The Japan Housing Finance Agency has begun calling in Flat35-type loans that were fraudulently obtained by investors. These home loans are designed for owner-occupiers, not investors, offering borrowers a low, fixed-rate mortgage over the duration of the loan.
Lured by the attractive interest rates on offer, some borrowers engaged in mortgage fraud by taking out home loans on investment properties. The JHF has started the process of requiring these investors to immediately pay back the outstanding loan in full, or have the property foreclosed on. Since loans are generally full-recourse, the investor would still be on the hook to pay off the balance if the property sells for a lower amount than what is owing.
In many cases, the real estate agents at the center of this fraud have been the ones pushing the scam onto first-time investors. At some point during the mortgage application process, the investor’s income is inflated, while the bank is given the impression that the property is to be used as the buyer’s main residence when, in fact, it is to be rented out to a tenant. The sales pitch sometimes includes ‘guaranteed rent’ which turns out to be much higher than the true market rent. If the rental guarantee falls over, the investor is left struggling to meet repayments. Selling the property won’t help either, as the investor may have paid a highly inflated price for it. Ultimately, the investor is left over-leveraged with a poor performing investment.
Source: The Nikkei Shimbun, February 4, 2020.
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