[The Fountain] A looming subprime mortgage crisis

The household debt situation in Korea now is exactly the same. Inflation leads to the hikes, and, consequently, real estate prices fall. The market is taking these steps steadily.

CHO HYUN-SOOKThe author is the deputy economic news editor at the JoongAng Ilbo. “You just bet against the American economy. If we’re right, people lose homes. People lose jobs. People lose retirement saving, people lose pensions … Every 1 percent unemployment goes up, 40,000 people die, did you know that?”

This is a line from “The Big Short,” a 2016 movie about the 2007 subprime mortgage crisis that drove not only the American economy but the global economy into a crisis. Charley and Jamie, the cofounders of a novice hedge fund, bet on the collapse of the American real estate and financial market, and when they are happy to make a fortune, Ben Rickert, a former trader who had helped them, shouted like that.

As the Korean real estate market is sliding endlessly, it is yet to reach the bottom. It is still unknown how high the interest rate that busted real estate prices would rise or how long it will last.

What triggered the subprime mortgage crisis in the U.S. in 2007 was also the interest rate. The Fed raised the policy rate up to 5.25 percent from as low as 1 percent because of the worsening inflation. As the insolvency of housing mortgage loans hidden in the super-low mortgage rate surfaced, it led to the collapse of the financial market. Banks lent subprime mortgage loans to people who didn’t have proper jobs or incomes and encouraged them to buy homes.

The household debt situation in Korea now is exactly the same. Inflation leads to the hikes, and, consequently, real estate prices fall. The market is taking these steps steadily. There is a difference. The household debt against nominal GDP was 68.2 percent in the third quarter of 2007, but the ratio jumped to 105.2 percent in the third quarter this year. That means household debt cannot be fully paid off with the money earned by the entire country for a year.

In the meantime, the government repeatedly stresses that the possibility of “system risk” for banks to collapse one after another is small thanks to the loan regulations on the loan-to-value (LTV) ratio, the debt-to-income (DTI) ratio, and the debt savings ratio (DSR). The government is practically arguing that there is no problem because banks will continue to collect interest and principal according to the rising interest rates, whether the price of the house bought by getting an excessively large loan is halved or tenants lose their rent deposits because of landlords’ investment fraud.

Let’s go back to a scene from the Big Short. Hedge fund manager Mark Baum predicted the crisis. “For 15,000 years, fraud and short-sighted thinking have never, ever worked. Not once. Eventually you get caught, things go south … I just know that at the end of the day, average people are going to pay for all of this. Because they always, always do,” he says.