korea planners associationdep. of pub adm. taegu university korea, taiwan, japan planners...

Korea Planners Association Dep. Of Pub Adm. Taegu University

Korea, Taiwan, Japan Planners Association International Seminar, Aug. 16-19. 2001

Deokho ChoProfessor of Taegu University

Tel : 001-82-53-850-6167E-mail: [email protected]

Homepage : http://biho.taegu,.ac.kr/~chodh


Table of Contents

I. Introduction

II. The Demographic Characteristics of the Korean Elderly Households

III. Asset Liquidation and the Korean Housing Finance Market

IV. Building of Reverse Mortgage System for the Elderly Homeowners

V. Housing Asset Liquidation and Potential Demand of the Korean Elderly Households

VI. Policy Implications of the Reverse Mortgage System

VII. Conclusion


The overall populations of many developed countries are both aging and declining in number. However, the number of elderly populations has been gradually increased. Aging society is one of the most representative demographic characteristics in Korea. An average life expectancy has greatly increased and living conditions for the elderly also has continuously been improved.

However, National Pension is not enough to cover the living costs of elderly households and other financing systems for the elderly did not establish. Therefore, the elderly people have experienced the shortage of their living costs and it will be deteriorated. The objectives of this paper are to elaborate a new housing financing model for the Korean elderly through the income conversion of housing assets, to analyze its potential demands, and to suggest a welfare-financing model for the Korean elderly.

I. Introduction


1. The Demographic Characteristics of the Korean Population Structure

An aging society is a worldwide trend. The populations of many developed countries are both aging and stagnant or declining. However, older populations of semi-developed countries are acutely increasing. Korean society is aging like other developed countries and eventually the number of older populations is acutely increasing (http://www.stat.go.kr: 07/08/2000). Its proportion has increased from 3.9 percent in 1980 to 5.9 in 1995, and 19.3 in 2030. Aging index was only 11.4 in 1980 but it reached 25.2 in 1995. It was increased to 32.9 percent in 2000 and 120.3 in 2030. Korea is rapidly changing to the aging society. It notes that the Korean elderly housing problems including the elderly welfare problems will be social issues in the near future.

II. The Demographic Characteristics of the Korean Elderly Households


1980 1985 1990 1995 2000 2005 2010 2015 2020 2030

Total0-14

15-6465+

374071265623305 1446

404201209526575 1750

433901113530093 2162

445541023631678 2640

472751023333450

3371

491241042134450

4253

506181008035506

5032

516779515

363165846

523589013

364466899

527438448

3413010165

RatioTotal0-14

15-6465+

100.0 33.8 62.3 3.9

100.0 29.9 65.8 4.3

100.0

25.769.3 5.0

100.0 23.0 71.1 5.9

100.0

21.673.1 5.3

100.0

21.170.1

8.7

100.0

20.070.1

9.9

100.0

18.470.311.3

100.0

17.269.613.2

100.0

16.064.719.3

Childhood Dependency*Elderly Dependency**

Aging Index

54.3 6.211.4

45.5 6.614.5

37.0 7.219.4

32.3 8.325.2

30.610.132.9

30.212.340.8

28.314.149.9

26.216.161.4

24.718.976.5

24.729.8

120.3

* Childhood Dependency: (0-14 ages/ 15-64 ages)*100** Elderly Dependency: (65 and over / 15-64)*100Sources: Korea Census Offices (1997). Final Result of 1995 Population and HousingCensus. (http://www.nso.go.kr/census/census5.hwp: 07/20/2000). Korea Census Office (1997). Social Indexes in Korea.

<Table 1> The Demographic Characteristics of Age Compositions in Korea (Unit: 1,000, %)


2. The Socio-Economic Characteristics of the Korean Elderly Households

The number of households which the ages of household members are 65 and over was 2,182,000 in 1995 and was 16.8 percent of total general households. 360,000 households during the last five years (1990-1995) were eventually increased and it noted 19.8 percent increase. This increase is much higher than that of total general households (14.1 percent) (Korea Census Office, 1997).

The extension of an average life expectancy has accelerated the increase of elderly households. Especially, the number of elderly female households is rapidly increasing because the female life expectancy is usually longer than that of male ones. In terms of household compositions, the number of elderly households who do not live with their sons or daughters is acutely increased because the family structure is changing from multi-generations household to a single-generation household (Lim and Cho, 1999a and 1999b).


In terms of tenure types of general households (see Table 2), the numbers of the households who live in the ownership housing are 6,910,000 that are composed of 53.3 percent of total general households in 1995. The numbers of Chonsei households are 3,845,000 (29.7 percent), and monthly rent households are 1,875,000 (14.5 percent).

