[The Fountain] The cruel face of mortgage

Korea’s household debts are swelling to their worst, and they won’t just fade away. I only hope the judgment day that Koreans will face soon won’t be too harsh.

CHO HYUN-SOOKThe author is business news reporter of the JoongAng Ilbo. A mortgage is a loan taken out with a home as collateral. In English, all loans taken out with various real estate assets, such as a house or land as collateral, are called mortgages.

The etymology of this word is quite grave. “Mortgage” is a portmanteau of “mort,” which means death, and “gage,” which means promise. It started with the “contract of death” used in medieval French and British laws.

The story of this frightening term evolving to the real estate loan is explained in the Institutes of the Lawes of England by a 17th-century English barrister Edward Coke. If the money is not paid back in time, the land held as collateral will be taken away for good, and the debtor’s rights will be “dead.” If the money is paid back as scheduled, the creditor’s right will be “dead.”

The name has been given, as the contract ends only when the right of either the creditor or the debtor disappears forever. The principle is not different from the current system, but the implication is quite frightening to those who purchased an apartment, for instance, with a large loan.

According to statistics from the Bank of Korea, the balance of mortgage loans exceeded 800 trillion won ($604 billion) as of the end of March. Housing loans, which seemed to be slowing down for a while, began to increase again, adding 2.3 trillion won more in a month.

As housing prices began to collapse suddenly as interest rates went up last year, the government chose a strategy of “paying debt with another debt” instead of taking a standard method. The government eased real estate regulations and gave out special housing loans. It even pressured banks to lower their lending rates. They led to a strange situation, where commercial banks’ bottom lending rate of 3.6 percent per year is nearly equivalent to the central bank’s interest rate of 3.5 percent.

The government’s radical strategy worked. The decline in real estate prices has stopped, and transactions have resumed as increased loans supported it.

The mortgage always works. It gave new homes, land and wealth to healthy debtors but took everything from delinquent borrowers. That’s what happened in Japan when the real estate bubble burst in the 1990s and in the U.S. during the 2008 financial crisis.

Korea’s household debts are swelling to their worst, and they won’t just fade away. I only hope the judgment day that Koreans will face soon won’t be too harsh.