adjustments in response to both the condition of the
            housing market and trends in mortgage loans. The lessons
            learned from the Korean experience are applicable to other
            situations. First, regulations regarding loan-to-value and
            debt-to-income ratios and other restrictions on mortgage
            lending can be employed as an important part of a
            countercyclical framework. Next, measures need to be applied
            in a timely manner and according to the specific conditions
            of each country. Finally, authorities should preemptively
            prepare macroprudential instruments before banks enter a
            period of rapid mortgage lending to avoid reckless mortgage
            lending operations and weaken any speculative motive in the
            housing market.
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repnme: repnme: Mortgage lending in Korea : an example of a
            countercyclical macroprudential approach
display_title: Mortgage lending in Korea : an
            example of a countercyclical macroprudential approach
listing_relative_url: /research/2010/12/13237035/mortgage-lending-korea-example-countercyclical-macroprudential-approach
topicv3: Housing Mortgage Finance Products m1326719 2183,Macroprudential Policy m1327151 1128,Housing Finance m1327222 612,Land and Housing m1327648 817,Financial Institutions m1505015 3797
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Finance and Financial Sector Development
no_of_pages: 32
author_keys: 0: author_key: 1073734
model_extractions: WPS5505 Policy Research Working Paper 5505

# Mortgage Lending in Korea

An Example of a Countercyclical Macroprudential Approach _Soon-taek Chang_ The World Bank Financial and Private Sector Development Financial Systems-Prudential Oversight Department December 2010
Policy Research Working Paper 5505

# **Abstract**

Regulatory regimes are actively discussing macroprudential policy. Korea pursued a countercyclical macroprudential approach to prevent the overheating of mortgage lending and to minimize the risk of loan default. The Korean financial supervisory authority made adjustments in response to both the condition of the housing market and trends in mortgage loans. The lessons learned from the Korean experience are applicable to other situations. First, regulations regarding loan-tovalue and debt-to-income ratios and other restrictions on mortgage lending can be employed as an important part of a countercyclical framework. Next, measures need to be applied in a timely manner and according to the specific conditions of each country. Finally, authorities should preemptively prepare macroprudential instruments before banks enter a period of rapid mortgage lending to avoid reckless mortgage lending operations and weaken any speculative motive in the housing market.

This paper is a product of the Financial Systems-Prudential Oversight Department, Financial and Private Sector Development. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank. org. The author may be contacted at schang2@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **Mortgage Lending in Korea: An Example of a Countercyclical Macroprudential Approach**

Soon-taek Chang The author is a Senior Financial Sector Specialist in the Financial and Private Sector Development Vice Presidency of the World Bank (schang2@worldbank.org). The author particularly thanks David Scott for his detailed comments and suggestions, and gratefully acknowledges comments from Aquiles A. Almansi, Miquel Dijkman, and Damodaran Krishnamurti, and the editorial assistance provided by Yejin Carol Lee, Liudmila Uvarova (from the World Bank), and Beth Creason. The views presented in this paper do not necessarily represent the views of the World Bank. Most factual details presented in this paper were obtained from the Financial Supervisory Service of Korea. The author advises the reader to refer directly to prudential guidelines distributed by the Korean financial supervisory authority for any legal concerns.
# **1. Introduction**

_“The procyclicality of the banking sector can amplify cycles in the real economy and financial market instability can lead to severe downturns.”_<sup>_1_</sup> Macroprudential<sup>2</sup> measures to moderate financial cycles and to manage systemwide risks have been actively discussed since the onset of the global crisis relating to the subprime mortgage boom and burst. However, it is difficult to find the appropriate level and timing for macroprudential policy since policies can significantly affect the economy, including the financial system.

Macroprudential tools are capable of targeting particularly weak sectors and can impact credit growth. Specific measures include setting limits on loan-to-value (LTV) ratios in mortgage lending, on loan servicing costs relative to income, and on the use of unusual mortgage products. However, these measures may present several difficulties when put to use. Relevant issues include: when these instruments should be put into effect, which indicators to consider, and whether the measures should obey a simple rule or allow for more discretion (OECD, 2010).

This paper provides an overview of the countercyclical approach taken by the Korean financial supervisory authority (the Financial Services Commission/Financial Supervisory Service, FSC/FSS)<sup>3</sup> in response to rapidly growing residential mortgage loans<sup>4</sup> in the boom cycle of the housing market (Figure 1), and discusses relevant policy implications relating to the concepts and use of macroprudential instruments.

This paper describes the various schemes applied to mortgage loans, from indirect supervisory approaches like regulations on loan loss provisions, to direct approaches<sup>5</sup> like the regulatory LTV ratio.<sup>6</sup> Other countries have used countercyclical provisioning, LTV ratios, and direct controls on lending in particular sectors to manage financial system procyclicality (Caruana, 2010). In comparison, Korea’s case seems to be more dynamic and the applied criteria seem to be more restrictive. This difference in approach is attributed to several years of fierce lending competition by banks and rampant speculation by borrowers in housing markets, especially in the Seoul metropolitan area.

> 1 “Procyclicality refers to the mutually reinforcing interactions between the financial and real sectors of the economy that tend to amplify business cycle fluctuations and cause or exacerbate financial instability,”  according to the Committee on the Global Financial System (2010a, p. 8).

> 2 “The term ‘macroprudential’ refers to the use of prudential tools with the explicit objective of promoting the stability of the financial system as a whole, not necessarily of the individual institutions within it” (Piet Clement, 2010, p.65).

> 3 <mark>The FSC serves as a consolidated policy-making body. The FSS primarily examines and supervises financial institutions. The FSS was established in 1999 by bringing together four supervisory bodies.</mark>

> 4 This paper defines mortgage loans as banks’ household loans for housing purchases and other uses, secured by mortgages on residential properties.

> 5 Direct measures are those that directly regulate the terms and conditions of mortgage lending. Thus, the available amount of the loan for a borrower can be limited according to the criteria of the regulation.

> 6 The LTV ratio is defined as the ratio of a possible loan amount against the value of collateral. “It is a key indicator of the ability of the mortgage market to provide access to financing” (Jones and Yokoyama, 2008, p.17).

2
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# **2. Background on the Growth of Mortgage Loans**

## **2.1. Strong Housing Markets**

Compared to other cities in Korea, housing prices in the Seoul metropolitan area have been high. Housing prices, including those in Seoul, dropped precipitously after the Asian financial crisis of 1997. By 2000, housing prices had recovered somewhat.

Prices began to increase steadily in 2001. There was widespread worry that the price rise for properties in the southern areas of Seoul, with their well-planned urban infrastructure and good schools, could cause a real estate bubble. Furthermore, possible ripple effects from such a real estate bubble increased government concerns about the growing gap in income (Jones and Yokoyama, 2008).

