The ruling party and government are pursuing a scheme requiring banks to sell their senior mortgage claims on jeonse fraud-affected properties to Korea Land and Housing Corporation (LH) at prices below market value, in addition to guaranteeing minimum deposits for victims.
For banks, artificially reducing their debt recovery amounts means additional costs are inevitable. Combined with low-interest loan support for victims, banks now face a burden exceeding 200 billion won. The banking sector is criticizing the government for mobilizing bank funds for various policies, including education tax hikes, establishing a bad bank for non-performing loans, and inclusive finance initiatives.
According to the Ministry of Land, Infrastructure and Transport, the cumulative number of government-recognized jeonse fraud victims reached 35,246 as of end-November, with 765 additional victims recognized last month alone. Of these, LH has purchased only 4,042 fraud-affected properties as of November 25, representing just 11.4% of the total.
The scheme being pursued by the ruling party, the land ministry and the Financial Services Commission involves banks with senior claims signing individual agreements with LH to transfer affected properties through auctions. The ruling party initially planned to purchase senior claims collectively through a fiscally-funded "jeonse fraud bad bank," but shifted to individual sales after encountering practical limitations including complex debt acquisition structures.
The problem is that the government is demanding banks conduct auctions at prices lower than what they would originally receive. When banks set lower claim amounts on affected properties they hold senior claims on and put them up for auction, LH—which has preemptive purchase rights on these properties—acquires them, and the difference banks concede is used as relief funds for victims. The Financial Services Commission launched an investigation yesterday into banks' senior claim holdings on affected properties and the rights structures of these properties.
"We understand the intent, but the risk of breach of fiduciary duty is high," a senior executive at a major commercial bank said. "I've never seen a method that forces giving up profits without creating a separate law or fund."
The government is also discussing having major commercial banks contribute approximately 100 billion won to expand low-interest refinancing loans for jeonse fraud victims. Currently, the government provides low-interest refinancing through the Housing and Urban Fund, but critics have consistently pointed out that some victims fall through the cracks due to requirements such as the property being 85 square meters or less in exclusive area. The intent is for the banking sector to support these victims with low-interest loans through fund creation. The government is pursuing a plan to establish a fund of approximately 200 billion won, combining 100 billion won for minimum deposit guarantees and 100 billion won for low-interest loan resources.
The banking sector, now facing costs of at least 200 billion won, says it has been "blindsided." Critics point out that the current administration has continuously shifted various costs onto banks.
This year, the banking sector contributed 360 billion won to a bad bank for the government's long-term delinquent debt restructuring program. Major financial holding companies have also announced inclusive finance plans worth tens of trillions of won each, rolling up their sleeves for shared-growth finance. The education tax increase from 0.5% to 1% starting next year also adds to the cost burden. Doubling the education tax rate from 0.5% to 1% for financial companies with tax bases exceeding 1 trillion won is another factor adding to the burden. The additional education tax the five major banks—KB, Shinhan, Hana, Woori and NH NongHyup—will have to pay is estimated at 475.8 billion won.
"With considerable cost concerns already from various contributions and fines, it is excessive to also ask the banking sector to provide relief funds for jeonse fraud victims that should be resolved through fiscal measures," a financial industry official said.
