[Opinion] Subprime Mortgage Influenza

U.S. Subprime mortgage are loans for less creditworthy borrowers. Although they make up only 12 percent of the total mortgage market industry of the country, they are now the focus of an economic shock caused by the collapse of housing prices and interest rate hikes.

When the overdue loan rate increased from 11 percent in 2004 to 14 percent at the end of last year, and rose to 20 percent recently, the global financial market, entangled with complex transactions, experienced repeated shocks. The U.S. investment bank, Bear Stearns, paid two of its hedge funds off, and BNP Paribas, the biggest commercial bank in France, halted withdrawals from three of its funds. Although the U.S. Federal Reserve, Bank of Japan and the European Central bank tried to cope with the crisis by injecting money into the market, global stock prices, including Korean stocks, plummeted.

In the past, such financial crisis would have had an impact only on subprime mortgage lenders and investors. At present, however, it is even hard to estimate which lenders lost assets, since there are diverse derivatives involved that even experts are not acquainted with. Ten years after the financial crisis back in 1997 that began in the emerging markets, the effects of the U.S. subprime mortgage influenza are spreading around the globe again. Until recently, however, even Wall Street financials did not raise any concerns over the spillover effect of the U.S. subprime mortgage fallout.

In the financial market, uncertainties are even worse than evident risk. When investors are uncertain of the risks involved in their investment, they will opt for stable assets and be likely to pull their liquidated assets out of the emerging markets. A trivial change in the U.S. housing financial market is causing a huge impact on the South American and Asian economy and dealing major blows to stock markets. There is some statistical evidence that shows that when American or European stocks decline by two percent, the Asian stocks tend to face wider decreases of sometimes more than three percent.

A Chinese researcher raised concerns, saying, “China faces more serious problems when it comes to housing loan issues.” According to him, China will be more at risk in the aftermath of a bubble burst, since China does not have a well-established credit rating system for borrowers unlike the U.S. On the other hand, Korea is in better shape because various measures to make the credit rating in the mortgage market more conservative have helped to cool down the real estate market. Also, the amount of investment into U.S. subprime market by local financial institutions is no more than 800 million dollars. However, as long as the U.S. influenza continues, it would be wise for Korea to remain cautious.

Hong Ko-ni, Editorial Writer, konihong@donga.com