Homeownership rate of 60 year old and over households is 76.8 percent and the proportion of Chonsei households is 14.1. Total number of households which their ages are 65 years and over is 2,182,187. The rate of their homeownership is 77.3 percent and the proportion of Chonsei households is 13.5. More than 90 percent of two age groups live in ownership home or Chonsei housing. It means that the Korean elderly households have considerable housing assets. These elderly groups are typical house-rich and income-poor groups because they do not have the monthly income except the National Pension. After that period, homeownership rate will be decreased because their income resources are limited. Therefore, the elderly people will meet some difficulties in obtaining the monthly living expenses. And then they must search other ways for resolving their living costs.


<Table 2> The Tenure Types of the Korean Elderly Households in 1995

(Units: the Number of Households)

Sources: Korea National Statistics Offices (1997). Final Result of 1995 Population and Housing Census and Database. (http://www.stat.go.kr: 07/20/2000).

60 year and over 65 year and over

Total Number of Households 3,153,100 (100) 2,182,187 (100)

Ownership Households 2,420,403 (76.8) 1,688,798 (77.3)

Chonsei Households 444,784 (14.1) 296,093 (13.5)

Monthly Rent with Deposit 6,152 (0.2) 103,877 (4.8)

Monthly Rent without Deposit 27,090 (0.9) 18,502 (0.8)

Declining Chonsei and Others 104,671 (3.3) 74,917 (3.4)


III. Asset Liquidation and the Korean Housing Finance Market

1. A Historical Review on Housing Financing Policies

Most housing policies have been focused on the direct or indirect support for becoming the homeowners, which has been a dream of most households. A public housing program is a direct support system and a housing financing system is an indirect one through a tax deduction and financial loan. In other words, most housing policies have concentrated on the first half of life cycle of each household. The elderly households usually own their own housing and most of their wealth are composed of the housing assets. Since the bulk of the non-pension wealth of the elderly is held in the form of illiquid housing assets, most elderly homeowners live with small monthly income but they are wealthy in terms of total assets.

In another aspect, housing problems of elderly households differ from those of general households.


The first problem that many elderly people face is the lack of monthly income even if they have a significant housing wealth.

The second is that they usually do not want to move to other place in order to keep an existing neighborhood connections and environments (Mayer and Simons, 1994).

The "sell and buy" alternative still leaves untapped proportion of housing equity invested in the new house. Another alternative is to sell their home and rent a new home. They can get access to their entire housing asset but they have to move. Moreover, this option could not guarantee their comfortable lives because they must give up homeownership right.

Finally, some elderly peoples rent some parts of their homes to tenants. It does not require additional costs like "sell and buy" or "sell and rent" option but it generates other obvious problems like the housing management for tenants and facilities sharing. Therefore, these traditional housing asset-tapping options might be not suitable for the elder people (Bizer, 1993; Cho and Ha, 1997a and 1997b; Mayer and Simons, 1994; Scholen, 1998).


2. Asset Liquidation of the Korean Finance Market

A concern on the asset liquidations has been significantly increased after International Monetary Fund (IMF) crisis in Korea. This asset liquidation did not focus on the housing finance market but the liquidity of business finance market. In terms of academic aspects, in the late of 1990s some scholars initiated to study a conversion of housing assets and a reverse mortgage system for the elderly (see Chapter IV). Cho and Ha (1997b) for the first time introduced a reverse mortgage system and developed a new housing finance system, which is called "Life-Time Housing Model." They integrated a reverse mortgage system with a mortgage system, following the life cycle of households. The first-half of household lifetime is covered by the mortgage system and its second-half is financed by the reverse mortgage one.


In September 1998, the Mortgage-Backed Securitization Act was established and revised in December 1999 and January 2000. Korea Mortgage Corporation (KoMoCo) is a new financial institution established in September 1999 according to the "Mortgage Backed Securitization Company Act" to promote the national economy. Its roles can be summarized as follows: 1) To purchase mortgage loans from primary lenders and to issue Mortgage-Backed Bonds (MBB) and Mortgage-Backed Securities (MBS); 2) To provide a guarantee of timely payment of interest and principal on MBS and financial advisory services relating to asset liquidation; 3) To issue Corporate Debentures and Commercial Papers. Especially it issues Mortgage Backed Securities (MBS) for sale to investors in the capital market by transferring Housing Mortgage Credits from financial institutions. It performs a crucial role in helping citizens receive housing loans easier than before and in supporting financial institutions by affording more liquidity and effective management of assets and risks. (see Figure 1).


<Figure 1.> The Process of MBB

Source: http://www.komoco.co.kr/eng/html/Structure.htm


KoMoCo can provide guarantees on MBS up to 20 times the capital of KoMoCo. Investors are secured by the mortgage pool, which is managed by KoMoCo in a separate trust. MBS will be issued with senior-subordinated structure ("multiple classes”) and KoMoCo will generally provide guarantees only for senior MBS holders (see Figure 2).

