Government announces measures to stop jeonse fraud

The government will be lowering the state-owned Korea Housing and Urban Guarantee Corporation's (HUG) backing of jeonse loans from 100 percent to 90 percent of the housing unit’s value. Sone 1,207 people have fallen victim to such fraud.

A neighborhood in Eunpyeong, Seoul, full of low-priced housing units also known as villas with more high-valued apartments in the backdrop. [YONHAP]

The government has decided to lower government-backed jeonse loans as a measure to preventing fraud.

Jeonse are very large refundable deposits paid up front for rent-free occupancy for a fixed period.

In a joint announcement by the Finance Ministry, Land Ministry, Justice Ministry and National Police Agency, the government will be lowering the state-owned Korea Housing and Urban Guarantee Corporation's (HUG) backing of jeonse loans from 100 percent to 90 percent of the housing unit’s value.

The reduction will take place from May, with the grace period protecting tenants who have already signed contacts with their landlords. It takes about two or three months for the payment process to be completed.

Under current regulations, HUG guarantees the full value of the housing unit when a person seeks a jeonse loan. If the value of the housing unit is 200 million won ($164,000), the person receives a guarantee for all 200 million won.

The system allows people with low credit scores to secure jeonse loans from commercial banks such as KB, Shinhan, Woori and Hana with lower interest rates than non-financial companies such as mutual saving banks, credit companies or insurance firms.

In recent years, government-backed jeonse loans have been used in fraudulent schemes to buy large numbers of low-value housing units that are later rented out.

The government announced other preventive measures, including strengthening penalties on real estate agents or certified appraisers involved in fraudulent schemes.

Real estate agents who commit fraud or more serious crimes will have their licenses immediately revoked, even when they receive suspended sentences.

Under the current law, the real estate agents have their licenses revoked only when they do jail time.

The government will also reintroduce a cap on the assistants that real estate agents may have. Licensed real estate agents were allowed to have no more than four assistants until 1999, when the cap was abolished.

The reforms will be introduced in June.

Land Mnister Won Hee-ryong explains the HUG's jeonse app during a briefing held at the government complex in Seoul on Thursday. [YONHAP]

The government will also improve the transparency on information of low-priced housing units — also known as villas — including market value and auction information.

HUG has created an app that includes not only information on abusive or dodgy landlords, but also on whether houses for rent have outstanding taxes.

Unlike apartments, villas in Korea are plagued by poor information, making them more vulnerable to fraud.

The government created in July a task force that investigated jeonse-related fraud, especially fraud involving villas, whose tenants are largely low-income households.

The government estimated that 1,207 people have fallen victim to such fraud, suffering 233.5 billion won in damages.

Most victims were young people in their 20s and 30s who lacked experience or knowledge and relied heavily on their real estate agents.

“Large-scale damage spread as factors like falling housing prices, systemic blind spots for tenants and specialized fraud rings overlapped,” said Finance Minister Choo Kyung-ho. “The government has been working on jeonse fraud since the second half of last year ... and we were able to achieve small results, including apprehending the people behind the so-called ‘villa king’."

Many punters have taken advantage of the current system to make leveraged bets. For cheaper apartments in Korea, the jeonse amount is often close to the market price of the property itself, so the deposit can almost pay for the property. Real estate empires can be amassed with little capital and no need to go to the bank.

The scheme works if real estate prices keep rising, if the owner can get one tenant to replace another without any vacancy, if the rules of the game remain the same and if the mastermind can manage the accounting nightmare of dealing in and keeping track of so much unsecured debt. It fails if any one of the many participants fails to play their part, or if any of the conditions change.

In the end, jeonse tenants face major financial losses if the apartment is seized by the government due to large amounts of unpaid taxes, as is often the case with the scheme.

Under the current law, when an apartment is seized by the government and auctioned, proceeds of the sale first go to repay the outstanding taxes. Only if there is anything left over does the government begin to repay the tenants' jeonse..

The government said six months of investigation into jeonse fraud has led to the apprehension of 1,941 people with 168 arrests.

That’s a significant jump, considering that only 243 were apprehended over the previous year with 11 arrests.

The Korean police have apprehended six organizations that owned 6,100 units in total.

One of the groups was the so-called “villa god” that owned 3,493 units. Gyeonggi Nambu Provincial Police has apprehended 137 people involved in the “villa god” case; five were arrested.

Another 80 people are still under investigation.

Seoul Metropolitan Police Agency is investigating the so-called “villa king” case, which sparked the broader investigation into jeonse fraud.

The case became a national cause célèbre when a proxy landlord in his 40s who owned 1,475 units died while owing 6.2 billion won in comprehensive real estate taxes, resulting in massive financial losses for the tenants.

The police have apprehended seven people, arrested two of them, including a real estate consultant.

Another 15 organizations nationwide were also found to have committed jeonse-related fraud, including profiting from bloated jeonse contracts.

“We will continue with the special investigation team with the determination to root out such jeonse fraud,” said Yoon Hee-keun, the National Police Agency's commissioner general.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]