Koreans Tapping Inheritances With Reverse Loans: MortgageSeonjin Cha
Kim Tae Hwan, a 68-year-old South Korean retiree, last year made a difficult decision.
The former taxi driver, who retired in April due to illness, had planned to leave his home, his only life savings, to his two children, receiving a monthly living allowance from them in return. Instead, concerned about Korea’s falling property prices, he rushed to take out a reverse mortgage on the 109-square-meter (1,173-square-foot) house on the outskirts of the South Korean capital.
“I thought the sooner the better to get the loan to get the most out of the house before home prices fall,” said Kim. “This reverse mortgage just gave me and my wife what we needed the most -- stable income and independence from my kids.”
Applications for reverse mortgages, which are typically taken out by elderly or retired homeowners who borrow money in the form of monthly payments against the equity in their homes, are surging to the highest in six years. Loans backed by state-run financing firm Korea Housing Finance Corp. jumped 71 percent in 2012 as retirees like Kim sought a steady income in a nation wracked by personal debt, falling home values and a rapidly aging population.
“As more South Koreans in their 50s are retiring without accumulating much fortune but a single house, the reverse mortgage is becoming the last resort for the retirees,” said Park Won Gap, the senior real-estate market analyst at Kookmin Bank, South Korea’s biggest lender by assets. “The fear of a further slide in home prices is encouraging them to take that option which has been a foreign idea to them. As not many people expect a bull real estate market any time soon, the reverse mortgage origination will inevitably increase.”
Reverse mortgages are repaid when the borrower dies or sells the house.
The volume of loans jumped to 5,013, worth 6.9 trillion won ($6.5 billion), in 2012 from the previous year, the highest since the KHFC introduced the product in 2007, as home prices in Seoul and the surrounding metropolitan area fell by the most in more than a decade.
JooTaekYeonKeum, which literally translates as housing pension, was introduced in 2007 as the government sought to help senior citizens prepare for retirement. Lenders provide the loans and the KHFC guarantees the full amount of the debt. Homeowners have to be at least 60 years or older and need to have paid off their mortgages to qualify. They can keep the home until they die as the KHFC guarantees the loan for life.
Kim said he held a family meeting before applying for the mortgage and after some discord, his children accepted the decision. While the home Kim and his wife bought 18 years ago and now own outright will go to his children eventually, if the property is worth less than the loan, his children will either give it up or keep it and repay the full amount of the loan.
Home prices in Seoul fell for the second time in three years in 2012 as South Korea bucked a trend of soaring home values in other parts of Asia, such as Hong Kong and Singapore, as household debt soared. The money owed reached a record 164 percent of disposable income in 2011, compared with 138 percent in the U.S. at the start of the housing crisis, according to an estimate by Royal Bank of Scotland Group Plc.
Seoul home prices declined 2.9 percent in 2012, the most in 14 years, and dropped 3 percent in the capital’s surrounding areas, the most since Kookmin Bank began tracking the data in 1999. Almost half the nation’s 50 million people reside in Seoul and surrounding areas.
Even as home prices drop, South Koreans are increasingly relying on their properties to fund retirement. Houses and residential real estate account for almost 70 percent of South Korean households’ average assets, while the proportion stood at 81 percent for those 60 years or older, according to a survey of 20,000 households by the Bank of Korea, Statistics Korea and the Financial Supervisory Service, released on Dec. 21.
About 54 percent of households with breadwinners not yet retired said that they were poorly prepared for a future without income, according to the survey.
“South Korea doesn’t have a well-organized public pension system in place yet, while many baby boomers born after 1955 will soon be retiring,” said Kang Jong Man, a researcher at the Seoul-based Korea Institute of Finance. “The reverse mortgages led by the government will have to be an alternative for the retirees who have a shortfall in living expenses.”
South Korea first introduced a national pension scheme in 1988, which initially covered employees between 18 years and 60 years working at companies with more than 10 staff, according to the website of the National Pension Service. The program was expanded in April 1999 to cover almost all South Korean workers.
The Korean public pension scheme was introduced “relatively recently,” according to a 2011 report by the Organization for Economic Co-operation and Development. The earnings replacement rate -- or how much pensions will make up for earnings after retirement -- for 40 years of contribution was 50 percent in 2008 and will be reduced 0.5 percentage point every year from 2009 to 2028 when it reaches 40 percent, the report said.
