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

This study examines the borrowing behavior of Korean households and the causes of loan defaults using hand-collected granular data. It tries to establish a set of models that determine the original amount and delinquency of loans, using financial and non-financial factors extracted from individual accounts and regulatory factors such as macroprudential tools as independent variables. Our empirical findings suggest several meaningful implications. First, the application of LTV and DTI regulations at the time 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) and also in mitigating loan defaults. Secondly, it is found that changes in housing prices are closely related to the size and delinquency of loans. A rise in house prices drives up loans due to the household’s affirmative attitude. Conversely, the downturn of house prices has a negative effect 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. 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 and therefore have weakened debt servicing capabilities.