Financial Services Agency Opens New Investigation into Illicit Real Estate Lending

Following the Suruga Bank scandal, there is a new financial institution being investigated for making fraudulent real estate loans in a Suruga Bank-type investment scheme. On Oct. 31st, the Financial Services Agency (FSA) announced that it was going to carry out an on-site inspection of the compliance and underwriting process at Seibu Shinkin (credit union). The skinny in the market is that the FSA is following up on rumors of collusion at the credit union in the forgery of bank deposit amounts and other borrower documents by unscrupulous real estate agents. If this is the case, we may be in for some interesting news soon.

The interesting news may be in the form of a legal petition for insolvency. This is because a Japanese credit union is in trouble this time. Compared to the average Japanese bank, Japanese credit unions tend to be small and have less financial backstop. If people begin to start to pull their deposits from Seibu Shinkin and/or business partners start to pull away, this could be the end of the road according to one insider.

We are already seeing the end of many of the so-called ‘salaryman-landlord’ investment schemes. The idea, as so simply depicted in the slogan of the Shinoken Group, is “owning an apartment building with no money down.” The problem is, for this scheme to pass a financial institution’s internal controls, often borrowers must be portrayed as better credit risks (i.e. much wealthier) than they really are. When the building’s income cannot cover the monthly loan payments (for instance, due to unexpected sudden vacancies in the building), and borrowers cannot cover the loan payments, the entire scheme falls apart due to the borrower’s lack of real creditworthiness.

This is basically what has been going on at TATERU, a real estate crowdfunding and construction company listed on the Tokyo Stock Exchange’s 1st board, at least according to some outside attorneys who inspected the company and announced their findings to the board of directors in a public report. But not only has TATERU been making dubious construction loans to individuals, it also applied to Saikyo Bank for further funding. So, these types of problematic investment schemes can have many losers. Shareholders may lose the most though (TATERU’s share price down this year roughly to 1/5th of its highs). However, one should consider that maybe the problem was in the inspection process when the company joined the capital markets. TATERU (first called “Investor’s Crowd”) made it on Mothers in Dec. 20, 2015, but within roughly a year it had already risen to the ranks of the 1st board of the TSE.

TATERU is a major player in real estate crowdfunding, where cash is collected through the internet for real estate investment schemes carried out by the construction and/or management company. It is well-known that the FSA is very interested in real estate crowdfunding, and we can expect to hear more soon.

Suruga Bank, TATERU, Seibu Shinkin, the saga continues. The FSA knows there are more problems coming down the pike, but no one knows when or where. Luckily however, in the 2nd quarter of 2018, the amount of new funding in ‘salaryman-landlord’ investment schemes totaled merely 560.3 billion JPY, half of the peak logged in the 3rd quarter of 2016.