In August 2005, the government began to set up new real estate policy packages to steady volatile housing costs. The packages were aimed at increasing the supply of housing, lowering housing prices, and restructuring the Korean property tax system. This last measure was intended to curb speculative demand by increasing the tax burden on high-priced houses and on owners of multiple houses (Jones and Yokoyama, 2008).

At that time, the supervisory authority’s prudential measure for mortgage lending was also included and considered one of the important measures to be used to reduce demand for housing.

## **2.2. Deregulation in Housing Finance**<sup>9</sup>

Housing finance in Korea can be separated into two eras: pre-deregulation and post-deregulation. Before housing finance was deregulated in 1996, over four-fifths of the housing finance market was public.

These loans were provided by the National Housing Fund (NHF). Lower-income households were thus able to receive rates below the going market rate. The Korea Housing Bank (KHB), in turn, provided housing loans to those with higher incomes.

In 1996, the Korean housing market structure was changed drastically: commercial banks entered into the long-term mortgage business. This followed in 1997 by the privatization of KHB. The Asian crisis of 1998 rocked the finance industry and spurred Korea to relax the governmental control over the housing market. A major element in this change was removing the mandatory sub-market housing prices in February 1998.

In 2004, these changes were continued with the establishment of the Korean Housing Finance Corporation (KHFC), which purchases long-term mortgages from commercial banks. This increased both the available liquidity and the length of maturity for mortgage loans.

> 9  The factual details presented in this section were obtained from “Determinants of house prices in nine Asia-Pacific economies” by Glindro and others (2008, p. 27-28).

4
<!-- Start of picture text --> (Year on year, by month, %) (BoK policy rate, %)<br>40 6<br>3 5 Gl Apartment purchase price index, Seoul<br>——BOoK policy rate 5<br>30<br>25 4<br>20<br>3<br>15<br>10 2<br>1<br>TM a TM a TM a TM wea TM a TM a TM a TM a WH nl<br>-5 So So So So So S Ss oS a oO<br>oO oOo oO oO Oo oO oO oO oO oO<br>N Ns N iN GN TMN N N TMN N<br><!-- End of picture text -->
<!-- Start of picture text --> (billion won) (percent)<br>300,000 Gam Trend of mortgage loans 18<br>280,000 ——Year on year, by month 16<br>260,000 14<br>240,0004 12<br>220,000 10<br>200,000<br>&<br>180,000<br>160,000 6<br>140,000 4<br>120,000 I | 2<br>100,000 ia)<br>4 ~ a ~ a TM~ a ~ 4 m 4 m a ~<br>st uy wo > oo a o<br>S oS i] > S So a4<br>oS So o =o oS oS o<br>om ol od mTM om om os<br><!-- End of picture text -->
# **3. Macroprudential Policy in Korea**

## **3.1. Emergence of Macroprudential Supervision**

Macroeconomic instability greatly affected the financial crisis in Korea at the end of 1997. The need for macroprudential supervision in Korea was highlighted by the bursting of the credit card bubble in 2003.<sup>13</sup> During the credit card lending boom, the supervisory authority did not respond adequately to the growth of household delinquencies stemming from the reckless behavior of credit card issuers. The authority was not sensitive to systemic distress originating from households because its prudential oversight was primarily focused on the soundness of individual financial institutions (Lee, 2006). This case underlined the importance of placing greater emphasis on detecting early warning signs before the build-up of excessive imbalances continued for too long (Kang and Ma, 2009).

After the credit card bubble burst, there was a new, widespread appreciation of macroprudential policy. Mortgage loans had increased sharply since 2000, which undermined the stability of the overall housing market. The supervisory authority has taken steps to prevent overheating in mortgage lending and to minimize the risk of loan default.

First, the supervisory authority raised the risk weighting for mortgage loans. The authority also raised the minimum loan loss reserve ratios for banks’ household and corporate loans that were classified<sup>14</sup> as normal and precautionary in November 2002 and in December 2006.

Second, in 2002, the authority started to reduce the maximum LTV ratio for mortgage loans, from approximately 75 percent to 40 percent in the Seoul metropolitan area.<sup>15</sup> The authority imposed additional measures, such as a ceiling of 40 percent on the DTI ratio for certain types of borrowers, as well as other restrictions on granting mortgage loans and maturity extensions on existing mortgage loans for properties in the Seoul metropolitan area. These various restrictions on mortgage lending were imposed on both banks and non-banking financial institutions.

> 13  “From mid-1998 to early 2002, the government pursued expansive economic policies to stimulate an economy struggling under the weight of a severe financial crisis. Credit card issuers began to compete fiercely for new card members in an attempt to expand their market share. What ensued from the perverse behavior were spiraling credit card delinquencies, which left the credit card companies with rapidly growing bad assets on their balance sheet. The distress in the credit card sector then quickly spread to other financial sectors. And with the economy in recession, many marginal companies and low-income households began to default on their debt.”  (Lee, 2006, p. 3).

> 14 According to the FSS Handbook (2010): “Banks are required to appropriately classify their assets and ensure their soundness. Bank assets are classified into five categories: (i) normal; (ii) precautionary; (iii) substandard; (iv) doubtful; and (v) estimated loss. Under these asset classification standards, the definition of each asset classification reflects the debt-servicing ability of the borrowers. Banks are required to set aside loan loss reserves in excess of the minimum regulatory ratios.”

> 15 The typical LTV ratio in OECD countries is generally much higher than in Korea and the guidelines on LTV ratios in other OECD countries limit the availability of loans by changing borrowing costs based on the LTV ratio (Jones and Yokoyama, 2008).

7
<!-- Start of picture text --> Year on year, by month (percent)<br>30 4 MMB Banks mortgage loans<br>25 4<br>—— Apartment purchase price index, Seoul<br>20<br>15<br>10 5<br>> linall |<br>2005.1 7 2006.1 7 2007.1 7 2008.1 7 2009.1 7 2010.1 7<br>s<br><!-- End of picture text -->
# **_Lowering the LTV ratio in 2002 and 2003_**

In September 2002, the FSS required banks to lower the LTV ratio on mortgage loans to below 60 percent of the value of the borrower-pledged real property from the prevailing 70 percent to 80 percent. In June 2003, the LTV ratio was lowered from 60 to 50 percent for loans with maturity of 3 years or less and backed by real properties located in speculative areas (Table 2).

