by Yoo Jaehoon
Published 20 Apr.2023 10:04(KST)
Across the country, cases of jeonse fraud using no-capital and gap investment methods are exploding like time bombs. This is due to the sharp rise in the base interest rate and the decline in housing prices that began in earnest last year. While the industry urgently calls for measures to protect victims of jeonse fraud, some also advise that it is necessary to reform the jeonse system itself, which has a strong private finance nature.
According to the financial sector on the 20th, even after the cases of Kim (42, nicknamed Villa King), who bought about 1,100 houses in the Seoul area and committed jeonse fraud before his death, and Nam (61, nicknamed Construction King), who owns about 2,700 houses mainly in Michuhol-gu, Incheon, incidents involving tenant deposit disputes are frequently occurring nationwide.
Recently, in Dongtan New Town, Hwaseong-si, Gyeonggi Province, landlord Park, who owns about 250 officetels, went bankrupt, causing tenants to be unable to recover their deposits. In the same area, Ji, who owns about 40 officetels, also filed for bankruptcy, increasing tenants' anxiety. In addition, jeonse fraud victims are emerging in Gyeonggi, Busan, Gyeongbuk, Pohang, and other regions.
These incidents occurring nationwide are fundamentally similar to 'reverse jeonse.' Due to the rise in the base interest rate and the resulting housing market slump, jeonse prices have fallen, putting landlords in a position where they cannot return tenant deposits. In particular, jeonse fraud cases have a greater ripple effect because certain landlords have exponentially increased the number of houses through no-capital and gap investments.
The problem is that these incidents are likely to expand further in the future. The related industry expects that incidents of jeonse fraud and tenant deposit non-return will frequently occur in areas with many villas and high jeonse rates, such as western Seoul, southern Gyeonggi, and Incheon.
According to a recent report by KB Financial Group Management Research Institute, the jeonse rates for villas in Gangseo, Gangdong, Songpa, Dobong, and Eunpyeong districts of Seoul ranged from 79% to 86%, while in Michuhol, Seo, Namdong, and Bupyeong districts of Incheon, they ranged from 81% to 92%. In particular, Michuhol-gu, Incheon, where the Construction King case occurred, had a jeonse rate approaching 92%, and in Gangseo-gu, where the Villa King case took place, there were several instances where the jeonse rate for newly built houses reached 100%.
In this situation, regions expecting a surge in housing supply are feared to experience further declines in jeonse prices and worsening reverse jeonse. For example, Hwaseong-si in Gyeonggi Province and Seo-gu in Incheon are expected to have about 22,000 new households moving in during 2023-2024, Yongin-si about 17,000 households, and Michuhol-gu in Incheon about 13,000 households.
Experts unanimously agree that reform is needed for the jeonse system, which is essentially a form of private finance. The Korea Research Institute for Human Settlements proposed the introduction of a 'deposit escrow system' in a report published last February. This system would require tenants to deposit a certain portion of their deposits, and for the remaining amount not deposited, mandatory subscription to deposit return insurance would be required to mitigate the risk of non-return of deposits.
At the financial sector level, the activation of 'non-recourse mortgage loans' and the 'risk-sharing loan system' have been suggested as alternatives. A 'non-recourse mortgage loan' limits the debtor's repayment responsibility to the collateral in case of default, so the debtor has no additional repayment obligation beyond the collateral. Financial institutions must properly evaluate creditworthiness when issuing loans, and if a loan is improperly issued, they must share losses exceeding the collateral. The 'risk-sharing loan system' links the housing price index with the loan system so that when housing prices rise or fall, borrowers and financial institutions share profits or losses accordingly.
Kang Min-seok, head of the real estate team at KB Financial Group Management Research Institute, said, "Since it is practically impossible to abolish the jeonse system itself, it is necessary to mandate subscription to deposit insurance and restrict loans on houses with excessively high jeonse rates to fundamentally prevent defaults." He added, "In this case, tenants who cannot get loans should be encouraged to switch from jeonse to monthly rent, which would be effective in preventing such incidents."
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.