A study on mortgage loan borrowing behavior of Korean households : A micro perspective

Abstract

This paper examines Korean household's borrowing behavior and the causes of default using granular data. It tries to establish a set of models that determine the original amount and delinquency of loans, using as independent variables financial and non-financial factors extracted from individual accounts and regulatory factors such as macroprudential tools. Our empirical findings suggest several meaningful implications. First, the application of LTV and DTI regulations at the date of borrowing turns out to be very effective in reducing the amount of loans and household's leverage (loan-to-income ratio or loan-to-collateral ratio) and also in mitigating defaults. Second, it is found that changes in housing prices are closely related to the loan size and its delinquency. A rise in housing prices drives up borrowings due to household's affirmative attitude. Conversely, their downturn has a negative impact on the soundness of existing loans, heightening the motive for strategically defaulting, notably when the auction price of a collateral house is below its loan balance. Recently, loan demand has become less sensitive to interest rates due to the upsurge in borrowings for daily living expenses and business funds. Lastly, our vintage and age cohort analyses show that there are relatively higher default risks in loans extended during the period of steeply rising housing prices and in those of seniors whose loan-to-income ratios are much higher.