By Choi Sung-jin
In 2010, a small business owner surnamed Chang, 61, borrowed 530 million won ($475,700) from a bank, offering his apartment in western Seoul as security.
To repay the floating-rate, 30-year mortgage, Chang was supposed to pay only interest during the first 10 years and redeem principal and interest by installment in the following 20 years. After paying 1.39 million won a month for about five years, he missed two payments amid worsening cash flows last year.
The bank wasted no time sending a notice of foreclosure to Chang, forcing him to raise money hurriedly and pay the arrears -- to no avail. "Once the borrower fails to pay interest for two months, he or she must pay back the entire borrowing," said a bank official, reminding Chang of the loan terms. He is in litigation now to keep the lender from auctioning his house.
Chang is hardly alone. Most banks, which have competed to carve out a larger share of mortgage markets by offering low lending rates in the past few years, are "taking umbrellas back" from delinquent clients at a mercilessly swift speed, as embarrassed borrowers describe it.
Three out of 10 foreclosures are on borrowers with fewer than three missed mortgage payments. Banks say these measures are inevitable to prevent bad debts, but public criticism is mounting about the lenders' selfish gimmicks.
According to data the Financial Supervisory Service submitted to Rep. Je Yun-kyong of the opposition Minjoo Party of Korea, there were 30,517 foreclosures from 2012 to 2015, and 8,759, or 28.7 percent, were fewer than 90 days overdue, indicating the banks foreclosed as soon as borrowers missed two months of payments. Almost half (48.4 percent) of foreclosures were made on missed payments of fewer than four months.
"It is completely barbaric for banks to kick families out on the street for just failing to pay two months' interest, only for the sake of lenders' convenience in loan management," Rep. Je said. "As many as in 43 percent of mortgages that turn sour, the loans are less than 50 percent of the collateral value, meaning they result from temporary cash-flow problems."
The banks are highly likely to recover principal and interest by giving borrowers a chance to pay but often hurry in exercising their forfeiting rights.
Chang, who testified at the National Assembly's parliamentary audit Thursday, exploded in anger, saying: "I just defaulted on the payment of less than 3 million won for two months, and paid default interest, but am about to driven out of my home."
Banks say they are being criticized for following common rules that allow them to execute their security rights two months after delinquency occurs. "Except for some special occasions, we start foreclosure procedures right after three months of delinquency," a bank official said.
"When seizures on security start by other creditors, such as the tax authorities and private lenders after two months' delinquency, banks, too, can't help but start their own process," he said, noting that this may be the case in relation to Chang.
The nation's top financial regulator was more cautious. "Foreclosure after two months of being in arrears is not so swift compared with foreign examples," said Lim Jong-ryong, chairman of the Financial Services Commission. "Still, we will study how to make the most of the ‘free workout system,' which delays payments for up to six months in exceptional cases."
In 2010, a small business owner surnamed Chang, 61, borrowed 530 million won ($475,700) from a bank, offering his apartment in western Seoul as security.
To repay the floating-rate, 30-year mortgage, Chang was supposed to pay only interest during the first 10 years and redeem principal and interest by installment in the following 20 years. After paying 1.39 million won a month for about five years, he missed two payments amid worsening cash flows last year.
The bank wasted no time sending a notice of foreclosure to Chang, forcing him to raise money hurriedly and pay the arrears -- to no avail. "Once the borrower fails to pay interest for two months, he or she must pay back the entire borrowing," said a bank official, reminding Chang of the loan terms. He is in litigation now to keep the lender from auctioning his house.
Chang is hardly alone. Most banks, which have competed to carve out a larger share of mortgage markets by offering low lending rates in the past few years, are "taking umbrellas back" from delinquent clients at a mercilessly swift speed, as embarrassed borrowers describe it.
Three out of 10 foreclosures are on borrowers with fewer than three missed mortgage payments. Banks say these measures are inevitable to prevent bad debts, but public criticism is mounting about the lenders' selfish gimmicks.
According to data the Financial Supervisory Service submitted to Rep. Je Yun-kyong of the opposition Minjoo Party of Korea, there were 30,517 foreclosures from 2012 to 2015, and 8,759, or 28.7 percent, were fewer than 90 days overdue, indicating the banks foreclosed as soon as borrowers missed two months of payments. Almost half (48.4 percent) of foreclosures were made on missed payments of fewer than four months.
"It is completely barbaric for banks to kick families out on the street for just failing to pay two months' interest, only for the sake of lenders' convenience in loan management," Rep. Je said. "As many as in 43 percent of mortgages that turn sour, the loans are less than 50 percent of the collateral value, meaning they result from temporary cash-flow problems."
The banks are highly likely to recover principal and interest by giving borrowers a chance to pay but often hurry in exercising their forfeiting rights.
Chang, who testified at the National Assembly's parliamentary audit Thursday, exploded in anger, saying: "I just defaulted on the payment of less than 3 million won for two months, and paid default interest, but am about to driven out of my home."
Banks say they are being criticized for following common rules that allow them to execute their security rights two months after delinquency occurs. "Except for some special occasions, we start foreclosure procedures right after three months of delinquency," a bank official said.
"When seizures on security start by other creditors, such as the tax authorities and private lenders after two months' delinquency, banks, too, can't help but start their own process," he said, noting that this may be the case in relation to Chang.
The nation's top financial regulator was more cautious. "Foreclosure after two months of being in arrears is not so swift compared with foreign examples," said Lim Jong-ryong, chairman of the Financial Services Commission. "Still, we will study how to make the most of the ‘free workout system,' which delays payments for up to six months in exceptional cases."
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