Japan’s Ministry of Land announced on May 7th that it will investigate possible illegal use of Flat 35 loans by some borrowers to finance investment properties. Flat 35 loans, which are backed by the government-affiliated Japan Housing Finance Agency (JHF), are widely-used long-term (35-year) fixed-rate low-interest loans meant to help people buy homes. Using a Flat 35 loan to buy an investment property would be illegal.
At a May 7th press conference, the Minister of Land Keiichi Ichii stated that if the government’s investigation finds fraudulent use of Flat 35 loans, it would require the borrower to return the funds in a lump sum. The Ministry of Land has also ordered the JHF to conduct its own investigation into the matter and to prevent any possible re-occurrences.
As of April 1st this year, the official lending rate for a Flat 35 loan with an LTV of 90% or less was between 1.290% and 1.960%, fixed for a 35-year term, compared to between 1.270% and 1.960% for the official March rate.
Flat 35 loans are securitized by the JHF and offered to borrowers via partnerships with private financial institutions which do the actual loan origination. The JHF is similar to Fannie Mae in the US or the Canada Mortgage and Housing Corporation.
When news broke of possible illicit lending, ARUHI Corporation, the industry’s leader in originating Flat 35 loans, came out with a statement saying that the company has not engaged in any fraudulent activities. However, ARUHI also announced that it is cooperating with the JHF to investigate whether it may have unintentionally been involved in processing loans where borrowers may have submitted fraudulent applications (for the purpose of mis-using the funds to buy investment properties). The company also stated that it has been working with the JHF to tighten requirements for screening loans since the beginning of this year.
ARUHI Corporation is listed on the First Section of the Tokyo Stock Exchange. Its share price plunged about 27.5% in the day following its May 7th press release on the possible fraud but has since recovered and is down about 20% from the pre-press release May 7th price of 1,983 JPY per share.
The news regarding possible Flat 35 illicit lending represents the latest black eye to bruise Japan’s residential real estate industry, following the revelations of construction defects by Daiwa House and a separate construction defect scandal that affected over 14,500 budget apartments operated by LeoPalace21.
Image: Tokyo Marathon 2016 (via Wikimedia)