By Na Jeong-ju
Staff Reporter
The government needs to ease tough rules on mortgages if property prices fall sharply, ranking finance officials said Thursday.
Lee Jang-yung, assistant governor of the Financial Supervisory Service (FSS), said the government should adopt a more flexible real estate policy to adjust the strict loan-to-value (LTV) and debt-to-income (DTI) ratios to protect lenders and borrowers.
``A decrease of real estate prices may raise default risks of financial institutions as well as borrowers and reduce the value of collateral,'' Lee said in a keynote speech at a symposium hosted by the Korean Finance Association in Seoul.
``To minimize the negative impact of a sudden collapse of housing prices on the financial market, the government should always check borrowers' debt repayment capabilities and risk management systems at financial firms.''
He suggested the government manage lending regulations on housing loans more flexibly. Currently, LTV and DTI ratios are applied strictly to prevent banks from extending excessive housing loans.
Banks currently apply a DTI ratio for loans backed by apartments or houses. The DTI ratio ranges from 40 percent to 60 percent depending on where homes are located.
The LTV ratio, the loan amount expressed as a percentage of the market price of the property, is also another key factor for banks to decide the loan amount. If the LTV ratio is 60 percent, a borrower can't receive loans exceeding 60 percent of the home price.
If housing prices fall, banks may move to recover loans to meet the lending rules, raising default risks for borrowers, Lee said.
``Given the importance of real estate in the country's economy, it is highly likely that a sudden fall of property prices may cause great financial instability,'' Lee said.
He called for the need to strengthen monitoring of sub-prime mortgage firms and private moneylenders, which are more vulnerable to unfavorable market changes than banks.
jj@koreatimes.co.kr