Figure 2. The Process of MBS

Source: http://www.komoco.co.kr/eng/html/Structure.htm


IV. Building of Revere Mortgage System for the Elderly Homeowners

1. Theory of a Reverse Mortgage System

A reverse mortgage system is one of the most representative income conversion programs for the elderly homeowners. It allows a elderly homeowner to convert some of the housing equity into cash or monthly income for the living costs without moving out or changing ownership types. For several reasons, a reverse mortgage is a more appealing solution than the alternative of simple selling the house and moving. A household that sells a home and moves out would have to reduce the level of housing consumption or change the composition of the housing services bundles such as familiar environment and neighborhood. The main advantage of a reverse mortgage over other means of taping housing equity is in its repayment schedule. It does not require the repayment on loan until a households dies or moves.


2. Types of a Reverse Mortgage System

The concept of a reverse mortgage system is theoretically so simple but it is very diverse in its terms and conditions. It is available in three basic forms and their combinations: tenure, term, and line of credit (Boehm and Ehrhardt, 1992). ① A tenure reverse mortgage provides the homeowners with monthly payment for the second half of household life-cycle, as long as the homeowner retains the house as the primary residence. After the homeowner moves or dies, the house is sold and the loan is repaid. ② A term reverse mortgage, in contrast, provides the borrower with the monthly payment for a fixed contract period, usually less than ten years. At the end of the term, the loan should be repaid. ③ A line of credit mortgage allows the borrower to make draws at any time up to some maximum pre-specified amount. The loan becomes due only if the borrower dies, moves, or sell the house.

Except of these three types, modified tenure and modified term are available. The latter is a combination term payments with line of credit and the borrower receives term payments and also had a line of credit. The former is a combination tenure payments and line of credit and the borrower get tenure payments and also has a line of credit.


3. A Reverse Mortgage and the Housing Equity Conversion Insurance Demonstration (HECM)

HECM is the most popular reverse mortgage system in U. S. because the Federal Housing Administration (FHA) protects both lenders and borrowers. Created in 1987 under the National Housing Act, the Home Equity Conversion Mortgage (HECM) insurance mortgage is designed to provide elderly homeowners a financial instrument to tap the equity in their homes without selling or moving from their homes (Szymanoski, 2000).

This program is intended to accomplish the three objectives: the first goal is to allow the conversion of home equity into liquid asset to meet the financial needs of the elderly homeowners; the second is to encourage and increase the participation of the primary and secondary mortgage markets in converting home equity into liquid assets; and the third is to determine the extent of demand for home equity conversion and the types of home equity conversion mortgages that best serve the needs of the elderly households (Szymanoski, 1994, Case and Schnare, 1994).


4. Program Risks and Limitations of the Reverse Mortgage System

Whether to remain in a home or move to alternative arrangements is a major life decision for most elderly households. The decision is influenced by a complex set of financial and demographic factors such as income, wealth, home equity, housing costs, neighborhoods, marital status, health and the presence of children. In aspects of the demand for reverse mortgages, there are several barriers to consumer acceptance of reverse mortgages such as product design, information availability, bequest motives, and the view of home equity as "saving of last resort (Mayer and Simons, 1994)." Especially the bequest motives, which are related the Korea social cultures, might be one of the most important barriers to accept the reverse mortgages (Cho and Ha, 1997; Lim and Cho, 1999). In aspects of supply for reverse mortgages, they face a number of accounting and regulatory uncertainties such as program risk and program longevities.


1). Interest Rates

In contrast to a conventional mortgage system, the reverse mortgage lender makes only a small initial investment, which is the first monthly payment to borrower. The cumulative loan balance increases gradually over time in a pattern opposite that of a conventional mortgage. Understanding and deciding the interest rate of reverse mortgage are very important to lenders and borrowers because a reverse mortgage creates large off-balance sheet liabilities if market interest rates rise above the fixed rate on the reverse mortgages.

2). Program Longevity

A reverse mortgage basically guarantees the monthly payment to borrower until he dies or moves out unless other conditions do not change. Longevity of borrowers highly influences the loan balance of lenders. However, it is very difficult to forecast the life expectancy of borrowers because individual life expectancies are extremely diverse.


3) The Evaluation of Housing Values

The amount of the monthly payment highly depends upon the property value of borrowers. However, it is very difficult to standardize the property value of housing equity. Property value uncertainty is a risk of reverse mortgage. Housing value is not a stationary time series. It closely relates to the national economy. Its values also are diverse, depending the age, facilities, size, location, and neighborhood of housing. Moreover, because the term of reverse mortgage is usually more than 10 years, it is more difficult to forecast the future values of housing units (Case and Schnare, 1994).


