Kim Seok-dong, chairman of the Financial Services Commission, has again ruled out the need for the government to take emergency steps or special measures now to deal with the household debt problem. But he might be mistaken.

Kim reassuringly said at a recent seminar on household debt that there was no need for the government to intervene to help the so-called “house poor” because their indebtedness did not pose serious risks to the financial system.

The top financial regulator’s optimistic view was based on a stress test recently undertaken by the Korea Institute of Finance. Kim told the institute to conduct a comprehensive survey of indebted households to assess the magnitude of the problem.

The institute defines the house poor as households whose mortgage debt exceeds the current estimated value of their homes. As of June, some 100,000 households were found to be “under water,” with their aggregate debt amounting to 48 trillion won ($43 billion).

The institute’s definition of the house poor is narrow. Some research institutes use the term more broadly to refer to households that have difficulty repaying their mortgages.

The KIF call these households the “potential house poor.” They spend more than 60 percent of their ordinary income to repay interest and principal on their loans. The institute estimated some 570,000 households belonged to this category, with their combined debts totaling 150 trillion won.

The KIF then conducted a bank stress test and found that even if house prices fell another 20 percent from the current levels, domestic banks would still be able to withstand the impact.

A 20 percent drop in house prices would increase the number of underwater households by 46,000 and inflict losses of up to 16 trillion won on banks, bringing down their average capital adequacy ratio from the present 13.8 percent to the 12 percent range.

But the institute notes that a 12 percent capital ratio is still well above the currently required 8 percent and the 10.5 percent to be applied to banks from next year.

This test outcome led Kim to play down the need for the government to take action to sort out the mess in the housing market.

Yet the KIF has clearly underestimated the magnitude of the problem by excluding from its calculation mortgage borrowers who were only paying interest on their debt without repaying the principal.

In Korea, mortgages are usually extended to households with a grace period. During this period, a borrower only pays interest on his loan. After that, he repays the debt either in one lump sum or in installments, depending on the type of loan contract.

According to bank data, the amount of mortgages for which the grace period ends either this year or next year totals 102 trillion won. A significant portion of these loans could turn sour when debtors are required to repay the principal either in a lump sum or in installments.

The KIF also failed to take into account the households that have taken out mortgages not only from banks but also from nonbank financial companies using the same collateral. The combined loan-to-value ratios of these households could easily exceed the 60 percent limit.

If house prices fall by 20 percent, a substantial proportion of these households could find that the value of their houses has dropped to less than the amount of their outstanding loan balance.

More importantly, the KIF stress test ignored the risks facing households that have purchased an extra house with a mortgage and leased it out. Recently, rental deposits have increased sharply despite the downward trend in house sales prices. These deposits are a kind of debt as they should be redeemed when rental contracts expire.

According to the Financial Stability Report issued by the Bank of Korea, the actual loan-to-value ratio of these households averages 71 percent. This means a 20 percent plunge in house prices would drag many of them under water.

What is more disturbing about landlords going under water is that it increases the risk of tenants not collecting some portion of their rental deposits.

To tackle the household debt problem, it is important to understand its full dimension. The KIF’s survey has helped us understand the conundrum better. Yet it was not based on the worst-case scenario. It should analyze the problem more thoroughly and prescribe solutions based on it.