KB Financial "Increase Mandatory Subscription to Jeonse Deposit Insurance and Landlords Should Bear the Guarantee Fee"

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[Asia Economy Reporter Minwoo Lee] Despite the mandatory subscription to rental deposit guarantees, concerns remain high over deposits not being returned, leading to calls for expanding mandatory enrollment. It is also argued that the guarantee fee should be borne 100% by the lessor, who is the party responsible for the risk.

On the 10th, KB Financial Group Management Research Institute published a report titled "Rationalization Plan for Rental Deposit Guarantees" containing these points.

According to the report, the number of registered rental housing units has been steadily increasing recently, and the number of rental households, which had seen little change until now, surged significantly in 2020. In 2020, the number of housing rental business operators and registered rental housing units reached record highs at approximately 389,000 and 3.27 million units, respectively. Of the total household increase of about 583,000 in 2020, rental households accounted for about 95.8% (559,000 households).

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In this situation, although the government mandated subscription to rental deposit guarantees from August 18, 2020, to protect tenants, some tenants are still exposed to the risk of deposit non-return. As of 2020, the total number of rental households was about 7.64 million, but the number of registered rental housing units was only about 3.27 million. A significant number of lessors (those who are not housing rental business operators) are still not subject to mandatory subscription for rental deposit guarantees. Additionally, even among those required to subscribe, there are cases where the guarantee limit is exceeded (the sum of the jeonse deposit and senior claims exceeds the housing price), or tenants attempting to subscribe directly to the jeonse deposit return guarantee are blocked by housing price limits.

It was also pointed out as a problem that tenants bear 100% of the guarantee fee for the jeonse deposit return guarantee. When the lessor is not a rental business operator, tenants must subscribe directly and bear the entire fee. KB Financial Group Management Research Institute noted, "It is uncommon and unreasonable for the creditor to bear the entire cost in the concept of guarantee insurance."

The jeonse deposit return guarantee has a structure different from typical guarantee insurance. Usually, the debtor (lessor) is the policyholder who subscribes to guarantee insurance, but in the jeonse deposit return guarantee, the creditor (tenant) subscribes. Although the risk of tenants not receiving their deposit back arises from the debtor lessor, the creditor tenant must subscribe to the guarantee insurance and bear the guarantee fee.

KB Financial Group Management Research Institute analyzed that the fact that tenants are often in a weaker position despite being creditors in the housing market influences this situation. Tenants bear 100% of the cost for the jeonse deposit return guarantee they subscribe to voluntarily, but tenants must bear 25% even in the mandatory rental deposit guarantee that lessors must subscribe to. For example, subscribing to a jeonse deposit return guarantee for 500 million KRW results in an average annual cost of about 1.39 million KRW over two years, which is equivalent to paying an additional 50,000 to 60,000 KRW per month in rent.

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Despite the mandatory rental deposit guarantee, tenant protection remains insufficient. According to the Housing and Urban Guarantee Corporation (HUG), the number and amount of guarantee incidents increased dramatically from 13 cases and 1.7 billion KRW in 2015 to 3,694 cases and 633 billion KRW in 2020. In particular, the number and amount of guarantee incidents increased most significantly in 2019, following the sharp rise in rental business operators and registered rental housing units since 2018.

KB Financial Group Management Research Institute stated, "While the increase in guarantee subscriptions can be seen as a cause for the rise in guarantee incidents, the fact that over 3,000 cases (600 billion KRW) occur annually according to HUG statistics means that disputes over jeonse deposit returns should be recognized as a significant social issue. According to Statistics Korea's 2021 Household Financial Welfare Survey, the proportion of deposits in the net assets of jeonse households exceeds half, making rental deposit risk a potential household risk for jeonse households," expressing concern.

Therefore, it was argued that the rental deposit system needs improvement. First, mandatory subscription to rental deposit guarantees should be expanded. It is suggested that lessors expected to pose relatively high tenant risk?such as those whose rental deposit ratio exceeds a certain percentage of the housing market price (70%) or those owning a certain number of houses (3 or more) who are not housing rental business operators?should be required to subscribe. It was also emphasized that exceptions to mandatory subscription should be minimized.

Furthermore, it was judged that all lessors should gradually be required to subscribe to rental deposit guarantees and that the guarantee system should be unified. Gradually unifying the jeonse deposit return guarantee into the rental deposit guarantee would standardize the basic purpose and structure of the guarantee to a typical guarantee insurance model. At the same time, the guarantee fee should be changed so that the lessor, who is the contract holder and the party responsible for the risk, bears 100% of the cost.

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