Table 2. LTV Ratios, June 2003

||Speculati<br>House<sup>c</sup>|on Zone<sup>a</sup><br>Apartment|Overheated Spe<br>House<sup>c</sup>|culation District<sup>b</sup><br>Apartment|Other<br>House<sup>c</sup>|Areas<br>Apartment|
|---|---|---|---|---|---|---|
|**Not more than 3 years**|**50% or less**|**50% or less**|**50% or less**|**50% or less**|60% or less|60% or less|
|More than 3 years|60% or less|60% or less|60% or less|60% or less|60% or less|60% or less|

_Source_ : FSS.

a. An area designated by the Minister of Strategy and Finance pursuant to the Article 104-2 of the Income Tax Act.

b. An area designated by the Minister of Land, Transport and Maritime Affairs or the Mayor/Provincial Governor pursuant to the provisions of Article 41 of the Housing Act.

c. Refers to houses excluding apartments and apartments for commercial and residential purposes.

In October 2003, the LTV ratio for loans with 10 years or less maturity and backed by apartment units in speculative areas was further reduced from 50 percent to 40 percent (Table 3).

Table 3. LTV Ratios, October 2003

||**Speculat**|**ion Zone**|Overheated Spe|culation District|<br>Othe|r Areas|
|---|---|---|---|---|---|---|
||House|**Apartment**|House|Apartment|House|Apartment|
|**Not more than 3 years**|50% or less|**40% or less**|50% or less|50% or less|60% or less|60% or less|
|**More than 3yrs but not more than 10yrs**|60% or less|**40% or less**|60% or less|60% or less|60% or less|60% or less|
|More than 10 yrs|60% or less|60% or less|60% or less|60% or less|60% or less|60% or less|

_Source_ : FSS.

# **_Adjusting the LTV ratio upward in 2004_**

In 2003, government intervention, including the prudential measures, successfully resulted in the slowing of the growth in housing prices. As a consequence, there were fewer loan defaults and the growth of new loans was slowed. In March 2004, the FSS raised the LTV ratio from 60 percent to 70 percent for mortgage loans not generally used for speculative purposes: those with a maturity of 10 years or more and less than one year of interest-only payments (Table 4). This step aimed to promote longer maturity by addressing the short-term maturity structure of mortgage loans. The FSS did this to address concerns that excessively low LTV ratios were unfair to both borrowers and non-speculative homebuyers.

Table 4. LTV Ratios, March 2004

||Speculat<br>|ion Zone<br>|Overheated<br>Dis<br>|Speculation<br>trict<br>|Other<br>|Areas<br>|
|---|---|---|---|---|---|---|
||House|Apartment|House|Apartment|House|Apartment|
|Not more than 3 years|50% or less|40% or less|50% or less|50% or less|60% or less|60% or less|
|More than 3yrs but not more than 10yrs|60% or less|40% or less|60% or less|60% or less|60% or less|60% or less|
|More than 10 yrs|60% or less|60% or less|60% or less|60% or less|60% or less|60% or less|
|**Payment in installments(10yrs or more)**<sup>**a**</sup>|**70% or less**|**70% or less**|**70% or less**|**70% or less**|**70% or less**|**70% or less**|

_Source_ : FSS.

a. Refers to loans with fixed interest rates (and a grace period of one year or less, DTI of 40% or less), having a plan to sell the loan to the Korea Housing Finance Corporation or a plan for self-securitization.

10
<!-- Start of picture text --> Year on year, by month (percent)<br>30<br>25 Ml Banks' mortgage loans<br>20 — Apartment purchase price index, Seoul<br>15<br>10<br>5<br>0<br>2005.1 7 2006.1 7 2007.1<br>5<br><!-- End of picture text --> <!-- Start of picture text --> po Ff<br>a a ee ee ee<br>a<br>eens ees eee eee eee ee ee<br>a<br><!-- End of picture text -->
# **_Integrating the measures into the regulations on supervision in July 2007_**

The supervisory authority has made numerous announcements regarding measures for risk management of housing mortgage loans since 2002. In actuality, the announced measures were treated as requirements. However, the structure of the administrative guidelines did not support either a stronger administrative power or a strong legal basis for implementation.

In July 2007, a series of measures to strengthen the risk management of mortgage lending were rearranged into the Regulation<sup>20</sup> and the Detailed Regulation<sup>21</sup> on Supervision of Banking Business (Box 2). The measures that applied to non-banking financial institutions were also written in during the same time.<sup>22</sup> The official integration of the measures sent a signal that these measures would not easily be weakened within a short period of time.

The Regulation contains a section entitled “Standards for Risk Management of Housing Mortgage Loan” (see Appendix C). The separate Detailed Regulation contains a section entitled “Detailed Standards for Risk Management of Housing Mortgage Loan.”<sup>23</sup> Box 2. Excerpt from the Regulation on Supervision of Banking Business<sup>a</sup> The regulation on risk management on housing mortgage loans reads as follows: Article 29‐2 (1) A financial institution, when dealing with housing mortgage loans, shall abide by LTV (Loan‐to‐Value ratio), DTI (Debt‐ to‐Income ratio) and other restrictions, etc. on granting housing mortgage loans and extensions of maturity provided for in Appendix 6 in order to maintain the sound management pursuant to Article 45 of the Act.

(2) In cases where the Governor deems it urgently necessary in view of the management soundness of financial institutions, the Governor may adjust LTV and DTI provided for in Appendix 6 within the limit of adding or reducing 10 percentage points. In such cases, the Governor shall immediately report the details of such adjustment to the FSC (Financial Services Commission).

(3) The detailed criteria on calculation methods and applicable objects of the LTV and DTI provided for in Paragraph (1), and the details of handling housing mortgage loans and limitations on extending maturity shall be subject to the determination of the Governor.

_Source_ : FSS, Regulation on Supervision of Banking Business. a. The regulation of Risk Management on Housing Mortgage Loans was newly established on July 26, 2007.

20 “The purpose of the Regulation is to prescribe matters necessary for the enforcement of matters within the jurisdiction of the Financial Services Commission in relation to the supervision of financial institutions pursuant to the Banking Act and the Enforcement Decree thereof, and other relevant Acts and subordinate statutes” (FSS, Regulation on Supervision of Banking Business).

21 “The purpose of the Detailed Regulations is to prescribe matters relating to the enforcement of those under the jurisdiction of the Governor of the Financial Supervisory Service provided for in the Banking Act and the Enforcement Decree of the Banking Act, and other relevant Acts and subordinate statutes, or regulations established by the Financial Services Commission, such as the Regulations on Supervision of Banking Business” (FSS, Detailed Regulation on Supervision of Banking Business).

22 Those measures consisted of the Regulation (and Detailed Regulation) on Supervision of Insurance Business, the Regulation (and Detailed Regulation) on Supervision of Mutual Savings Bank Business; the Regulation (and Detailed Regulation) on Supervision of Mutual Financial Business; and the Regulation (and Detailed Regulation) on Supervision of Credit-Specialized Financial Business.

