Housing woes stimulate demand for reverse mortgages
By Kim Tong-hyung
After spending a fortune on their homes in B.C. (Before Crisis), Koreans are slowing coming around the fact that they probably will never be able to sell high on their properties in these times defined as A.D. (After Disaster).
So rather than just sitting on their homes and watching their values decline faster than phone booths, many of them are using their property as collateral to improve their pensions.
The Korea Housing Finance Corporation (HF) confirmed that more and more seniors are turning to reverse mortgages, an arrangement in which a homeowner borrows against the equity in his or her home and receives monthly payments from the lender.
It could be argued that reverse mortgages are a financial tool tailored made for Korea, which struggles to cope with a prolonged housing market slump, decaying employment situations, spiraling family debt and stagnant income. This has resulted in millions of over-50 Koreans marching blindly into retirement poverty.
To older workers who are failing to make adequate provision for retirement and still struggling to repay the loans on their ill-advised splurge on houses a few years back, the allure of reverse mortgages is obvious.
Instead of scrambling to come up with the money to service debt, the homeowner can tap house equity not only to pay off the loan, but also receive money for living expenses.
The option of converting an illiquid asset ― a house ― into a liquid one is crucial for retirees who would otherwise have to brace for an acute squeeze in their living standards, a HF official said.
However, one problem is that the dismal economy appears to be sidelining workers at an increasingly younger age, as reverse mortgages here are only available to citizens over-60. While it would be ideal if the younger retirees had the opportunity to sell off their homes and use the income on other assets, the slumping housing market is eliminating such options quickly.
``The number of reverse mortgages taken out at financial companies reached over 1,670 through April this year, nearly double the 850 approved in the first four months of last year. There were less than 14 reverse mortgage applications per day last year, but this year there have been more than 27,’’ said an HF official.
The growth in the number of people heading toward poverty in later life is an alarming development for the country, where people collectively owe more money than what the economy generates in a year.
The Bank of Korea (BOK) puts the household debt mountain at 912.9 trillion won ($803 billion) based on data from savings institutions and other financial companies. Experts say the total has way passed one quadrillion won, which is about an entire year’s gross domestic product (GDP), when combining the borrowing by self-employed people, non-profit organizations and measurements in non-interest paying debt.
And many of these desperate borrowers seem to be baby boomers, or those born in the era of fecundity that was the 1950s and ‘60s. Debt attached to those over 50 accounted for 46.4 percent of all household liabilities in 2011, representing an increase of 13.2 points since 2003, the BOK report said.
The proportion of people over 50 in the population grew by 8 percent during the same period, showing that indebtedness among older people is growing at an even faster pace than the country is aging.