Audit Reveals Failures in South Korea’s Housing Guarantor
South Korea’s state-run Housing and Urban Guarantee Corporation (HUG), commonly known as the housing guarantor, has failed to properly investigate debtors and recover claims after paying out approximately 15 trillion won (around $10.3 billion) in defaulted guarantees over the past five years, according to a government audit released on July 30.
The audit, conducted by the Board of Audit and Inspection, identified problems in guarantee issuance, project financing reviews, debt collection, and customer refunds. HUG provides guarantees intended to protect tenants if landlords fail to return jeonse deposits.
Jonse is a housing rental arrangement widely used in South Korea
In South Korea, a unique housing rental arrangement called jeonse is widely used. Under this arrangement, a tenant provides a large refundable deposit instead of paying, or in exchange for paying less, monthly rent. HUG’s guarantees are designed to protect tenants in case landlords fail to return these deposits.
Undercharged guarantee fees and improper credit rating calculations
The audit found that HUG undercharged a corporate rental business by approximately 2.77 billion won (around $1.9 million) when issuing guarantees covering 12,752 homes. This discrepancy occurred because employees used an earlier, more favorable credit rating from the application date instead of the credit rating on the date the guarantee was issued, as required by HUG’s rules.
As a result, the audit board called for disciplinary action against the employees involved and instructed HUG to review ways of collecting the unpaid fees.
Financial losses and operating losses
HUG has reported financial losses since 2022, including cases involving large-scale jeonse fraud. Its operating loss grew from 242.9 billion won (around $166 million) in 2022 to 2.19 trillion won (around $1.5 billion) in 2024.
Weak reviews of housing project financing guarantees
The audit also found deficiencies in HUG’s reviews of housing project financing guarantees. Such guarantees rely largely on a developer’s projected income from future home sales, making an accurate assessment of expected cash flow essential.
Auditors found that HUG accepted financial data in which developers had arbitrarily delayed construction payments, improving the projects’ apparent debt-service capacity. As a result, HUG approved a combined 382 billion won (around $261 million) in guarantees for three projects that should have been rejected under its own standards.
Thousands of debtors not investigated
The audit board also found major gaps in HUG’s efforts to identify assets belonging to debtors after paying claims on their behalf. An examination of seven regional management centers found no record of an asset investigation for 2,915 of 9,003 debtors, or 32.3%.
The rate varied widely among regional offices. The Seoul Northern Center investigated the assets of only 21.6% of the debtors assigned to it, compared with 99.8% at the Seoul Western Center.
Tenants missed refunds
HUG also failed to refund fees to some tenants who had been enrolled in both a landlord rental deposit guarantee and a tenant jeonse deposit return guarantee. The audit identified 1,699 cases involving approximately 173 million won (around $118,000) in unreturned fees.
The audit board instructed HUG to analyze the causes of the problems and develop improvements in its core operations, including guarantee reviews, issuance procedures, and debt recovery. It also called for disciplinary or corrective action against employees responsible for improper decisions.
With these findings, HUG must take immediate action to rectify its operations and ensure the protection of tenants who have relied on its guarantees.