23 Available on the FSS website at “Detailed Regulation on Supervision of Banking Business <Appendix 18>”, <<http://english.fss.or.kr/fsseng/emdc/prs/fss_v.jsp?btmIndex=174&fssIndex=10090&selectType=0&find=>>.

12
<!-- Start of picture text --> Year on year, by month (percent)<br>30 5<br>25 Ml Banks'' mortgage loans<br>20 5 .<br>—— Apartment purchase price index, Seoul<br>15 4<br>10<br>ie] T T T T T T T T | I I | T T T T T T T T T T T T T T T T T T<br>2007.1 7 2008.1 7 2009.1 7 2010.1 7<br>5 |<br><!-- End of picture text -->
In July 2009, the FSS asked banks to voluntarily strengthen their mortgage loan risk management. In October 2009, the request was extended to non-banking financial companies.<sup>26</sup> The recommendations called for lowering the LTV and raising the DTI ratios for properties in certain zones of the Seoul metropolitan area, which were no longer classified as overheated speculative districts or speculative designation zones.<sup>27</sup> At that time, there were only three speculative districts in Seoul where the LTV ratio requirement remained at 40 percent.

As a result of these changes, the LTV limit was lowered from 60 percent to 50 percent in the following cases (Table 6):

- For apartment units with mortgage maturities of less than 10 years.

- For apartment units with mortgage maturities of more than 10 years but with a collateral value over KRW600 million.

- For non-apartment, detached units with mortgage maturities of less than 3 years.

Table 6. Change in the LTV Ratio for Banks in the Seoul Metropolitan Area, 2009

|||Apartm<br>|ent units<br>|Detache<br>|d units<br>|
|---|---|---|---|---|---|
|||Before|After|Before|After|
|Not more than 3 years||60% or less|**50% or less**|60% or less|**50% or less**|
|3–10 yrs||60% or less|**50% or less**|60% or less|60% or less|
|More<br>Collateral|more than 600Mil won|60% or less|**50% or less**|60% or less|60% or less|
|than 10 yrs<br>value|600 Mil won or less|60% or less|60% or less|60% or less|60% or less|
|Payment in installments|(10 yrs or more)<sup>a</sup>|70% or less|70% or less|70% or less|70% or less|

_Source_ : FSS Press Release, July 2009.

- a. Refers to loans with fixed interest rates (and a grace period of one year or less, DTI of 40% or less), having a plan to sell the  loan to the Korea Housing Finance Corporation or a plan for self-securitization.

The strengthened LTV and DTI regulations have subdued the upward trend of housing prices. Since early 2010, despite signs of economic recovery, several restraining factors have held this rising trend in check. These factors include anxiety about overvaluation of housing prices and the amount of unsold housing (FSR, April 2010).

This series of prudential measures seem to have generally protected the quality of loans. This is evaluated by using the average LTV ratio as an indicator of banks’ mortgage loan quality. At the end of July 2009, the average LTV ratio was 47.1 percent, compared to 74.9 percent in the United States (FSR, November 2009).

.

> 26  The currently applicable LTV ratio of 70 percent for non-banks (mutual finance companies, savings banks, and credit-specialized financial companies) was strengthened to 60 percent, starting in October 2009.  The currently applicable LTV ratio of 70 percent or less in regard to non-apartment detached units will remain in force unchanged. 27  The strengthened LTV limit excluded mortgage loans that have a combined total of less than KRW50 million from all lenders, mortgage loans for relocation, and balloon payments and mortgage loans for unsold residential units.

14
<!-- Start of picture text --> 12 (percent) @ Average of annual increase rate of housing prices, 2001-06<br>10 Ol Average of annual increase rate of housing prices, 2007-08<br>3<br>6<br>4<br>2<br>Oo<br>-2 3S & co & a Oo PF ww<br>-4 SO SP FS 1S a SP<br>“MP wr we ST SG Vs < FS<br>-6 =Ss we oFaad =ee Ssos<br>we<br>-3<br><!-- End of picture text -->
<!-- Start of picture text --> (Trend of LTV ratio cap, %) (BoK policy rate, %)<br>80 6<br>75 ----Trend of LTV ratio cap for apartment units, Seoul<br>semanam nan - 5.5<br>70 - \ —— Bok policy rate + 5<br>65 4 Hy - 4.5<br>60 --- ---, 4<br>55 ‘ a \ 3.5<br>50 1 H '<br>+ t-, H e—-- 3<br>45 ‘ ' 2.5<br>40 ‘t—_----- - - - - - - ‘ 2<br>35 1.5<br>a4 TM~ 4 TM~ 4 4 TM~ 4 TM~ 4 TM~ a4 ~ a ~ 4 TM~ 4<br>a N 0 st Va wo ~ co a fo)<br>So So So Ss > i] oS i] So =“<br>oO oO oO oO oO oO Oo Oo oO oO<br>N N N —N TMN N TMN TMN Ns Ns<br><!-- End of picture text -->
The Basel Committee recently suggested that authorities deploy a countercyclical capital buffer, possibly in tandem with other macroprudential tools, in order to ensure that the banking system had an additional buffer of capital to protect it from future potential losses when excess aggregate credit growth is judged to be associated with a buildup of systemwide risks.<sup>31</sup> The Committee also suggested that alternative tools, such as LTV limits, interest rate qualification tests, and sectoral capital buffers, be deployed in situations where excess credit growth is concentrated in specific sectors, but aggregate credit growth is judged not to be excessive or accompanied by increased systemwide risk.

Still, the buffer alone is not sufficient. Therefore, the authorities in each jurisdiction must use wide discretionary power to make concrete decisions on macroprudential policies and tools.<sup>32</sup>

# **The second lesson for macroprudential policy makers is that measures need to be applied in a timely manner and according to the specific conditions of each given country.**

Policy makers should examine and diagnose the country’s housing and mortgage lending market, including the government’s housing policy, as it may affect the supply of housing. Supervisors’ responses should adapt to changing economic conditions, including the response of the credit and housing markets. Regulatory measures need to be reviewed in response to fluctuations in the financial cycle.<sup>33</sup> In general, the fluctuations can be measured or evaluated by the increasing rate of credit or the amount of loans supplied for a certain period.

The rapid growth of the mortgage loans was not expected when the Korean government relaxed its controls over the housing market and finances after the Asian crisis. Therefore, it seems necessary to examine possible effects on the markets when an authority deregulates a prudential regime.

Stress tests also need to be conducted to check systemic weaknesses and risks. Since 2006, the FSS has conducted a series of stress tests on the likely impact of a sharp drop in real estate prices. The authority focused on the banking system’s exposure to mortgage lending and analyzed the effect of falling housing prices on bank profitability (Lee, 2006). Banks were also required to regularly conduct similar tests.

An effective collateral evaluation system and an income certification method are indispensable to banks in order to efficiently identify the risks in the financial environment.

