Kim Yeon-hee & Seo Eun-kyung

Mortgage Bonds on Menu for South Korea

Seoul. South Korean banks are set to return to the global mortgage securitization market and diversify their funding base, even if investor caution about Asian mortgage assets has recently raised costs for their securitized debt.

Following Kookmin Bank’s sale of $1 billion covered bonds in May, Woori Bank is aiming to sell $500 million worth of residential mortgage-backed securities around September, said an official from the country’s No. 2 lender.

Third-ranked Shinhan Bank is looking to sell about $500 million of RMBS later this year and Korea Housing Finance is eyeing a $1 billion covered bond sale in the second half, which will be its first offshore issue, according to industry sources and the agency.

South Korean banks aggressively expanded mortgage lending in the first seven months of this year, up an average 3 trillion won ($2.5 billion) per month, making up for stalled loan demand from big companies and poor sales of stock funds.

RMBS, which are debt assets based on pooled residential mortgages, are relatively new to investors in South Korea, because the country has less than a decade of mortgage history.

But solid underlying assets and rising apartment prices in Seoul and surrounding areas mean their mortgages have a lower chance of delinquencies. Restrictions on mortgages, through a reduced ceiling on home-backed loans, are also supporting their collateral value.

“S outh Korean banks have a relatively low loan-to-value ratio, negligible loss ratio and attractive coupon rates, considering the low-risk Korean mortgage market,” said Citibank Korea. “But a thin secondary market and prepayment risks remain negative factors for the global RMBS ma rket.”

Ko rean regulators say local banks cannot help but securitize more of their mortgage assets, to reduce their heavy reliance on deposits and other costly debt sales to fund home-backed loans, which have soared sinc e 2000.

The loan-to-deposit ratio of Korean banks hit 135 percent in April, but it was off its peak of 142 percent in July 2008, Hana Financial’s research institute said.

I n 2008, only 2 percent of banks’ mortgage loans were securitized, out of the total of 236 trillion won at the end of last year, said the Financial Supervisory Servic e.

Hong Kong Mortgage Corp. is one buyer, along with insurance firms and pension funds.

But challenges remain, including a limited investor pool, the absence of back-up systems for issuers’ bankruptcies in Korea and difficulty in pricing mortgage assets.

Local home-backed loans have complicated structures, including maturities and repayment plans, which are far from standardized. Only 5 percent of mortgage loan borrowers are in fixed-rates.

With an immature market and investors still cautious after the global credit crisis, Korean RMBS need to be sold through private placements, making the pricing more expensive than before, said an official at a top domestic bank, who asked not to be identified.

Korea’s mortgage loan delinquency ratio was just 0.43 percent in June, versus 9.4 percent for the United States in May, which was a 25-year high. Their loan-to-value ratio has been cut to 50 percent of the market price of a home worth 600 million won or more, from 60 percent since July. US subprime mortgages had a 94 percent of loan-to-value ratios last year.

Reuters

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