[Exclusive] Empty Can Jeonse, Only 2.5 Billion Recovered Out of 173.9 Billion Won Jeonse Deposit Lost Due to Property Provisional Seizure

Claiming Reimbursement for Withheld Jeonse Deposit
From Auction to Property Pre-Seizure and Collection
Procedures Are Followed, but
Recovery Amounts Are Extremely Low
Concerns Over Public Guarantee Fund Deficits
Auctions Frozen Due to Real Estate Decline

[Image source=Yonhap News]

On the 28th, a citizen is receiving consultation from the Korea Legal Aid Corporation regarding the reporting of jeonse fraud damage at the Jeonse Damage Support Center located inside the Korea Chamber of Commerce and Industry on Hwagok-ro, Gangseo-gu, Seoul. Photo by Jinhyung Kang aymsdream@

[Asia Economy Reporter Koo Chae-eun] Although there is a legal procedure (subrogation claim) to recover the jeonse deposit withheld by landlords through provisional seizure of assets, the amount recovered is far less than the damage incurred. This is because many landlords who have embezzled the jeonse deposit are cash-flow negative, capital-less investors.

According to data submitted by the Housing and Urban Guarantee Corporation (HUG) to the National Assembly Land, Infrastructure and Transport Committee member Kim Doo-kwan of the Democratic Party on the 17th (‘Number of Subrogation Claims and Recovery Amounts for Jeonse Guarantee Incidents’), from 2019 to this year, HUG provisionally seized assets on 2,909 cases (173.9 billion KRW) of jeonse debtors’ owned houses with guarantee incidents, but only recovered 2.5 billion KRW. The recovery rate was only 1.43%.

The Jeonse Deposit Return Guarantee Insurance is a system where HUG compensates the subscriber (tenant) on behalf of the landlord when the landlord defaults on the jeonse deposit (subrogation payment). Afterwards, HUG claims subrogation rights against the landlord to recover the money paid. The procedure involves ① auctioning the house with the guarantee incident and claiming the bid amount, ② provisional seizure of the landlord’s other houses, and ③ collecting other assets such as the landlord’s salary and deposits. The lower the subrogation recovery rate, the greater the deterioration of public guarantee funds.

Real estate agent Jang Seok-ho said, “Many landlords who engage in gap speculation are capital-less investors. Although the guarantee institution can claim subrogation rights based on legal grounds, the actual amount recovered is almost nothing,” adding, “If the market freezes further, the recovery rate will decline even more.”

The problem is that the first step to recover the withheld jeonse deposit?the auction market?is also freezing. This is due to the real estate market downturn. As the number of auction bidders sharply decreases, the rate of failed auctions increases and the auction bid-to-appraisal ratio plummets. According to Gigi Auction, a court auction specialist company, the average auction success rate for Seoul apartments last month was 22.4%, down 14.1 percentage points from the previous month. This is the lowest figure since statistics began in May 2001.

In fact, from 2019 to this year (up to August), the total amount HUG paid on behalf of tenants (guarantee insurance subscribers) due to guarantee incidents reached 377.2 billion KRW, while the amount recovered through auctions was 96.5 billion KRW. Looking at the annual figures, in 2020, HUG made subrogation payments of 57.8 billion KRW due to jeonse guarantee incidents, but only recovered 7.7 billion KRW through auctions. Last year, 132.7 billion KRW was paid, with 43.8 billion KRW recovered via auctions. This year, 178.2 billion KRW was paid, and 44.5 billion KRW was recovered from auctioned properties.

Status of Auction Proceedings Related to Hug's Jeonse Deposit Return Guarantee (Source: Office of Kim Du-gwan, Democratic Party of Korea)

Agent Jang expressed concern, saying, “The past 3 to 4 years were a period of rising real estate prices, so recovery through auctions was possible, but it may become difficult going forward.”

Seo Jin-hyung, co-representative of the Fair Housing Forum and professor of MD Product Planning and Business at Gyeongin Women’s University, said, “Subrogation claims themselves are bad debts caused by landlords who lack repayment ability, so even if claims are made, recovery is difficult,” adding, “If the auction bid-to-appraisal ratio decreases, the recovery rate will drop further and the management environment of guarantee institutions will worsen.”

Seo added, “Ultimately, the screening for guarantee insurance should be strict, but the political sphere views it as a ‘social security system,’ so guarantee institutions face a dilemma,” diagnosing, “The more bad debts public guarantee institutions bear, the more it must be covered by taxpayers’ money.”

HUG explained, “We have established a Hidden Asset Reporting Center to recover assets whose whereabouts are unclear, such as overseas assets or assets under false names, held by malicious landlords.”