> 31 “The Basel Committee agreed that a building block approach should be adopted to organize the work on procyclicality. The aim of this approach was to align the development of tools to address procyclicality according to a specific set of objectives” (Countercyclical capital buffer proposal, BCBS, July 2010, p.1).

> 32 N’Diaye (2009, p.21) notes that “countercyclical macro prudential rules, such as countercyclical capital adequacy rules, could support monetary policy in reducing output fluctuations while maintaining financial stability. The simulations also show that countercyclical capital adequacy rules can help mitigate swings in asset prices and, potentially, lower the risks of financial instability. Nevertheless, implementing and appropriately calibrating countercyclical macro prudential rules to individual country circumstances may be complex, particularly in cases where banks already exceed the existing capital adequacy requirements.”

> 33 There is a possibility that economic cycle is not consistent with the financial cycle.

17
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One requirement related to small and medium enterprises (SMEs) is particularly notable. It requires that no financial institution should grant a new corporate loan for small and medium enterprises secured by mortgage on an apartment in a speculation zone for the purpose of acquiring a residential house. This was announced in response to fierce competition among domestic banks to expand the scale of their assets in the wake of a real estate market boom. This was also intended to prevent SME loans from being used for speculative investing in the housing markets.

In 2007, the FSS announced proposals for systemwide improvement of mortgage loan reviews with the KFB and the banking industry, in order to shift loan review practices from being focused on collateral to being based on an assessment of ability to repay debt. The proposal encouraged lenders to improve their internal loan review processes based on best practices.

**The third and last lesson is that it is advisable for supervisors to preemptively prepare macroprudential instruments before banks enter a period of rapid mortgage lending.** This would avoid reckless mortgage lending operations and weaken any speculative motive in the housing market.

It was a tremendous challenge for the Korean authority to strengthen the standards needed to counteract rapidly growing mortgage lending and to slow run-ups in housing prices. Despite the fact that many of the borrowers lodged protests against policies that reduced access to credit for some people, prudential measures for mortgage lending have been recognized as an important instrument for reducing housing demand.<sup>35</sup> In fact, the rapid increase of housing prices was (and is) one of the main national issues, as it affects the distribution of wealth. Announcements of prudential measures have generated considerable criticism and a debate about the role of the financial authority. Some academics commented that the banking regulation had temporary and limited effects in restraining the demand for loans, and such regulations cannot be the essential remedy for the housing bubble. Newspapers commented that the measures were disadvantageous for the poor because some lower-income borrowers could find it harder to access credit to buy their houses in a boom phase.

By contrast, others pointed out that the measures should be toughened further because bank lending was continuously increasing after a brief slow down. Having experienced the housing boom and the recent crisis, most financial institutions and borrowers have gradually begun to understand the necessity for regulations on the mortgage market.

Although the quality of mortgage loans has remained generally sound, household debt has been rising faster than income because of mortgage loans for some time. Thus, the accumulation of household debt should be watched because it could weaken potential growth by reducing saving rates, thereby decreasing future capacity to consume (MPR, March 2010).

> 35  When a downward spiral of housing prices continues, the construction sector or house suppliers tend to want the authority to weaken the measures so that banks can provide more loans to homebuyers in a bid to spur housing transactions.

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# **5. Concluding Remarks**

_“It is a challenge to sound the alarm when profits are going up during lending booms.”_

**_---_** Taesoo Kang and Guonan Ma (2009)

In good times, when businesses and banks enjoy large growth in profits, it can be daunting for policy makers to make decisions that may counteract that growth. Similarly, during times when deregulation is popular, policy makers may be intimidated by going against public opinion and pushing new regulation.

However, it is imperative to maintain a big picture perspective. Rampant asset growth in the banking sector, as well as in the nonbanking sector, can lead to unsustainable bubbles in the financial and real sectors of economy. Therefore, it is vital that financial supervisors ensure that credit stability is a priority over rapid growth in profits.

Korea learned this lesson after suffering from both the Asian crisis of 1997 and the credit card collapse of 2003. The Korean financial supervisory authority was able to stabilize the overheated housing and mortgage lending markets by working jointly with the Korean government and the Bank of Korea.

Many other countries are currently undergoing events in their housing markets similar to those experienced by Korea in the mid-2000s. These countries are seeing their mortgage lending starting to expand, along with the level of risk associated with these loans. Instituting countercyclical measures now, such as those used by Korea, will help prevent financial institutions from becoming insolvent.

The applicability of Korea’s risk management scheme is not limited to mortgage loans. This concept is adaptable to other vulnerable sectors in the financial industry, such as credit loans and corporate loans. This method is most effective when paired with an early warning system to monitor the health of the financial industry.

Lessons in macroprudential policy learned from Korea can hopefully help financial supervisors and policy makers from other countries avoid the repetition of a similar crisis in the future.

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# **Appendix A. Mortgage Lending Policy: Regulatory DTI Ratio**

The regulatory debt-to-income (DTI) ratio is the total annual amount of redemption in principal and interest of the loan against the borrower’s annual income (Box A.1).

Box A.1. Calculation of Debt-to-Income (DTI) Ratio The redemption amount of principal per year for the relevant mortgage loan <u>+ the redemption amount of interest per year for other loans</u> X 100 Annual income _Source_ : FSS.

In addition to the applicable LTV ratio, the DTI ratio for some applicants has been limited since 2005. In October 2005, the DTI ratio was limited to 40 percent for married borrowers whose spouse already had mortgage credit and for unmarried mortgage applicants 30 years or younger seeking housing units in speculative areas (Box A.2).

In March 2006, the application of the DTI ratio was extended to include mortgage applicants purchasing a housing unit in a speculative area whose collateral value exceeded KRW600 million, in addition to the LTV requirement already in effect.

In November 2006, the application of the DTI ratio was expanded to include some additional speculative areas outside Seoul.

## Box A.2. Regulation on the DTI Ratio<sup>a</sup>

The 40 percent DTI regulation was set for a very limited range of cases:

1. For loans secured by apartments in areas of high speculation as designed by the government or certain metropolitan areas designated as areas of excessive investment by the government, with appraisal values of more than KRW600 million where the loan application date is within 3 months of the ownership transfer; or

2. For the following borrowers who: i) have a spouse who already has a loan secured by housing, or ii) are single and under 30 years old, applying for loans secured by apartment(s) located in areas of high speculation as designated by the government.

_Source_ : FSS a. Added to the regulation in July 2007.

In February 2007, the FSS announced proposals for systemic improvement of mortgage loan reviews with the Korea Federation of Banks and the banking industry, to shift loan review practices from being collateral-focused to being based on assessment of borrowers’ ability to repay debt. The proposal encouraged lenders to improve internal loan review processes through their own plan based on best practices.

