17.3 Trillion Won in Jeonse Eviction Loans as of Late April
Only a 5% Increase Compared to the Previous Year
As the reverse jeonse crisis becomes a reality, calls to ease regulations on jeonse eviction loan funds are gaining momentum. With voices from landlord organizations and related industries advocating for partial relaxation of the total debt service ratio (DSR) regulations on loans for jeonse deposit returns, authorities have begun reviewing the matter. However, some argue that this could merely postpone insolvency, emphasizing the need for supplementary measures.
According to the financial sector on the 1st, the outstanding balance of jeonse eviction loans (jeonse deposit return loans conditional on tenant eviction) at the four major commercial banks (KB Kookmin, Shinhan, Hana, and Woori) stood at 17.3059 trillion won as of the end of last month. This represents a 4.72% (779.6 billion won) increase compared to the previous year. Compared to the end of 2021, before the real estate price decline fully began (11.3427 trillion won), it has increased by nearly 6 trillion won.
Loans for tenant deposit returns under the government's special Bogeumjari Loan program are also significant. According to the Korea Housing Finance Corporation (HF), as of the end of last month, the number and amount of applications for special Bogeumjari Loans for tenant deposit returns reached 10,761 cases and 2.621 trillion won, respectively.
Industry insiders agree that as the second half of the year progresses, the reverse jeonse crisis is likely to worsen, making DSR regulation relaxation necessary. Although some regulations related to jeonse eviction loans were eased earlier this year, the DSR for each borrower is still capped at 40%, making it difficult to secure additional loans related to jeonse deposit returns.
The government also appears to be supporting the easing of DSR regulations as the reverse jeonse crisis materializes. On the 30th of last month, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho stated, "I have heard that many people are facing difficulties in loans related to jeonse deposit return guarantees," adding, "We will consider limited relaxation of loan regulations in this regard."
Inside and outside the authorities, there are discussions about easing the interest coverage ratio (RTI) regulations for real estate rental businesses alongside the DSR regulation relaxation. RTI refers to the ratio of annual interest expenses to rental income and is used as an indicator to assess the appropriateness of loans for real estate rental operators. According to the model standards for credit screening of personal business loans by the Korea Federation of Banks, banks can provide new loans if the RTI is 1.25 times or higher for housing rental loans (1.5 times or higher in speculative areas and speculative overheating districts) and 1.5 times or higher for non-housing rental loans.
A financial sector official said, "Since a significant portion consists of jeonse properties and considering the increase in loan interest due to last year's sharp base rate hikes, there are quite a few rental operators whose RTI does not meet the regulatory level," adding, "If this is eased, it could provide some breathing room for loans."
However, there are also strong concerns within the authorities and financial sector about such loan regulation easing. While loosening loan regulations may help prevent incidents of jeonse deposit non-return, it could merely be a temporary fix that postpones insolvency. If additional loans increase the bank's senior mortgage rights on the property, it could become more difficult to find new tenants, and even if new tenants are found, the possibility of jeonse deposit non-return may increase.
Moreover, with the delinquency rates of commercial banks surging, if such measures lead to loans exceeding landlords' repayment capacity, the risk of insolvency could expand further. There are also significant concerns that this could stimulate household debt, which has ballooned to record levels.
Therefore, authorities believe that even if regulations related to jeonse eviction loans such as DSR are relaxed, safety measures must be put in place. For example, easing loan regulations only for landlords who have subscribed to guarantees for returning rental deposits could prevent moral hazard. A financial authority official said, "There is a consensus among related agencies that the reverse jeonse problem is becoming a reality," adding, "It is necessary to minimize side effects from easing loan regulations."
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