Apartment complexes in Seoul / Yonhap

The number of home-backed non-performing loans referred for public auctions nearly quadrupled last year, due to sustained high borrowing rates brought on by rapid monetary tightening after the pandemic, data showed Thursday. A loan is non-performing if interest payments are 90 days past due and therefore considered unlikely to be repaid.

The uptick in home foreclosures is likely to remain elevated, as inferred from the combined 4 trillion won ($2.9 billion) worth of non-performing loans granted by the nation's four major banks last year.

Also coming into play are the eased regulations whereby savings banks will be able to refer non-performing loans to the state-run Korea Asset Management Corp. (KAMCO), an indication of more vibrant participation of and expanded market share for the secondary higher-rate-charging lenders.

According to market sources, KAMCO-purchased home-backed non-performing loans came to 1,645 last year, up 3.4 times the 482 a year earlier.

Of the total, 1,485 cases involved loans granted with apartments put up as collateral, followed by 63 cases that had multi-family multi-story homes as collateral, and 22 cases of loans granted against studio apartments.

The deterioration of non-performing loans is particularly rapid for apartment-collateralized cases, as evidenced by the total figure surging to 1,485, up from 400 in 2022.

The figure was limited to 183 in 2021 amid the property market boom, as enabled and amplified by the pandemic-induced record-low borrowing costs.

The spike in KAMCO-mediated auctions coincides with the number of January court auctions of foreclosed homes registering an 11-year high.

In January, the number of new auction applications filed with the Supreme Court surpassed 10,000, the highest since July 2013 when the figure stood at 11,266. It was the highest January figure in 10 years and six months.

The number of applications is a more accurate reflection of the market than ones in progress, since the latter are scheduled with a time lag of at least six months and include items already put up for auction that failed to find a buyer.

"Last month's figure illustrates many borrowers coming under greater financial strain due to the economic downturn in a market that took a dive in 2022 and has been stagnating since," an industry official said.

Most of them are the so-called "gap investors" seeking gains under the country's jeonse system, the official said. The home renting system unique to Korea is one whereby tenants pay a lump sum refundable deposit for the term of the contract instead of monthly rent. The gap investors can thus purchase homes while having only a small amount of money in hand as the "gap" between the home prices and jeonse deposit can be small. For example, if they can get an 80 million won jeonse deposit from a tenant while the home is sold at 100 million won, they only need to fund 20 million won to register the home as theirs.

"An increasing number of similar cases will pour in, mostly involving borrowers in their 20s and 30s who will not be able to handle soaring interest costs," the official added.