In March 2007, banks set forth detailed criteria to apply different lending limits to each borrower within a 40 percent to 60 percent DTI ratio, varying according to the size of the housing unit, lending amount, borrower's credit rating, repayment method, interest rate, and evidence of income.

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In July 2007, the FSS released proposals (Best Practice) for systemic improvement of mortgage loan reviews for mutual savings banks, credit unions and credit cooperatives, and creditspecialized financial companies. The scope of application for the financial institutions is loans for apartments within areas of high speculation as designated by the government, and areas of excessive investment in the Seoul metropolitan area. DTI ratios of 40 percent to 60 percent are required for mortgage loans on apartments exceeding KRW300 million. The ratios are slightly higher for loans on apartments of lesser value (Table A.1).

Table A.1. Best Practice DTI Ratios, July 2007

|Collateral value|Loan amount|Bank|s, Insurers|**DTI base**<br>Savings banks, mutual finance<br>companies, credit specialized<br>financial companies|
|---|---|---|---|---|
||More than KRW100mil.|40%|Less than||
|More than KRW 300mil.|KRW50mil.–KRW100mil.|50%|60%|(same)|
||KRW50mil. or less||‐||
|KRW300 mil.<br>Surface area more<br>than 85m<sup>2</sup>|<br>More than KRW100mil.<br>KRW50mil.–KRW100mil.|**40%**<br>**50%**|**Less than**<br>**60%**|**45%**<br>**Less than**<br>**70%**<br>**55%**|
|or less<br>|KRW50mil. or less||‐|(same)|
|Surface area less<br>|More than KRW50mil.|**50%, le**|**ss than 60%**|**55%**,less than**70%**|
|than 85m<sup>2</sup>|KRW50mil. or less||‐|(same)|
||**Adjustments**<br>|**to DTI bas**<br>|**e**<br>||
|Fixed interest|Amortization|Cr|edit ratings|Income|
|+ 5%p|+ 5%p|‐ 5|%por + 5%p|‐ 5%p|
|_Source_: FSS.|||||

In September 2009, the continued upward trend in the metropolitan area’s mortgage loans led the FSS to recommend that the banks apply the DTI ratio to cover some non-speculative areas (previously designated speculative) in the metropolitan area (Table A.2).

Table A.2. DTI Ratios of Banks and Insurers, September 2009

|||Current coverae|**DTI ratio**<br>Exanded co|erae|
|---|---|---|---|---|
|Collateral value|Loan amount|g|p <br>|g <br>|
|||Speculative area|Seoul(excluding<br>speculative area)|Incheon,<br>Kyunggi|
|More than KRW600 mil|More than KRW50 mil.|40%|**50%**|**60%**|
|.|KRW50 mil. or less|‐|‐|‐|
|More than KRW 600 mil.|More than KRW100mil.|**40%**|**50%**|**60%**|
|(holding title for more than 3|KRW50 mil.–KRW100 mil.|**50%**|||
|months)|KRW50 mil. or less|‐|‐|‐|
|KRW300 mil.–KRW600 mil.|||||
||More than KRW100 mil.|**40%**|**50%**|**60%**|
|Surface area more than 85 m<sup>2</sup>|KRW50 mil.–KRW100 mil.|**50%**|||
||KRW50 mil. or less|**‐**|‐|‐|
|Surface area less than 85 m<sup>2</sup>|More than KRW85 mil.|**50%**|**50%**|**60%**|
||KRW50 mil. or less|‐|‐|‐|

_Source_ : FSS Press Release, September 2009.

Note: Insurers were recommended with the same criteria in October 2009.

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In October 2009, the FSS made recommendations to the non-banking financial companies<sup>36</sup> to include applying debt to-income (DTI) ratios for all the metropolitan areas (Table A.3).

# TableA.3. DTI Ratios of Non-banks, October 2009

|||Crrnt r<sup>a</sup>|**DTI ratio**<br>Edd|<sup>b</sup>|**DTI**|
|---|---|---|---|---|---|
|Collateral value|Loan amount|ue coveage|xpane cov|erage|adjustments|
|||Speculative area|Seoul (excluding<br>speculative area)|Incheon,<br>Kyunggi||
|More than KRW600 mil.<br>(holding title for 3 months or|More than KRW50 mil.|**40%**|**50%**|**60%**|‐|
|<br>less)|KRW50 mil. or less|‐|‐|‐||
|More than KRW600 mil.|More than KRW100 mil.|**40%**||||
|(holding title for more than 3<br>months)|KRW50 mil.–KRW100 mil.|**50%**|**50%**|**60%**|<br>Fixed interest<br>rates : + 5%p|
||KRW50 mil. or less|‐|‐|‐||
|KRW300 mil.– KRW600 mil.|More than KRW100 mil.|**40%**|**50%**|**60%**|<br>Amortization<br>schedule: +|
||KRW50 mil.–KRW100 mil.|**50%**|||5%p|
||KRW50 mil. or less|‐|‐|‐|<br>Credit|
|KRW300 mil. or less|||||ratings: ‐<br>5%p or + 5%p|
|Surface area more than 85|More than KRW100 mil.|**45%**|**55%**|**65%**||
|m<sup>2</sup>|KRW50 mil.–KRW100 mil.|**55%**|||<br>Income: ‐|
||KRW50 mil. or less|**‐**|‐|‐|5%p|
|Sf l th 85<sup>2</sup>|More than KRW50 mil.|**55%**|**55%**|**65%**||
|urace area ess an m|KRW50 mil. or less|‐|‐|‐||

_Source_ : FSS Press Release, October 2009.

a. Supervisory regulation (in excess of KRW600 million, mortgage loans taken out less than 3 months subsequent to title transfer) and financial companies’ internal guidelines (other loans) b. Maximum DTI ratio for apartments valued in excess of KRW300 million: 60% or less for Seoul 70% or less for Incheon and Kyunggi Province (currently 60% or less for speculative areas) Maximum DTI ratio for apartments valued at KRW300 million or less: 70% or less for Seoul 75% or less for Incheon and Kyunggi Province (currently 70% or less for speculative areas)

> 36  Non-banking financial companies refer to mutual finance companies, savings banks and specialized credit financial companies.

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# **Appendix B.  Other Oversight of Bank Lending Activities**

The following limitations were also issued by the financial supervisory authority.

## **Limitations on Housing Mortgage Loans**

June 2005. A new home mortgage loan for purchase of an apartment unit in speculative areas will be allowed once for any single borrower. For those borrowers who ended up temporarily owning two housing units, mortgage credit for the new house in the speculative area will be allowed with the condition that the old housing unit be sold within a year of new mortgage date.

August 2005. No new mortgage applications for the legally under-aged borrowers will be accepted. (Prior to this, there was no guidance on borrower’s age.) For borrowers with three or more mortgages in speculative areas, mortgage loans will be reduced to two.

