[Jeonse's Betrayal] ① '85% Mortgage' Secondary Financial Sector 'Burden'... Government Auction Suspension 'Aftershock'

The government has decided to halt the auction process of the victimized properties involved in the Incheon Michuhol-gu jeonse fraud case linked to Mr. Nam Mo (61, also known as the 'Construction King'), effectively buying time. This move aims to protect victims who are in a situation where they have lost their jeonse deposits and are also required to vacate their homes.

The government and ruling party plan to follow up with measures such as granting priority purchase rights for the victimized properties and expanding low-interest loans. However, the financial sector views the recovery of victims' deposits as realistically difficult. Meanwhile, the secondary financial sector faces the risk of increased exposure due to this time-buying strategy.

Government buys time... Jeonse deposit recovery remains 'uncertain'

According to the financial sector on the 20th, the Korea Asset Management Corporation (KAMCO) and financial institutions will suspend auction procedures for properties confirmed as victims of the Incheon Michuhol-gu jeonse fraud starting today. This action follows a request for cooperation made during the inter-ministerial task force (TF) on jeonse fraud victim support held the previous day, asking banks and mutual finance institutions to immediately postpone auctions on loans they hold for 2,479 confirmed victim households.

The government also plans to seek cooperation to postpone auction procedures as much as possible for cases sold to third parties such as private non-performing loan (NPL) management companies. The government will continue to monitor the situation and consider additional measures if necessary.

Victims of jeonse fraud held a press conference on the 18th in front of the Presidential Office in Yongsan-gu, Seoul, urging the establishment of measures to address jeonse fraud damage. Photo by Dongju Yoon doso7@

This measure provides some relief to the victim tenants. If the auction proceeded and the property was sold, the victims would face the double hardship of losing their jeonse deposits and having to vacate their homes. Victim groups had previously requested a suspension of the auction process.

Of course, the auction suspension is a temporary measure and is seen as a stopgap. Under current regulations, if the creditor who applied for the auction requests a postponement, the auction can be delayed up to twice, with each delay lasting up to two months. This means the victims are likely to face the same situation again in a few months.

However, it is assessed that it is difficult to come up with practical solutions. Opposition parties such as the Democratic Party and the Justice Party have proposed that the Korea Land and Housing Corporation (LH) purchase the victimized properties and use them as rental housing to support victims. Many criticize this as unrealistic since the lessor (the jeonse fraudster) has already taken out mortgage loans up to the maximum possible amount, meaning that ultimately only the senior creditors, i.e., financial institutions, would benefit rather than the victims.

Additionally, victim groups and opposition parties have suggested a 'rescue first, recover later' approach, where LH and KAMCO purchase the deposit refund claims to return part of the deposits to victims and then participate directly in auctions to recover claims or acquire properties. However, the government and ruling party remain cautious.

At a press briefing held the previous day, Land, Infrastructure and Transport Minister Won Hee-ryong said about this approach, "KAMCO's acquisition of bad debt claims involves confirming losses of 50% or 70%, but it is unclear whether tenants would accept such loss confirmation," adding, "Demanding full refund means taxpayers bear the losses from fraud, but is there social consensus on this?"

Minister of Land, Infrastructure and Transport Won Hee-ryong is speaking at the ruling party-government council meeting on the eradication of jeonse fraud and victim support held at the National Assembly on the 20th. Photo by Hyunmin Kim kimhyun81@

In response, the government and ruling party held a meeting at the National Assembly this morning and announced measures including ▲ granting tenants priority purchase rights during auctions of victimized properties ▲ supplying low-interest loans (such as auction balance loans) ▲ full confiscation and compensation of proceeds from organized jeonse fraud crimes. However, these are considered difficult to serve as practical alternatives. Tenants who lost their deposits are likely to find it burdensome to take on victimized properties. Many of the victim tenants are young adults in their 20s and 30s, often early in their careers.

The financial sector realistically views the recovery of jeonse fraud victims' deposits as challenging. A representative from a commercial bank said, "Measures such as granting priority purchase rights and supporting low-interest auction balance loans may proceed to support victims, but the key issue is who will cover the jeonse deposits lost to fraud," adding, "Ultimately, the public sector must step in, but it is a difficult decision."

Secondary financial sector anxious over time-buying

According to data obtained by Asia Economy from the National Countermeasure Committee for Jeonse Fraud Victims, 85.2% (87 cases) of mortgages set on 102 lessors were held by the secondary financial sector. Specifically, Saemaeul Geumgo accounted for 30.3% (31 cases), credit unions 25.5% (26 cases), agricultural cooperatives and fisheries cooperatives each 13.7% (14 cases each), and savings banks and forestry cooperatives each 1% (1 case each). Primary financial institutions (commercial banks) accounted for only 7.8% (8 cases), and individuals or corporations made up 2.9% (3 cases).

In particular, Saemaeul Geumgo, credit unions, agricultural cooperatives, and fisheries cooperatives operate independently by each branch or cooperative, meaning that each must bear the risk individually. A mortgage is a form of collateral held by financial institutions when lending money. If the debt is not recovered normally and delinquency continues, the financial institution proceeds with auction procedures as a last resort. However, if all financial sectors participate in the auction suspension, these cooperatives or branches will be unable to recover claims during this period, increasing their burden. This raises concerns about the potential negative impact on the soundness of these cooperatives and branches.

In fact, reviewing disclosures from some mutual finance companies holding mortgage rights (as of the end of last year) shows that many had non-performing loan ratios exceeding 7%, with some reaching as high as 15.57%. The non-performing loan ratio, a key soundness indicator, represents the proportion of bad loans within total loans held by a bank. Generally, a ratio below 5% is considered healthy. According to the Financial Supervisory Service, the overall non-performing loan ratio for mutual finance institutions last year was about 1.84%. A mutual finance sector official said, "It will take time for the government to devise measures, and this is essentially buying time, so the financial sector must endure it," but added, "It is true that each cooperative must manage the risk during this period."

This content was produced with the assistance of AI translation services.