P1253814558VqAgO

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

• Asset Liquidation
• and Reverse
• Mortgage System

Deokho ChoProfessor of Taegu University Tel
001-82-53-850-6167E-mail chodh_at_biho.taegu.ac.kr
Homepage http//biho.taegu,.ac.kr/chodh
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Table of Contents

1. Introduction
2. The Demographic Characteristics of the Korean
   Elderly Households
3. Asset Liquidation and the Korean Housing Finance
   Market
4. Building of Reverse Mortgage System for the
   Elderly Homeowners
5. Housing Asset Liquidation and Potential Demand of
   the Korean Elderly Households
6. Policy Implications of the Reverse Mortgage
   System
7. Conclusion

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I. Introduction
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.

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II. The Demographic Characteristics of the Korean
Elderly Households
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.
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ltTable 1gt The Demographic Characteristics of Age
Compositions in Korea (Unit 1,000, )
Childhood Dependency (0-14 ages/ 15-64
ages)100 Elderly Dependency (65 and over /
15-64)100 Sources Korea Census Offices (1997).
Final Result of 1995 Population and
Housing Census. (http//www.nso.go.kr/census/censu
s5.hwp 07/20/2000). Korea Census Office (1997).
Social Indexes in Korea.
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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).
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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.
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ltTable 2gt 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.k
r 07/20/2000).
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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.
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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).
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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.
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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).
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ltFigure 1.gt The Process of MBB Source
http//www.komoco.co.kr/eng/html/Structure.htm
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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
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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.
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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). ? 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. ? 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. ?
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.
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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).
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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.
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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.
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 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).
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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).
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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.
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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.
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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.
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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.
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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.
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The End Thank you