V. Housing Asset Liquidation and Potential Demand of the Korean Elderly Households

National Pension Scheme (NPS) was initiated in 1988. NPS is an income security program to provide against loss or reduction of earnings ability due to old age, sickness, death, and so forth. The amount of benefits is calculated by the principle of income redistribution among the social strata (http://www.npc.or.kr/eng/einfo/ga_bb_1f.html: 08/27/2000). However, NPS was initiated in just 12 years ago and then the pension beneficiaries of elderly people who live with their spouses are only 209,662 but total elderly households are 2,182,187 (see Table 2). The monthly average pension amount is ￦ 384,000 and it only covers 32.9 percent of net monthly income ( ￦ 1,167,000) (Kwon, 1999). This amount does not cover the minimal living cost per month for an elderly couple ( ￦ 460,000) (http://www.mohw.go.kr/hp/owa/ha000.a000: 08/20/2000). If a retirement grant is included in the monthly payment, the monthly amount which the elderly households can receive is ￦ 566,000 (45.8 percent of the monthly income).


In 1998, an average housing wealth was about 61 percent of total assets of the Korean elderly households that included the real estate and monetary assets (Kwon, 1999). These statistics point to the potential benefits of a mechanism that could convert home equity into the monthly income for many house-rich and income-poor elderly. The liquidation of elderly housing asset can significantly contribute to improve the income shortage of elderly households. In other words, a reverse mortgage is one of the most feasible policy alternatives to solve the monthly income shortages of the Korean elderly. The number of elderly people has been dramatically increased and will be increased for the next few decades (see Table 1). Moreover, more than 75 percent of total elderly households have their own housing. More than 90 percent of total elderly households at least live in the Chonsei or ownership housing (see Table 2). Eventually Cho and Ha (1997b) noted the liquidation processes of housing assets for elderly homeowners. They estimated the monthly income converted from the liquidation of housing asset. If the housing prices is ￦ 80,000,000, interest rate 12 % per year and contract term 30 years, the elderly can get about ￦ 822,000 every month from the liquidation of housing assets.


Eventually, most of all ownership and Chonsei elderly households can become potential demanders of reverse mortgage system. Therefore, if the reverse mortgage system is adopted in the Korean housing finance market, the housing problems and living cost shortages of almost all Korean elderly (more than 90 percent of the Korean elderly) will be solved (see Chapter II). Eventually Lim and Cho (1999b) analyzed the potential demand of reverse mortgage system for the elderly in Inchon Metropolitan City. 48.3 percent of total elderly people answered that they have a willingness to adopt the reverse mortgage system if this system is implemented in the financial market. This result shows that there might be significant demand on the reverse mortgage system in the Korean housing market.


VI. Policy Implications of A Reverse Mortgage System

1). The reverse mortgage system guarantees the certain level of living conditions as well as the homeownership for the lifetime of each elderly household. It is different from the permanent rental housing in the socialist countries or welfare housing in the European countries because each household has the ownership right to the home. Therefore, it will contribute to elderly households' psychological stabilization on homeownership.

2). A home is a very expensive product relative to the household's income and composes of a significant proportion of individual wealth. Housing succession to the offspring means an inheritance of wealth. It probably violates the social equity. This reverse mortgage can significantly prevent the wealth succession to the offspring. Therefore, it results in the achievement of socio-economic justice.


3). The reverse mortgage system provides a new turning point of welfare policy. Until now, elderly peoples who are house-rich but cash-poor have a difficulty to maintain their existing living standards. The government must have supported these elderly groups. It was a burden on the welfare budgets of government. It causes difficulties in supporting real poor elderly peoples who are house-poor and cash-poor. In case which the mortgage system works well, most households can own their housing free of loan when they retire from their jobs. Therefore, most of households are potential demanders of the reverse mortgage system.

4). A basic concept of reverse mortgage focuses on the liquidation of housing equity of elderly homeowners. In the long term, the liquidation of all fixed assets including the housing can be possible. Therefore, the liquidation of all real estate equities will greatly contribute to the activation of regional economics.


VII. Conclusions

A mortgage system usually cover the provision of housing services for the first half of life cycle of each household from the its generation to the household retirement. A reverse mortgage handles its second half. The housing services which the reverse mortgage system provides is same with a permanent rental housing but guarantees the homeownership and the monthly income for the maintenance of living standard during the life-time of elderly households. Therefore, it simultaneously contains advantages of permanent rental and homeownership housing. It might be an ultimate goal of most housing policies.

Moreover, the reverse mortgage system can be integrated with a pension, insurance and other social security systems. If then, this program can be developed to a comprehensive welfare model which simultaneously secures a certain level of living, Medicare, and homeownership for the life-time of elderly households. It also prevents the succession of individual wealth to the offspring. It can result in the achievement of socio-economic justice because it provides an equal opportunity to the next generation. Therefore, this system is a new paradigm of the housing policy for the elderly people.


The End

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