Korea Housing Finance Corporation Begins Payment Guarantee... Long-term, Fixed-rate Mortgage Loan Interest Rates Decrease

Financial Services Commission Announces 'Covered Bond Activation Plan'
Housing Finance Corporation and 5 Major Commercial Banks Hold 'Business Agreement Ceremony'
Issuance Rates Expected to Decrease by 5-21bp Compared to Bank Bonds Due to Payment Guarantee
Incentives for Financial Institutions Issuing and Investing in Covered Bonds
Covered Bond Re-Liquefaction Program

The Financial Services Commission is launching a 'payment guarantee service' by Korea Housing Finance Corporation (HF) as part of measures to expand fixed-rate loans, while promoting the covered bond market to establish a foundation for long-term, fixed-rate mortgage loans. With HF's payment guarantee, the issuance interest rate of covered bonds issued by banks will be reduced by up to 21 basis points (1bp=0.01%) compared to bank bonds, enabling consumers to access long-term, fixed-rate products at lower interest rates. Covered bonds are bonds issued secured by high-quality assets such as mortgage loans and government bonds, where investors have recourse rights against the issuer, and in case of issuer bankruptcy, they receive priority repayment through the collateral assets, ensuring high stability.

On the 27th, the Financial Services Commission announced that it held a 'Covered Bond Payment Guarantee Business Agreement Ceremony for the Activation of Private Long-term Mortgages' at the Korea Federation of Banks, with participation from HF and the five major commercial banks. The ceremony was attended by Kim So-young, Vice Chairman of the Financial Services Commission; Choi Jun-woo, President of HF; Jung Sang-hyuk, CEO of Shinhan Bank; Cho Byung-kyu, CEO of Woori Bank; and Lee Seung-yeol, CEO of Hana Bank, among others.

The payment guarantee service, starting from this day, is a follow-up measure to the 'Fixed-rate Loan Expansion Plan' announced in May 2023. Through HF's payment guarantee, banks issuing covered bonds can lower issuance interest rates, and investors can invest in long-term assets that are safer and require less capital cost.

When HF provides payment guarantees for covered bonds issued by AAA-rated banks, issuance interest rates are expected to decrease by 5 to 21 basis points compared to bank bonds of the same maturity. If banks pass on these reduced funding costs to the interest rates of long-term, fixed-rate products, consumers are expected to benefit from lower interest rates on long-term products.

HF also plans to promote a covered bond re-securitization program. This program involves HF purchasing 10-year maturity covered bonds issued by banks and issuing and selling securitized securities through a self-trust. By directly purchasing long-term covered bonds, which are currently difficult to absorb in the market, HF will facilitate banks' issuance and sale of long-term covered bonds. The long-term funds raised through this can be used to supply long-term, fixed-rate mortgage loans for houses valued over 600 million KRW, which are currently difficult to provide under policy mortgages.

The financial authorities will also provide various incentives to financial institutions issuing and investing in covered bonds in conjunction with the launch of the payment guarantee service. On the issuance side, when banks issue covered bonds with maturities of 10 years or more, they will be allowed to use the funds raised through issuance for loans within 1% of the bank's won deposits, with an additional recognition limit provided when calculating the won loan-to-deposit ratio. Furthermore, to improve the inconvenience of submitting and disclosing covered bond issuance-related documents, which have been done manually, and to manage related data electronically, the covered bond issuance and disclosure tasks will be integrated into the electronic disclosure system (DART) within this year.

On the investment side, various measures will be pursued to increase incentives for investors such as pension funds and insurance companies who wish to invest in long-term instruments to purchase covered bonds. Discussions will be held with related agencies to include covered bonds as eligible collateral securities for loans and settlement by the Bank of Korea. If included as eligible collateral, financial institutions holding covered bonds can provide them as collateral to the Bank of Korea, increasing the utilization of held assets.

Additionally, covered bonds guaranteed by HF have no risk weight under current capital regulations, so banks or insurance companies holding guaranteed assets do not need to set aside additional capital. This increases incentives to invest in covered bonds. The Korea Financial Investment Association and bond rating agencies plan to disclose the 'Covered Bond Market Yield Reference Rate,' which can be referenced when issuing and trading covered bonds, starting from the end of June to reduce investment uncertainty.

Vice Chairman Kim So-young emphasized the direction of encouraging long-term, fixed-rate products amid ongoing expectations of interest rate cuts, stating, "Expanding long-term, fixed-rate products is a policy direction that should be continuously pursued. Since issuance interest rates can be significantly lowered, it is timely as it allows consumers to access fixed-rate products with competitive rates compared to variable rates during interest rate cuts."

The financial authorities plan to continuously monitor the issuance and distribution trends of covered bonds and will identify and implement improvement tasks for activating covered bonds, including additional reviews on establishing swap banks and preferential contribution rates for Korea Housing & Urban Guarantee Corporation (KHUG), as needed.