When loans become favors

Ha Hyun-ock

The author is an editorial writer at the JoongAng Ilbo.

“Banks are not short of money. Borrowers have collateral and their credit is not poor. Yet they still cannot borrow. The ‘loan freeze’ sweeping the market and the ‘loan cliff’ pushing out even genuine borrowers are riddled with contradictions. The reason is a credit crunch created by financial regulators.”

Those were the opening lines of a column I wrote five years ago, on Oct. 14, 2021. They bear an unsettling resemblance to today. Back then, financial authorities imposed limits on total lending, leaving people facing apartment move-ins or expiring jeonse, or lump-sum key-money lease, contracts as “loan refugees.”

Regulators eventually excluded jeonse loans from lending caps and promised group loans for final apartment payments. But as banks tightened lending, borrowers inevitably migrated to nonbank lenders.

Now the loan refugees are back. Commercial banks that have exhausted their annual household lending allowances are closing their doors. Some have halved per-person limits or reduced monthly lending quotas for individual branches. Others have suspended new online mortgages. As hurdles rise, borrowers face an increasingly desperate race to secure loans.

The most anxious are some 70,000 households scheduled to move into new homes in the second half. Prospective residents planned their financing according to lending rules in place when they purchased their apartments. Now, reduced limits and blocked mortgage loans threaten those plans. Some say they may lose their homes.

In desperation, borrowers are turning to secondary and tertiary lenders, private transactions and even high-interest private loans.

Those awaiting new apartments cannot even use the seller-backed mortgage arrangement that President Lee Jae Myung used when purchasing an apartment. Nor can everyone benefit from the “presidential petition opportunity” created by the so-called Pal d’Arc.

At a presidential real estate policy debate on July 23, a prospective resident of an apartment complex in Suwon complained that lending restrictions prevented her from making her final payment. After Lee said officials should “look into it,” the previously closed lending window promptly reopened. The five major banks provided an additional 500 billion won in loans.

The resident who raised the issue was subsequently nicknamed “Pal d’Arc,” combining the apartment complex’s name, Palucid, with Joan of Arc.

It was appropriate for the president to examine a regulatory problem and seek a solution. But questions of principle and fairness are unavoidable. If the additional loans to Palucid count toward overall lending quotas, borrowers elsewhere will have less access to credit. If mortage loans are excluded from those quotas, meanwhile, that amounts to acknowledging flaws in the previous restrictions.

Financial authorities are now preparing to revise the rules. A comprehensive real estate and financial package expected this month may allow banks to increase household lending targets to accommodate mortgage loans for new homes and relocation loans for members of reconstruction associations.

But exceptions create further fairness problems. If mortgage loans for newly built homes receive exemptions, it becomes difficult to justify denying equivalent financing to buyers of existing homes.

At its core, a loan is a contract between a financial institution and an individual borrower. Banks assess creditworthiness, income and collateral value, then lend according to repayment capacity. Borrowers likewise consider interest rates and repayment conditions before deciding how much debt they can afford.

Traditionally, interest rates served as coordinates guiding supply and demand within that system.

That basic logic has long since disappeared. Borrowers with stronger credit can face higher rates, while higher-value collateral can paradoxically result in lower lending limits. This distortion arose because the government increasingly turned credit regulation into a principal instrument of housing policy.

Eventually, access to loans itself became something resembling government largesse or preferential treatment. Borrowers are now reduced to pleading for official consideration simply to obtain financing that banks might otherwise have been willing to provide.

There is certainly a legitimate need to control Korea’s excessive household debt. Financial stability cannot be ignored, and unrestricted lending can fuel housing speculation and expose households and banks to serious risks.

But the relationship between the objective and the means has been reversed. While lending continues to wander somewhere between government favor and administrative consideration, everyone involved — ordinary borrowers, banks and financial authorities themselves — is left exhausted by a system whose rules keep changing.