The surge in reverse mortgages is in sharp contrast to the sluggish growth in new mortgages. Those loans rose 3.5 percent last year, the slowest pace in five years, to 316.9 trillion won as the government seeks to curb the increase in household debt, seen as one of the biggest potential risks to Asia’s fourth-biggest economy.
Since reverse mortgages were first offered in 2007, 17.2 trillion won have been extended, with 12,299 retirees applying, according to the KHFC.
The average interest rate on the debt is 110 basis points above the three-month certificate of deposit rate, set by KHFC. Korea’s 91-day CD rate has been the benchmark for banks’ variable lending. The rate was 2.84 percent yesterday, according to Korea Financial Investment Association data. That compares with the Bank of Korea’s benchmark policy rate of 2.75 percent.
While reverse mortgages in Korea haven’t been packaged into securities, there is an active market for regular home loans sold as residential mortgage backed securities. Last year, a record 20.3 trillion won of RMBS was sold, more than double the 10 trillion won in 2011, as KHFC took over loans from commercial lenders that meet its standards for RMBS issuance and issued the securities as part of government efforts to increase longer-term, fixed-rate mortgages. KHFC’s RMBS sales may reach 21 trillion won this year, according to its own estimate.
Korean bank stocks are outperforming the benchmark Kospi index this year. KB Financial Group Inc., owner of South Korea’s biggest mortgage lender Kookmin Bank, gained 5.2 percent this year compared with the Kospi’s 1.6 percent drop. Woori Finance Holdings Co. which is operating the nation’s No. 2 lender by assets Woori Bank, advanced 8.1 percent and Shinhan Financial Group Co., operator of third-biggest lender Shinhan Bank, climbed 7.9 percent. KB Financial fell 0.1 percent at the close of trading in Seoul today, Woori added 0.8 percent and Shinhan dropped 0.5 percent.
The average rate for banks’ new mortgage loans stood at 4.19 percent in November, according to the latest available data from the Bank of Korea.
A rapidly aging population may pose a threat to South Korea’s long-term economy as the country expects to become a super-aged society in 2026 after passing being an aged society in 2017, the fastest aging population among OECD member countries, the finance ministry said in a Dec. 27 report. An aged society refers to nations where people 65 years or older make up at least 14 percent of the population and a super- or hyper-aged society means the elderly account for at least 20 percent, according to a definition by the United Nations.
The U.S. is the biggest market in the world for reverse mortgages, with about $38 billion outstanding of bonds backed by the loans and guaranteed by the federal government. Home prices that have fallen by about a third since their 2006 peak mean homeowners have less equity, and issuance fell to 49,080 last year through November, down from a peak of 115,176 in 2008.
U.S. Senator Bob Corker, a Republican from Tennessee, criticized the U.S. government agency responsible for the debt in a hearing last month, saying they’re losing money on the products, while brokers are making an “absolute fortune.
A federal appeals court this month revived a lawsuit accusing the U.S. Department of Housing and Urban Development of setting up its reverse-mortgage program in a way that makes it more likely a surviving spouse will end up in foreclosure and several banks have also stopped making the loans after criticism by the National Consumer Law Center and other watchdog groups, which allege that some unscrupulous lenders take advantage of elderly homeowners.
The uptake in reverse mortgages in South Korea also contrasts with other parts of Asia that have experienced surging home values. In Hong Kong, where home prices have doubled in four years, reverse mortgages have drawn little interest as retirees opt to sell their homes, rent and use the remaining cash to support themselves. Local lenders received 319 applications for the plan as of the end of 2012, according to figures on the Hong Kong Mortgage Corp.’s website.
The KHFC expects reverse mortgage origination to reach 1 million by 2030 as more people qualify for the loans, Jang Sang In, the general manager at the KHFC’s reverse-mortgage department, said in a Jan. 8 phone interview.
“The good old days when you raise kids and educate them and they’re supposed to take care of your retirement are gone,” said Kim, the taxi driver. “They’re just too busy taking care of themselves and I don’t know how many days I have remaining. I feel so lucky I am qualified for the reverse mortgage. Some of my friends, who’re already indebted with their house, don’t even have this option.”