January 2007. Rollover will be allowed for only one mortgage loan if a borrower has two or more mortgage loans backed by an apartment in a speculative area. The prohibition of multiple mortgage lending measures will be expanded to all financial sectors.

## **Limitation on Corporate Loans based on Apartment in Speculation Zone**

June 2005. No financial institution should grant a new corporate loan secured by a mortgage on an apartment is to be acquired after July 2005 in a speculation zone, except with special approval.

## **Response to the Herd Behavior in Bank Lending to SMEs**

To ensure the health of small and medium-size business loans, the financial authority stepped up its oversight on the credit evaluation methods used at banks to ensure that they are appropriate and watched over the use of loans to prevent funds from being used for purposes other than intended.

## **Easing of Mortgage-Servicing Burden in 2008**

November 2008. Borrowers who took out a second mortgage on the condition of the sale of the first property within one year will be exempted from having to sell the first property if the area of the second property was no longer declared a "speculative" area.

The exclusion coincided with the lifting of speculative designation of certain residential areas in southern Seoul by the government and significantly reduced the debt-servicing burden of many mortgage borrowers. Furthermore, borrowers who own two housing units and received financing on the condition that either of the units be sold within one year will be allowed to retain both housing units for up to two years.

Additionally, financial institutions will be allowed to grant a new corporate loan secured by mortgage on an apartment in a speculation zone, unless the corporate loan is for the purpose of acquiring a residential house, except with special approval.

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# **Appendix C. Standards for Risk Management of Housing Mortgage Loan**

## **CHAPTER I. General Provisions**

## **1. (Definitions) The terms used in these Standards shall be defined as follows:**

- a. “Housing mortgage loan” means a loan for household (including an asset-backed securitized loan) extended by a financial institution against houses. The loan falling into any of the followings shall be deemed as housing mortgage loan unless otherwise prescribed:

- (1) Intermediate payment loans and balance payment loans in case of parceling-out houses; (2) Or relocation expense loans for houses under rebuilding and/or redevelopment, intermediate payment loans and balance payment loans for additional allotted charges.

- b. “House” means a house prescribed under Article 2, Item 1 of the Housing Act.

- c. “New loan” means a newly extended loan, including increase of the existing loan amount, renewal of the loan agreement, refinancing, taking over of obligations, etc. However, in cases of extension of loan maturity, renewal of the loan agreement or refinancing in which only the conditions for interest rate or maturity are changed and the transfer of the existing intermediate payment loan to a balance payment loan without increasing the amount of loan, they shall not be deemed to be new loans.

- d. “Loan-to-Value ratio (LTV)” means the ratio of maximum amount of possible loan against the value of mortgage, which is considered at the time of extending a housing mortgage loan.

- e. “Debt-to-Income ratio (DTI)” means the ratio of the total annual amount of redemption of principle and interest of the loan against the borrower’s annual income.

- f. “Speculation zone” means an area designated by the Minister of Strategy and Finance pursuant to the Article 104-2 of the Income Tax Act.

- g. “Overheated speculation district” means an area designated by the Minister of Land, Transport and Maritime Affairs or the Mayor/Do Governor pursuant to the provisions of Article 41 of the Housing Act.

- h. “Seoul Metropolitan Area” means Seoul Metropolitan City, Incheon Metropolitan City, and Gyeonggido.

## **CHAPTER II. Loan-to-Value Ratio**

## **2. (Application of LTV)**

a. LTV at the time of extending new housing mortgage loans by financial institutions is as follows:

|||Specula<br> <sup>(1)</sup>|tion Zone<br>|Overheated Spe<br>|culation District<br>|Othe <br>|r Areas<br>|
|---|---|---|---|---|---|---|---|
||**Maturity**|House|Apartment|House|Apartment|House|Apartment|
|Not more t|han 3years<sup>(2)</sup>|50% or less|40% or less<sup>(2)</sup>|50% or less|50% or less<sup>(2)</sup>|60% or less<sup>(4)</sup>|60% or less<sup>(2) (4)</sup>|
|More than|3yrs but not more than 10yrs|60% or less|40% or less|60% or less|60% or less|60% or less<sup>(4)</sup>|60% or less<sup>(4)</sup>|
|More|Mortgage value:<br>more than600Milwon|60% or less|40% or less|60% or less|60% or less|60% or less<sup>(4)</sup>|60% or less<sup>(4)</sup>|
|than 10 yrs<br>|<br>Mortgage value:<br>less than600Milwon<br>|60% or less<br>|60% or less|60% or less|60% or less|60% or less<sup>(4)</sup>|60% or less<sup>(4)</sup>|
|Payment in|installments(10yrs or more) <sup>(3)</sup>|70% or less|70% or less|70% or less|70% or less|70% or less|70% or less|

Note: (1) Referring to the houses excluding apartments and apartments for commercial and residential purposes.

(2) In case of the intermediate payment loans and relocation expense loans for an apartment, the equivalent ratio shall be applied without taking the maturity into account.

- (3) Referring to the loan with fixed interest rate (and with the grace period of one year or less, DTI of 40% or less), having a plan to sell itself to the Korea Housing Finance Corporation or a plan for self-securitization.

- (4) In case of a house outside of the Seoul Metropolitan Area, for which a parceling-out contract was not

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concluded until June 10, 2008 after parceling-out procedures, if the house newly concludes a parceling-out contract between June 11, 2008 and June 30, 2009 and pay the contract deposit, the LTV of 70% or less applies. In such cases, the financial institution shall receive from the borrower a copy of the document issued by the Mayor or the head of _Gun/Gu_ proving that the house has not been parceled-out and a copy of the document issued by the Mayor or the head of _Gun/ Gu_ proving that there was a self-helping effort to parcel-out the house such as decreasing sales price by 10% or more or relaxation of parceling-out conditions whose effect is equivalent in its degree to the said decrease of sales price, and after checking the copy of the documents the financial institution shall calculate the LTV based on the decreased sales price (including the case of relaxation of parceling-out conditions).

- b. Despite the LTV prescribed in the above Sub-item (a), in case of taking over the loan of the existing borrower without changing balance amount, maturity, method of redemption and without extending additional loans, the LTV which was applied for the existing borrower may be applied for such taking over, and in case of transfer of the existing intermediate payment loan to a balance payment loan without increasing the amount of loan or change of the financial institution etc., the LTV at the time of extending the intermediate payment loan may be applied.

# **CHAPTER III.  Debt-to-Income Ratio (DTI)**

**3. (Applicable Objects and its Standards)** In case a new housing mortgage loan falls under any of the followings, financial institutions shall extend the loan within the borrower’s DTI of not exceeding 40%:

- a. Apartment mortgage loan in a speculation zone for the borrower whose spouse has taken out a housing mortgage loan more than once: Provided, however, in case where the borrower inevitably takes over the loan obligations in order to inherit or to participate in auction procedures or others held to secure creditor’s debt obligations, the application of DTI may be exempted.

