Regulatory debate accelerates after president's remarks
Only 10% of lease-business loans are apartment-backed... many individuals rely on "gap investment"
As President Lee Jaemyung has been calling day after day for stronger loan regulations on multiple-home owners ahead of the June 3 local elections, financial authorities are facing growing difficulties. As the pattern continues in which the authorities flesh out measures in line with de facto guidelines suggested by the president, concerns are mounting that policy direction is being set first without sufficient fact-finding. The financial authorities are now being pressed to design finely tuned policies that can be implemented quickly while enhancing effectiveness and minimizing side effects.
According to the financial sector on the 25th, recent discussions at the Financial Services Commission (FSC) on tightening loan regulations for multiple-home owners have been gaining both speed and intensity since the president’s public remarks.
When President Lee raised the issue of extending loan maturities for multiple-home owners via his social networking service (SNS) account on X (formerly Twitter) on the 13th, just before the Lunar New Year holidays, the financial authorities began reviewing a plan to tighten the Rent-to-Interest (RTI) ratio regulations for residential lease business operators by linking them to their annual rental income. Later, on the 20th, when President Lee again stated, “Why are you only reviewing RTI regulations? For fairness, extensions or refinancing of existing loans on multiple homes should be subject to the same lending regulations as loans for purchasing new multiple homes,” the discussion expanded to include restrictions on extending loan maturities. The president’s additional remarks effectively broadened the scope of the regulations.
The FSC has now effectively decided on a direction under which individual multiple-home owners and residential lease business operators who own apartments in designated regulatory areas such as Seoul and the greater metropolitan area will be subject to a loan-to-value (LTV) ratio of 0% when extending loan maturities, the same as for new loans. Until now, loans to lease business operators were customarily extended at maturity, but going forward the authorities intend to have those loans repaid instead. However, taking market conditions into account, they have decided not to uniformly expand the regulations to include real estate in non-metropolitan regions or multi-family housing.
A financial industry official said, “When the president posts a related message on SNS, the authorities interpret his intentions and move into policy review,” adding, “In effect, even the detailed direction is being indicated, and the regulations are being designed in a top-down manner.”
The problem is that policy direction is being set while the financial authorities still do not have a full grasp of the status of loans to multiple-home owners across the financial sector. This is why there are concerns that it will be difficult to predict the regulatory impact in advance.
An official at a commercial bank explained, “When a borrower takes out a new loan, we can check how many homes they own, but if they purchase additional homes afterward, that information is not reflected in the system,” adding, “On the ground, it is difficult to accurately aggregate the loan volume related to multiple-home owners.”
In this regard, the financial authorities are reviewing ways to share information with related agencies such as the National Tax Service.
There is also considerable skepticism about the impact on the market. The previous day, the FSC held its third meeting on loan regulations for multiple-home owners to review the current situation, and it was reported that of the roughly 15 trillion won in outstanding loans to residential lease business operators at the five major banks, only about 10% are backed by apartment collateral. For individual multiple-home owners, it is common to purchase apartments in regulatory areas, where prices are relatively high, using “gap investment,” in which the buyer takes over a property already occupied by a tenant under a jeonse lease, so the share of traditional mortgage loans may not be large. In addition, given that many of these loans are structured as long-term amortizing loans with maturities of 30 years or more, some analysts say that even if the loans are called in immediately, the short-term impact on the real estate market could be limited. Accordingly, there are projections that the recall of loans to multiple-home owners will have only a limited effect in terms of increasing the number of apartments for sale in regulatory areas.
On the other hand, there are significant concerns about increased housing insecurity for tenants. In response, the financial authorities are also reviewing measures such as deferring loan repayment until the tenant’s move-out date. There is also discussion that if multiple-home owners come under financial pressure, they may choose to sell homes in non-metropolitan regions first, rather than apartments in regulatory areas.
The financial authorities plan to announce, next week, household debt management measures that will include both market-stabilization effects and protections for tenants. The announcement, which had originally been scheduled for this week, has been postponed based on the judgment that more time is needed for fact-finding and for formulating detailed measures.
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