[Tracking Jeonse Fraud Reality] ① 'Jeonse Fraud' That Took Away Living Spaces

Organized Fraud Disguised as Asset Owners
Villa Village in Ruins, 2030 Generation in Tears

Editor's NoteAlthough the Constitution includes the Housing Lease Protection Act enacted in 1981, there are still dozens to hundreds of jeonse fraud cases every year. This indicates that the institutional framework is quite inadequate. Every time a jeonse fraud issue arises, voices call for reforming the system, but those calls last only briefly. As a result, as of January 2023, the problem has finally exploded. Asia Economy sought out victims suffering from jeonse fraud, listened to their stories, and uncovered the malicious methods used by perpetrators.

[Asia Economy Reporter Cha Wanyong] July 2014. In Sinheung-dong, Jung-gu, Incheon, a jeonse fraud victim, Mr. Son (45), left behind his wife and two children and passed away. He chose the horrific method of self-immolation. People were outraged by the tragic story of Mr. Son, who was a socially vulnerable individual, and the government promised to reform the jeonse system to prevent such tragedies from happening again.

More than eight years have passed since then, but nothing has changed. Although some recommended provisions were introduced, their effectiveness was minimal. On the contrary, jeonse fraud flourished by taking advantage of the recent years' real estate price surge. As the perception that houses are a channel for asset accumulation became widespread, investing in houses became normalized, and fraudsters disguised as investors or asset owners carried out organized fraudulent activities.

In areas with a concentration of mid-to-low priced villas such as Hwagok-dong in Gangseo-gu, Seoul, there have been consecutive cases of jeonse fraud crimes. The photo shows a panoramic view of the Hwagok-dong area.

Recently, the so-called 'Villa King,' 'Construction King,' and 'Villa God' have committed jeonse fraud involving over 6,300 units. Adding dozens to hundreds of other cases, the total revealed jeonse fraud amounts to about 8,000 units. A total of 844 people have been arrested, of whom 83 are in custody.

There are still many undisclosed jeonse fraud cases. The scale of the damage is unpredictable. In particular, during Asia Economy's in-depth investigation into jeonse fraud, previously unknown suspected cases were detected. Thirty-two urban-style residential units (one-room apartments) near a university area in Seoul were all found to be involved in sale fraud or jeonse fraud, and this was reported to the Seoul Metropolitan Government's Civil Life Crime Reporting Center.

◆Villa Village Residents Become Prey to Jeonse Fraud=Most of the housing types used in jeonse fraud are newly built villas or multi-family houses. This is because market price information is unclear, and it was easy to attract tenants by promoting benefits such as 'newly built' and 'full option.'

The target areas are places where newly built villas or multi-family houses cluster, prices are low, and demand is high. Hwaggok-dong in Gangseo-gu, Seoul; Sungui and Juan-dong in Michuhol-gu, Incheon; and Bupyeong-dong in Bupyeong-gu match these conditions. According to statistics by the Housing and Urban Guarantee Corporation (HUG) on the top 30 regions with concentrated management of jeonse deposit return guarantees, as of November last year, Hwaggok-dong recorded 737 cases of jeonse deposit non-return accidents, ranking first overwhelmingly. Following were Bupyeong-dong in Bupyeong-gu, Incheon (189 cases), Sungui and Juan-dong in Michuhol-gu, Incheon (160 cases), Sinwol-dong in Yangcheon-gu, Seoul (157 cases), and Gwangyang-si, Jeollanam-do (131 cases), each with over 100 related guarantee accidents.

In Hwaggok-dong, Gangseo-gu, where the highest number of jeonse fraud cases occurred, apartments account for only 14.7% (12,666 households). In Hwaggok 2-dong, 95.4%; Hwaggok 4-dong, 92.5%; Hwaggokbon-dong, 94.1%; and Hwaggok 8-dong, 93.5% of residents live in housing other than apartments.

Bupyeong-dong in Bupyeong-gu and Sungui and Juan-dong in Michuhol-gu, Incheon, are typical old city areas where fraudsters exploited the difficulty of comparing prices with surrounding buildings for newly constructed properties. As a result, most of the houses used in jeonse fraud were newly built villas or apartments within a single complex. Although called apartments, they are essentially urban-style residential units.

Jeonse fraud crimes exploited the real estate market situation where jeonse prices surged sharply in a short period. Especially those who lacked money to rent apartments became victims.

Jeonse fraud victim Kim Ji-yeon (33) said, "I was transferred to Seoul while working in Cheonan and had to find a jeonse in Hwaggok-dong. The apartment jeonse in Cheonan was 120 million won, but with that money, I couldn't find an apartment in Seoul." She added, "I looked around here and there but ended up renting a villa in Hwaggok-dong and became a victim of fraud."

Jeonse fraud mainly used the gap speculation method, buying houses with borrowed money. Fraudsters focused on newly built villas with high jeonse-to-sale price ratios or no established sale prices, purchasing them intensively and operating systematically by mobilizing corporations, figurehead owners, real estate agents, and brokers.

◆Seven out of Ten Jeonse Fraud Victims Are in Their 20s and 30s=More than half of the jeonse fraud victims are in their 20s and 30s. This is interpreted as reflecting Seoul's expensive housing prices and the increasing trend of single-person households. Additionally, the sharp rise in interest rates last year significantly increased the repayment burden on young people. As of the end of 2021, 93.5% of jeonse loan balances were variable-rate, meaning they were directly hit by interest rate hikes.

According to an analysis by the Ministry of Land, Infrastructure and Transport of 687 suspected jeonse fraud cases reported to the Jeonse Damage Support Center from September 28 to November 30, 30-somethings accounted for 50.9%, 20-somethings 17.9%, totaling 68.8%. Those in their 40s accounted for 11.3%, and those in their 50s 6.6%.

Also, the Housing and Urban Guarantee Corporation (HUG) 'Concentrated Management Multi-Household Debtor Status' confirms that jeonse fraud is concentrated among '2030 villa tenants.' This statistic classifies cases where HUG made subrogation payments three or more times and the unrecovered amount exceeded 200 million won. Among tenants who suffered jeonse fraud last year, three out of four were in their 20s and 30s.

According to the Korea Housing Finance Corporation (HF), as of the end of October last year, the amount subrogated by HF due to failure to repay jeonse loans to banks was 267.5 billion won (5,564 cases). Notably, more than half, 56.84% (152 billion won), was borrowed by people in their 20s and 30s. The proportion of 20s and 30s had maintained the low 40% range until 2020 but surged in 2021.

The problem is that this year, due to the combined effects of increased loan interest burdens from base rate hikes and falling house prices, the risk of 'empty shell jeonse' is high, likely causing continued jeonse loan damages.

According to data submitted by Rep. Park Sang-hyuk of the Democratic Party from the Housing and Urban Guarantee Corporation (HUG), among 709,026 houses insured under the landlord business guarantee insurance, 54% are 'empty shell houses' where the landlord's debt ratio exceeds 80%.

The debt ratio is the ratio of the sum of the landlord's mortgage loans and jeonse deposits to the house price. If this ratio exceeds 80%, even if the house is sold, tenants may not receive their deposits back properly, hence the term 'empty shell house.'