New leaseback scheme adapted to help 'house poor'

By Kim Jae-won

Woori Financial Group said Wednesday it plans to introduce a new financial product this month to give homebuyers stuck with negative equity breathing room amid a freefalling property market.

After peaking in the early- to mid-2000s, house prices have been sliding inexorably since the collapse of Lehman Brothers in 2008, adding to the financial difficulties of people who have taken out large loans to buy real estate on the blind faith that property prices would rise forever.

Woori will allow credit-crunched homeowners to trust their houses to the group for up to five years, during which they pay leases similar to the interest payments on their mortgages, Woori officials say. This will provide an effect similar to suspending the payment of principles during that span to reduce the debt-serving burden of homeowners.

“We are releasing this product to support consumers who are struggling to pay back their mortgages. It is a customized service for those who have only one house,” said a Woori official.

The nation’s biggest banking group said that new program is based on a “trust-and-leaseback” scheme, a variation of the “sale-and-leaseback” system which is widely used in the United States. Sale-and-lease back is a financial transaction, where a person sells an asset and leases it back over the long-term. Therefore, he continues to be able to use the asset but no longer owns it.

The transaction is generally made for fixed assets, notably real estate, planes, trains and automobiles, and the purposes are varied, including financing, accounting and taxation.

Woori Group said that the beneficiaries will be limited to consumers who bought mortgages from Woori Bank, its flagship banking affiliate. The size of the fund will be around 90 billion won.

The company said chances will later be extended to other consumers of Gwangju Bank and Kyungnam Bank, two provincial subsidiaries of the group if the initial plan goes smoothly.

Experts say that Woori was under pressure to announce such a product to help the house poor by the government, which is seeking to ease people’s concerns ahead of the presidential election in December. The Financial Services Commission has been eager to introduce solutions to the country’s snowballing household debt but none of them have shown any tangible results so far.

The company said that it adopted a trust scheme instead of the initial sale strategy to avoid disputes with consumers over housing prices. Woori said that consumers who use the trust-and-leaseback system do not need to pay housing trade tax.