- b. Apartment mortgage loan in a speculation zone for an unmarried borrower who is less than full 30 years of age: Provided, however, in case where the borrower inevitably takes over the loan obligations in order to inherit or to participate in auction procedures or others held to secure creditor’s debt obligations, the application of DTI may be exempted.

- c. Household loan in order to finance a borrower who newly purchases an apartment as a mortgage, whose market price is more than 600 million won, in a speculation zone or in an overheated speculation district within Seoul Metropolitan Area: Provided, however, in case of any of the followings, the application of DTI may be exempted:

- (1) A loan against an apartment for which three months, as at the date of extending the loan, have passed from the date of registration of title transfer (referring to the date on which the application for title transfer is filed with the registry office): Provided, however, if the purpose of the loan is deemed to avoid application of DTI, it shall be excluded;

- (2) A loan against shares (proportional ownership) of the rebuilding or redevelopment for which three months have passed from the date of application for the change of association member list, or from the date of registration of proportional ownership transfer;

- (3) A loan against an apartment which falls under any of the followings and three months have not passed from the date of registration of title transfer:

- a) Small amount of loan covering 50 million won or less (aggregated amount of loans in all financial institutions);

- b) Loan exceeding 50 million won which is deemed to be inevitably necessary to finance urgent business needs or other purposes and

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- obtained approval of the Credit Committee (or, other decisionmaking organization equivalent to the Credit Committee); or

- c) In case where the borrower inevitably takes over loan obligations in order to inherit or to participate in auction procedures or others held to secure creditor’s debt obligations; or

- (4) Loan for relocation expenses or additional allotted charges to be received as a result of the progress of rebuilding or redevelopment of houses after three months have passed since the acquisition of the houses.

# **CHAPTER IV. Execution, Limitations on Extension of Maturity, etc. of Housing Mortgage Loan**

**4. (Limitations on Execution of Apartment Mortgage Loan in Speculation Zone by Same Borrower)** A financial institution may not newly extend a loan for a borrower who has already secured a housing mortgage loan against an apartment in a speculation zone: Provided, however, that this shall not apply in any of the following cases:

- a. Regarding a borrower who has already secured a housing mortgage loan, if the balance of existing loan against an apartment in a speculation zone is within LTV, in the case of extending an additional loan (inferior priority) against the said apartment within the scope of LTV; or

- b. Where another loan is granted to a borrower, who already owes a housing mortgage loan, on condition that the residential house that the borrower already owns shall be disposed of (the transfer of title shall be completed) within two years after the new loan is granted (based on the registration date of transfer of ownership after the construction of a new apartment is completed, if the new loan is for intermediated payments or moving expenses) in connection with a contract for purchasing a new apartment and where a special agreement that the term of the mortgage loan for the new apartment shall be accelerated if the borrower is unable to prove that the disposition of the residential house that the borrower already owns and the repayment of the pre-existing loan have been completed on or before the prescribed deadline. <Amended on November 7, 2008>

**5. (Limitations on Maturity Extension of Apartment Mortgage Loan in Speculation Zone)** Regarding a borrower who has already secured two or more apartment mortgage loans (referring to household loans), a financial institution shall retrieve the loans in the order that whichever loan’s maturity becomes due earlier than that of others without extending the maturity and thereby eventually reduce the number of apartment mortgage loans for the same borrower in speculation zones to one case: Provided, however, that this shall not apply in any of the following cases:

- a. Maturity may be extended within the period of one year if there is a special agreement that the number of apartment mortgage loans in speculation zones be reduced to one case within a year from the time of maturity, and the borrower loses the benefit of time from the case of loan whose grace period is over if the borrower fails to perform the special agreement;

- b. In case of two loans, if the maturity of the existing apartment mortgage loan becomes due earlier than that of the loan for financing intermediate payment (including the loan for relocation expenses), the maturity may be extended if there is a special agreement that the number of loans be reduced to one case within a grace period (one year) from the time of maturity of the loan for financing intermediate payment; thereafter, even when the maturity of the loan for financing intermediate payment becomes due, the maturity may be extended with a special agreement that the number of loans be reduced to one case within a grace period (one year);

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- c. In case where the title transfer by sale is restricted for all the owned apartments, the grace period may be adjusted if there is a special agreement that the number of loans be reduced to a case within one year from the first time when the maturity restriction ends;

- d. A grace period of additional one year each may be granted in any of the followings:

- (1) In case of the loan secured by a house as mortgage to be inevitably used by the borrower’s parents, children, or spouse who is/are actually residing in the address (referring to the address on the copy of resident registration) different from that of the borrower: Provided, however, the total number of such loan shall be one case; or

- (2) In case where the disposition of a house owned is impossible due to court’s provisional seizure or injunction for prohibition of disposition, destruction of the house by fire or natural disaster, or objection to the sale by a co-inheritor or a co-owner of right of share, etc; or

- e. In case of the loan under a special agreement with the condition of disposition pursuant to the Sub-item (b) of Item 4; and the case of the loan secured by an existing house (i.e., the house to be disposed).

# **6. (Limitations on Acquisition of Mortgage and on Execution of Housing Mortgage Loan for Minor Borrower)**

- a. A financial institution shall not extend a new housing mortgage loan for a minor (excluding a minor who is married) as at the date of loan extension: Provided, however, this shall neither apply to the loan within 40% of DTI for a minor who has no parents such as the minor who is the head of a household, etc., nor to the loan for a minor who inevitably takes over the loan obligations due to inheritance, etc.

- b. A financial institution may extend the maturity, only one time and for maximum one year, of the residential mortgage loan for a minor borrower (including the case in which a third party provides a mortgage): Provided, however, the financial institution may exceptionally extend maturity for a minor borrower who has no parents, such as a minor who is the head of a household, etc.

- c. In case where a borrower was a minor at the time of the loan extension and thereafter became an adult when the maturity is due (including the time when the grace period of a year is over), a new loan may be extended after the existing loan is retrieved.

**7. (Limitation on Corporate Loan based on Apartment in Speculation Zone)** No financial institution shall grant a new corporate loan secured by mortgage on an apartment in a speculation zone for the purpose of acquiring a residential house, except where it is approved inevitable. <Amended on November 7, 2008>

**8. (Principles of Deliberation for Residential Mortgage Loan)** A financial institution shall, at the time of extending a residential mortgage loan, thoroughly conduct the credit review, by comprehensively taking into account of the overall credit rating, etc. based on the borrower’s ability to repay, such as income etc., and on the evaluation of the borrower’s personal credit

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