[Viewpoint]Reverse progress

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[Viewpoint]Reverse progress

Lots of social and economic problems occur when a society ages.
That’s particularly true in South Korea, where the country is aging while the birthrate is decreasing at the fastest pace in the world.
Although keeping up the standard of living for the aging population is an important social issue, our system to provide income for people after they retire is primitive and needs a lot of time to mature.
Moreover, the national pension system has a serious structural imbalance. Not enough is being put in and too much is being taken out.
It is time, therefore, to find a way to improve the current national pension system and provide a new system to complement the existing one.
A “reverse” mortgage is a loan against the owner’s home. The owner gets a certain fixed amount of cash in the form of a pension until his death, but doesn’t have to move out of his home.
Couples who are both over the age of 65 and own only one house worth less than 600 million won ($653,000) are eligible for a reverse mortgage.
The loan gets repaid when the home is sold after the borrower dies. If there is a balance left, it will be paid to the homeowner’s designated heir.
Even if the price of the home is less than the total amount of the loan, the heir will not be obligated to repay the difference to the mortgage company.
The damage is covered by reverse mortgage insurance.
The government decided to introduce the system to help aging couples solve the financial issues they face related to keeping their homes and paying their living expenses after retirement.
On Thursday, the Housing Finance Corporation started to sell reverse mortgage loan products.
The new system will likely give the economy a jolt by inducing older consumers to spend more money. It will also stabilize the prices of real estate.
Still, older people in our society must get rid of their traditional way of thinking that a house is a property which should be inherited.
Instead, they should consider a house as a place to live that can be useful to them in other ways.
In order to establish the reverse mortgage system here, many issues need to be tackled.
The reverse mortgage is a long-term loan based on the future value of a house.
Risks are a part of the formula, including the market risk from the fluctuation of home prices and the fluctuation of interest rates, as well as the longevity risk from the changes in average age of death.
Private financial companies have a hard time managing the risks on these loans.
Therefore, the Korea Housing Finance Corporation will sell the mortgage product to homeowners, giving them the assurance that their loan is guaranteed by a public corporation.
The corporation must minimize the government’s financial burden by continuously developing risk-management techniques.
It must also study using mortgage-backed securities as a way to minimize that risk, transferring the risk to the capital market.
Because the long-term loans must be paid continuously until the terms and conditions of the loan are terminated, there needs to be a way, in the long run, to find a way to raise funds to support the mortgage system and turn it into a security.
Diverse ways to make the payments, which satisfy the needs of elderly people, as well as new mortgage products, need to be developed.
The government also should consider widening the eligibility criteria after checking the progress of the reverse loan system.
At the same time, they must try to make sure that as many elderly people as possible benefit from the new system.
For example, our farming villages have already become super-aging societies.
The elderly farmers are in a tough situation. They keep farming because if they stop, they won’t have any income.
In order to stabilize their living situation after retirement, reverse mortgages must be made available to farmers, allowing them to keep their farms and their houses.

*The writer is a visiting professor of insurance and finance at Daegu University. Translation by the JoongAng Daily staff.

by Ma Seung-ryeol
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